Cornerstone Healthcare, an operator of skilled nursing facilities in the Pacific Northwest, filed for Chapter 11 bankruptcy protection. The CEO, Will Masterson, announced the reorganization in a statement filed with the U.S. Bankruptcy Court Western District of Washington that listed lender and lessor issues as the reason for it.
Operations across the portfolio weren’t great leading up to the bankruptcy, but they certainly could have been worse. The portfolio includes 14 SNFs and one assisted living community in Washington, Oregon and Idaho, with total capacity of 1,508 beds. Occupancy was 78% based on that capacity. In the year to date through September 2019, the company generated more than $94.9 million in total revenue ($127 million in the previous 12 months), with $2.195 million in EBITDA.
Seven of the facilities have HUD debt and are part of one master lease, while the remaining non-HUD facilities are leased to another master entity, both controlled by the landlord, Formation Capital. MidCap Financial Trust had provided a revolving credit facility totaling $17 million with a maturity date of December 1, 2020 that is secured by liens encumbering substantially all of the assets. At the time of petition, Cornerstone owed approximately $9.085 million in debt to MidCap, in addition to approximately $20.9 million in general unsecured debt, the majority of which was trade debt that is past due.
In October, Cornerstone had received default notices from MidCap based on the fixed charge coverage ratio under the credit agreements. Formation Capital had also asserted that there are various defaults under the lease agreements, but has not sent a formal notice of default. Nevertheless, the MidCap defaults and the threat of defaults from the landlord significantly affected cash flow. In addition, Cornerstone had about $1.7 million in unpaid compensation to its employees, which they hope (among other issues) will be remedied by the restructuring.
As far as the potential lease defaults, that is an unfortunate trend in the skilled nursing industry, with facilities often unable to keep up with those payment escalators. Both the operator and the landlord should know what they are getting into with these agreements, but all-too-rosy expectations in terms of future cash flow hurt everyone involved.
