Timing is everything. In the April issue of The SeniorCare Investor, we wrote about what the decline in financial performance at HCR ManorCare (HCRMC) from the 12-month period ending September 30, 2016 to the 12-month period ending December 31, 2016. Annualized EBITDAR dropped by $5.5 million which, although not a big number, was enough to cause fixed coverage to drop a little to 1.10x for the December 31 full-year period. At the property level, however, the coverage increased to 0.84x, a ratio that is still unacceptable and not sustainable. The company’s skilled nursing facilities are at 82.6% occupancy, which is also low for a company of its quality, and the 60 assisted living/memory care communities are at 83.7% occupancy, which is significantly below the national average. We commented that there had still been little word from HCRMC’s landlord, Quality Care Properties (NYSE: QCP) as to what they intend to do as a single-tenant REIT with a troubled tenant.
No sooner had we gone to print then QCP announced it had entered into a forbearance agreement with HCRMC, which includes HCRMC making reduced monthly rent payments of $32 million for April, May and June, with a deferral of an additional $7.5 million per month, all $22.5 million of which is due on July 5 or upon early termination of this agreement. QCP has also agreed to provide up to $7.0 million per month in additional credit ($21 million maximum) which would be due no later than December 31, 2016. This appears to be a lot of favorable breaks and flexibility that we had hoped HCRMC would not be needing after a few previous rent reductions in addition to divesting what should have been its 50 worst performing SNFs. QCP is also working with HCRMC management, and we assume The Carlyle Group as well (which still owns HCRMC), to reach a “comprehensive, long-term solution to the master lease,” which may include QCP taking an increased equity interest in the “struggling company.”
The important thing to remember, however, is that the struggle HCRMC is having is paying the rent, not making money. The problem is that the initial lease payments of $472.5 million were based on an initial purchase price of $147,000 per bed/unit with 3.5% escalators in the first five years. That just didn’t work. Hindsight is 20/20, of course, and keep in mind that corporate EBITDAR was $487.3 million in 2016, which includes the very significant home health and hospice business. So all is not bad, just the existing rent levels. QCP is providing some temporary easing, but we assume it is all designed to put pressure on HCRMC and its owners to finally decide what they want to be when they grow up. Despite the problems, we believe that QCP CEO Mark Ordan is in the driver’s seat; it’s just a question of in which direction he wants to turn, and when. Hold on to your seatbelts.
