HCR ManorCare expected to file for bankruptcy

March 03--Toledo-based HCR ManorCare Inc., which operates more than 500 elder-care facilities nationwide, will voluntarily file early next week for Chapter 11 bankruptcy and then be acquired by Quality Care Properties Inc., a real-estate investment trust the Toledo firm owes millions in rent.

Quality Care, of Bethesda, Md., said Friday a deal has been struck to end its nine-month rent dispute with ManorCare. But the deal will result in Quality Care acquiring ManorCare and replacing the Toledo firm's management team.

The agreement calls for Quality Care, which owns the facilities that ManorCare operates, to trade its collection claims of unpaid and deferred rent for 100 percent ownership of ManorCare. The Toledo firm will become a wholly-owned indirect subsidiary of Quality Care.

Quality Care said the transaction should recapitalize ManorCare and give it "stability and flexibility" to better react to rapid changes occurring in the post-acute health care industry.

Companies like HCR ManorCare have been hammered the last two years by lower Medicare reimbursements that have cut revenue streams severely, experts say. Financial filings show ManorCare lost $3.7 million the last three years, including $3.2 million in 2016.

"We considered every possible option and determined that entering this agreement to take direct ownership of our tenant best positions QCP to reposition the business to realize the potential of its properties for QCP shareholders," Mark Ordan, Quality Care's chief executive, said in a statement.

Steven Cavanaugh, ManorCare's president and chief executive, stated, "We have worked with QCP to reach an agreement that provides stability for our employees, residents, and patients. I am proud of the hard work and dedication that HCR ManorCare employees have continued to demonstrate in delivering outstanding care during difficult times."

The reorganization plan, subject to bankruptcy court and other regulatory approvals, requires all of ManorCare's 50,000 employees nationwide, its creditors, vendors, and suppliers be "unimpaired" by the transaction and paid when payments are due. The firm has 1,700 area employees, including about 700 at its 333 N. Summit St. headquarters.

ManorCare sent employees a brief email Friday to inform them it planned to enter bankruptcy.

Several employees entering and exiting the headquarters building on Friday declined to comment.

The deal is designed so that it "will have no impact on patient care" at ManorCare facilities, Quality Care said.

ManorCare operates rehabilitation centers, memory-care communities, assisted-living facilities, outpatient rehabilitation clinics, and hospice and home health care agencies under the names of ManorCare, Heartland, and Arden. Heartland is one of the top five largest hospice companies in the United States.

"We have invested a significant amount of time and effort in developing this proposed solution for all constituents involved. We believe that this agreement is a positive outcome for all of HCR ManorCare's stakeholders," John R. Castellano, ManorCare's chief restructuring officer, said in a statement.

Quality Care said it expects a bankruptcy court to give approval in the second quarter and the transaction to be completed sometime this fall.

The agreement calls for Mr. Cavanaugh to be replaced by Guy Sansone, a managing director and chairman of the health-care unit at global professional services firm Alvarez & Marsal. A ManorCare spokesman said the company won't comment on whether Mr. Cavanaugh will take another role at the firm.

Laura Linynsky, a Quality Care vice president and former chief operating officer at Sunrise Senior Living, Inc., an assisted-living facility chain, will become ManorCare's chief financial officer.

"Under Guy and Laura's leadership, HCR ManorCare will continue to support the excellent employees providing long-term care, hospice and rehabilitation services, and corporate services to enhance patient care and drive referrals," Mr. Ordan said.

Acquiring ManorCare will force Quality Care, which had been strictly a landlord, to give up its status as a real-estate investment trust. The Maryland firm said it will hold an investor conference 60 days from now to provide updates on its strategy and financial picture and added that ManorCare's controlling stockholders have signed an agreement supporting the transaction.

The two sides began sparring over rent payments and as part of their deal, ManorCare made payments totaling $23.5 million -- $14 million and $9.5 million previously due Jan. 25 and Feb. 10, respectively.

Quality Care said it expects to receive further rent payments from ManorCare during the Chapter 11 period in accordance with the terms of the bankruptcy and subsequent acquisition.

The lease ManorCare has with Quality Care allows the landlord to place the elder-care operator in a court-approved receivership should the tenant default on its rent. Last May, ManorCare defaulted on a $39.5 million monthly payment and on Aug. 17, Quality Care asked a California Superior Court judge in Los Angeles to appoint a receiver to take control of the Toledo firm.

Since then, the two sides agreed in December to a lower monthly rent of $23.5 million and publicly have appeared to be at odds while negotiating privately to come to an accommodation that would satisfy Quality Care's shareholders, benefit employees, and protect patients.

Thomas Ealey, a health-care industry expert and a professor of business administration at Alma College in Michigan, suggested last month that a sale of ManorCare would be the best solution for all involved.

On Friday, Mr. Ealey said he wasn't surprised by the bankruptcy-acquisition plan.

"This will allow stability for residents and employees for a while -- and enrich a lot of lawyers," he said.

Mr. Ordan said in the coming weeks and months, Quality Care will work closely with ManorCare senior management and its other executives to ensure a smooth transition.

"HCR ManorCare's team of skilled, dedicated, and compassionate employees will continue to be the ultimate driver of the company's superior patient care. We look forward to completing this transaction and to delivering long-term value to employees, patients, residents, and shareholders," Mr. Ordan said.

Contact Jon Chavez at [email protected] or 419-724-6128.

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