CHICAGO (Reuters) - The fate of one of the largest U.S. nursing home operators, HCR ManorCare, will reach a critical court deadline on Thursday in a battle over months of unpaid rent, a growing problem in an industry where eviction would put thousands of elderly out on the street.
Many nursing home chains spun off their properties to real estate companies over the last decade to unlock value. Now those landlords need to deal with operators behind on their rent without harming thousands of elderly residents.
In a lawsuit filed in August, HCR ManorCare’s landlord, Quality Care Properties Inc, said the chain owes more than $300 million in rent at its 292 skilled nursing and assisted living locations.
ManorCare has until Oct. 18 to respond to the lawsuit Quality Care filed seeking to replace management with a court-appointed receiver who would oversee everything from laundry and meals to patient care at ManorCare’s facilities.
Generally, a landlord can evict a tenant who fails to pay rent.
“However, because the leased properties care for approximately 30,000 patients - many of whom are elderly, vulnerable and require specialized care - abrupt eviction could cause substantial harm,” Quality Care said in its lawsuit, filed in California state court on August 17.
ManorCare declined to comment but said in June it had been negotiating its master lease agreement for several months and remains committed to high-quality patient care.
Toledo, Ohio-based ManorCare is the largest senior housing chain in financial distress. But other leveraged chains are struggling under declining reimbursements, higher costs, lower occupancy and increased federal scrutiny over billing.
Receivers have been appointed to replace management at small regional chains. But many in the healthcare industry are watching to see how the first stand-off between such a large national chain and Quality Care, a specialized real estate investment trust, plays out, analysts and advisers said.
Genesis Healthcare Inc, which describes itself as the largest U.S. operator of skilled nursing facilities, negotiated changes to its master lease agreements with its REIT landlords last year to give it more flexibility. The company’s stock has lost about 75 percent of its value this year.
With more skilled nursing facilities defaulting on leases, property owners are increasingly looking to receiverships as an alternative to evictions or bankruptcy, lawyers and advisers told Reuters.
A receiver can ensure continuity of care for patients and residents while preparing the facility for a transition to a new owner or operator. The process is cheaper and more stable than bankruptcy proceedings.
“It’s the ultimate remedy for a landlord or lender,” said Suzanne Koenig, president of long-term healthcare facility turnaround company SAK Management Services.
Quality Care has agreed to at least one rent reduction for ManorCare and said it is considering marketing the properties to another operator.
Foreseeing industry headwinds, including uncertainty over Medicaid payments that cover over 60 percent of skilled nursing homes’ costs, some of the largest healthcare REITs have diversified away from the industry in the past year.
Quality Care, for example, was spun off in 2016 by larger real estate investment trust HCP Inc, which had acquired the ManorCare assets from private equity fund Carlyle Group LP in 2010 for $6.1 billion.
Industry specialists say another outcome could be Quality Care taking over ManorCare. That would reunite the chain with its real estate but would force Quality Care to give up its REIT status, which enjoys more favorable tax treatment.
Reporting by Tracy Rucinski; Editing by Noeleen Walder and Dan Grebler