HCP Spin-Off Reveals ManorCare’s Dire Financial State

April 16, 2017, Mary Kate Nelson, Senior Housing News - It has been far from smooth sailing for Quality Care Properties (NYSE: QCP) since its spin-off from HCP Inc. (NYSE: HCP) last year.  It was no secret that QCP was formed to take a troubled tenant, skilled nursing provider HCR ManorCare, out of HCP’s portfolio.  

But on Friday, QCP released bleak new financial information about Toledo, Ohio-based ManorCare, one of the largest skilled nursing companies nationally.

In short, ManorCare’s financial situation has so deteriorated, with recurring losses and negative working capital, that auditors have “substantial doubt” over whether the company can continue to operate as a going concern.

Approximately 94% of Quality Care Properties’ total revenues during the year ended Dec. 31, 2016, can be attributed to HCR ManorCare.

The failure or inability of the skilled nursing operator to pay QCP would “materially reduce [QCP’s] liquidity, cash flow, net operating income and results of operations, which would in turn reduce the amount of dividends [QCP] pays to [its] stockholders, cause [its] stock price to decline and have other materially adverse effects on [the] business, results of operations and financial condition,” QCP states in a filing with the U.S. Securities and Exchange Commission (SEC). 

To address the situation, ManorCare management “plans to request a waiver from its lenders regarding expected areas of non-compliance with the terms of the credit agreement and to continue good faith discussions with the lessor concerning a long-term restructuring of the master lease,” the SEC filing states.

The master lease restructuring and waiver would allow ManorCare to meet its estimated liquidity needs for over 12 months and mitigate the “going concern” doubts, according to the filing.

Still, ManorCare management cannot guarantee that the long-term lease restructuring will be achieved.  The company also cannot predict whether its lenders will opt to waive or enforce their remedies regarding non-compliance.

Earlier this month, QCP entered into a forbearance agreement with HCR III Healthcare, LLC and its parent company HCR ManorCare, Inc.

QCP shares were down 1.57% in after-hours trading on Friday, after the company released the SEC filing.