Saturday, May 20, 2017

Healthcare Experts Fooled on ManorCare Ownership

In a sad sign of the times a respected media publication cannot decipher the complex legal and investment relationships for firms intent on making a fortune in healthcare.  Modern Healthcare could not get The Carlyle Group, a politically connected private equity underwriter, owns Manorcare, an owner and operator of nursing homes in the U.S.

Carlyle Partners V purchased the company in 2007 for $6.3 billion.  It later sold the nursing home buildings to HCP for $6.1 billion and entered into an agreement to lease them back.  HCP is a real estate investment trust.  Carlyle still owns HCR Manorcare, the operator of nursing homes   

There is a lawsuit against HCP by shareholders upset that HCP entered into a bad deal with Carlyle.  The Carlyle Group charges Manorcare annual management fees to direct corporate strategy and deal fees to undertake the $6.1 billion sale of nursing home real estate to HCP.

Between a decade of management fees, deal fees, special dividends/distributions and proceeds from the HCP sale Carlyle has already made money on ManorCare. 

Modern Healthcare erroneously reported:
Real estate investment trust HCP has been sued for allegedly hiding Medicare kickback allegations against its skilled-nursing provider ManorCare from investors.

In a proposed class action lawsuit filed in an Ohio federal court Monday, HCP shareholder Scott Weldon accused the Irvine, Calif.-based company of violating the Securities Exchange Act by hiding from investors that ManorCare, an HCP-acquired skilled nursing facility operator, was repeatedly accused of fraudulently billing Medicare for more than $6 billion.

Before it was acquired by HCP in 2011, ManorCare was sued three times for insurance fraud. The Department of Justice joined the suits in 2015 after it investigated the company. That information was not disclosed to shareholders, the suit alleges. 
ManorCare operates 281 skilled nursing facilities in 30 states..
The nursing home operator is owned by The Carlyle Group, not HCP.

HCP was effusive in their praise for the ManorCare real estate deal, calling it a high quality transaction with best in class management team.  That was before things went south.

HCP shareholders are suing because their company did not disclose or act on critical information in a major deal, which has since gone bad.

HCP tried to isolate the asset by spinning it off into a separate publicly traded vehicle.  It spun off the ManorCare facility portfolio into Quality Care Properties (QCP) in October 2016.

QCP's recent 10-Q cited ManorCare's getting a "going concern" qualification from public accountants.  It also stated:

On April 5, 2017, the Company entered into a forbearance agreement (the "Agreement") with HCR III and HCRMC (together, "HCR ManorCare"). Among other things, the Agreement requires HCR ManorCare to make cash rent payments of $32 million for each of April, May and June of 2017, with a deferral of payment of the additional $7.5 million per month otherwise due until the earlier of (i) July 5, 2017 and (ii) an early termination of the Agreement, with all deferred amounts becoming immediately due and payable upon an early termination. The Agreement also required HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which were received on April 10, 2017 and included a "going concern" exception for HCR ManorCare in the auditor opinion.

During the term of the Agreement, which will end on July 5, 2017, unless earlier terminated, QCP and HCR ManorCare intend to engage in good faith discussions concerning a long-term restructuring of the terms of the master lease, the guaranty of the master lease and certain other matters. To facilitate the exploration of restructuring alternatives, QCP also agreed to provide HCR ManorCare with a temporary secured extension of credit of up to $7 million per month during each of April, May and June of 2017 (up to $21 million in the aggregate), which would be due and payable in full not later than December 31, 2017, subject to acceleration upon certain events.

HCR ManorCare made the reduced cash rent payments of $32 million for each of April and May of 2017. HCR ManorCare borrowed $7 million for April 2017 under the temporary secured credit agreement.
Oddly, The Carlyle Group is never mentioned in articles about ManorCare's financial turmoil, nor is it identified as ManorCare's owner in QCP's SEC documents. Carlyle is skilled in keeping their good name.

Update 6-5-17:  Modern Healthcare editor did not reply to the e-mail I sent informing them of this error.  Neither did they add a correction to the piece.  The piece remains uncorrected on 5-5-18.