Quality Care Properties is taking its issues with HCR ManorCare (the lack of full rent payments) one step further. Late yesterday QCP announced that it is initiating a legal process to appoint an independent receiver to oversee the operation of the skilled nursing and assisted living properties that it owns which are leased to HCRMC. Apparently, the two companies had previously agreed that QCP would have the right to appoint a receiver to operate the properties if HCRMC defaulted on the leases. That default has already occurred.
Assuming the California State Court appoints a receiver, QCP plans to start transitioning the properties to new owners and operators. They believe there will be strong demand from regional players. This represents a rather harsh step, and in more normal times a company like HCRMC would not give up its operations of nearly 300 properties. But with the leases in place, those properties have little to no value because at the property level, they can’t support the leases.
The lease coverage at the facility level has dropped from 0.83x in the first quarter this year to 0.76x in the second quarter, and the total corporate coverage is below 1.0x. We do not see that improving any time soon. This obviously explains why HCRMC has not paid the full rent for a few months, but we don’t know what its management has been doing, if anything, to rectify the situation.
While we had always assumed the game plan was to merge HCRMC into QCP, and then dissolving the leases, it looks as if HCRMC and its private equity owner, The Carlyle Group, have not been able to come to any agreement with QCP on how or when to accomplish this. Two big obstacles have been the $100 million-plus deferred compensation package to senior management, most of which is unfunded, and the liability for a potential Department of Justice settlement (or judgement).
Is QCP taking this current step to provide a big nudge to Carlyle? Or are negotiations really at an insurmountable standstill, leaving QCP management no choice? We may know in few weeks. In early trading Friday morning, QCP’s shares had dropped by more than 5%.
