Saturday, February 3, 2018

Carlyle Still Owns Conflicted ManorCare


The Carlyle Group continues pulling the strings for nursing home giant ManorCare.  Last summer Carlyle said it would cede control of ManorCare to QCP, the real estate investment trust that owns the nursing home facilities.  It hasn't.

Under the lease, ManorCare agreed that QCP would have the right to appoint an independent receiver to operate the facilities in the event of a default.

“HCR ManorCare has refused QCP’s requests to appoint fully independent directors and officers to oversee the skilled nursing and assisted living/memory care businesses at facilities owned by QCP,” the REIT stated. “Instead, the facilities remain under the control of the incumbent HCR ManorCare senior executive team and board of directors, who QCP believes are burdened by irreconcilable potential or actual conflicts of interest, including duties to sister companies in the HCR ManorCare group, personal claims against the HCR ManorCare group and potential personal exposure to HCR ManorCare and/or its stakeholders.
The article left out duties to parent corporation, The Carlyle Group, which commonly charges affiliates management fees.  ManorCare's website showed the two big events that set the stage for the current debacle:

2007
The company is taken private with The Carlyle Group as the majority owner. The name of the company changes to HCR ManorCare.

2011
In a sale/leaseback transaction, company sells 338 post-acute, skilled nursing and assisted living facilities to HCP, a real estate investment trust (REIT) headquartered in California, for $6.1 billion. HCR ManorCare continues to operate and manage all of the assets sold.
HCP/QCP bought ManorCare CMBS debt before striking the big $6.1 billion deal.  HCP hosted Investor Day in May 2015 and highlighted its ManorCare portfolio.


A year later HCP spun off ManorCare's properties to insulate the REIT from its infected investment.

After several years of declining operating results, our executive management team and Board of Directors decided in May 2016 to spin off our HCRManorCare, Inc. (HCR ManorCare) portfolio of post-acute/skilled nursing properties.

In summer 2017 ManorCare's ship sunk underwater from the capital structure imposed by Carlyle.  The rats came out according to the NYPost.

ManorCare CEO Paul Ormond was demanding the immediate payout of a $100 million deferred settlement package. The Carlyle Group, the private equity firm that has owned ManorCare since 2007, had apparently washed its hands and given its blessing to QCP, with Carlyle’s management was actively “ceding control” to the REIT. No such deal ever materialized.
February 2018 found HCR ManorCare failing to pay the Reduced Cash Rent amount of $14 million due on January 25, 2018.  QCP reduced ManorCare's cash rent several  times.  It went from $39.5 million to $32 million to $23.5 million.

The question is why ManorCare hasn't gone into bankruptcy?  It's defaulted on its master lease agreement.

On July 7, 2017, QCP delivered a notice of default under the Master Lease relating to nonpayment of rent due and other matters. The notice of default demanded payment of all current and past due rent, totaling approximately $79.6 million, by the end of the day on July 14, 2017. Such amount was not paid, and therefore, an Event of Default exists under the Master Lease, requiring the immediate payment of an additional approximately $265 million.
Carlyle's David Rubenstein knows banks and leaseholders don't want to take over and run corporations. What does Carlyle gain by dragging its feet?

Update 3-11-18:  ManorCare filed for bankruptcy on Sunday, March 4th.  ManorCare workers who protested Carlyle's purchase in early 2007 feel somewhat vindicated.