While the financial deterioration of HCR ManorCare continues, at least there was some good news in the past few weeks that may result in an agreement between it and its landlord, Quality Care Properties. Apparently, the DOJ has filed a notice to dismiss its case against HCRMC which was filed in April 2015 relating to alleged false claims for Medicare reimbursement.

The consensus had been that HCRMC should just settle because the legal costs were high and it is often very hard to win against the government. But the ManorCare half of the company was well known back in the early 2000s for rarely settling liability claims from the drive-by trial attorneys, especially in Florida, so many of them eventually stopped suing the company. It was just not financially worthwhile. Well, in this case, although it cost them through legal fees, they stuck to their guns and won an uphill battle. We remember one former senior executive swearing to us that the company did absolutely nothing wrong, and it looks like he might have been right. It ain’t over ‘til it’s over, however, as one party has already filed papers in the court to oppose any dismissal of the case.

Meanwhile, there are good reasons why HCRMC has not been willing to pay its full rent to QCP, other than as part of a negotiating strategy. On a trailing 12-month basis for the period ended September 30, 2017, EBITDAR dropped by $36.8 million from the 12-months ended June 30, to just $390.2 million. That resulted in the fixed coverage charge ratio declining from 0.87x to 0.80x for the 12 months ended September 30. That includes the full company operations, but when looked at for just the facilities leased from QCP, the fixed charge coverage ratio dropped from 0.76x to 0.69x, assuming the full rent owed in the calculations. That is obviously a major problem, and much worse than the other skilled nursing providers and their respective REIT landlords.

Quality Care Properties currently owns 232 skilled nursing facilities with 30,786 beds and 60 senior living communities with 4,208 units leased to HCRMC. The occupancy levels are below industry averages, at 81.6% for the SNFs and 80.4% for the senior living, and we don’t see them improving much until QCP and HCRMC come to some sort of resolution. With all the other REIT/tenant rent renegotiations going on, we have to assume HCRMC management would like a slice of that pie, even though they already had their share of a few rent reductions and still couldn’t make it work. The best solution to turn operations around would seem to be to parcel out the properties to regional providers, which is what QCP has indicated they want to do.

With the former HCRMC CEO gone, and now the DOJ case dropped (for now), the road would seem to have been cleared to finally resolve the rent and future structure issues. The Carlyle Group may be haggling for a bigger cut, but in the meantime QCP’s share price has been dropping. Given all the problems facing the skilled nursing sector, the longer the wait, the lower the value of HCRMC’s assets.