Quality Care Properties Inc.'s takeover of nursing home operator HCR ManorCare Inc. may take several months to complete, after which the company will have to find a way to stabilize ManorCare's operations in a difficult operating environment, according to bankruptcy filings.
ManorCare, which operates more than 450 U.S. healthcare facilities, filed for Chapter 11 bankruptcy March 4 as part of a planned transaction in which its majority shareholder, private equity firm Carlyle Group LP, will give up all of its equity. Quality Care, a real estate investment trust that is ManorCare's principal landlord and creditor, will take full ownership of the operator.
John Castellano, ManorCare's chief restructuring officer, said in a bankruptcy court filing that both sides believe securing approvals to complete the transaction could take three to six months. After that, Quality Care's task will be to turn ManorCare's operations around, likely with a combination of efforts to cut general and administrative expenses, Stifel analyst Chad Vanacore said. Such expense cuts can often involve management layoffs.
Quality Care has said it plans to give up its REIT status upon acquiring the operator, and Vanacore said its transformation could involve hiring experienced skilled nursing operators and turnaround specialists to deal with ManorCare.
Guy Sansone, a managing director at professional services firm Alvarez & Marsal, and Laura Linynsky, Quality Care's senior vice president and a former COO at Sunrise Senior Living, will serve as consultants during the transition, and will become ManorCare's CEO and CFO, respectively, after the transition is complete.

ManorCare owes Quality Care roughly $445.8 million in deferred and unpaid rent, and the planned transaction, which preserves ManorCare as a separate unit under Quality Care's ownership, would push back the due date on the deferred portion of the debt. In return for giving up on the promise of quick repayment, Quality Care is getting something valuable: the ability to dictate the operator's strategic moves.
"They have control, which means that they won't just suggest to the operator that they make changes," Vanacore said. "They will go in there and make changes themselves. Control means that they can launch an effective turnaround, rather than sit on the sidelines."
Castellano said in his court filing that many of ManorCare's problems in recent years stem from broader trends in the skilled nursing industry. In 2011, when ManorCare sold much of its real estate to HCP Inc. and agreed to lease it back, the property sector appeared strong because of factors including an aging U.S. population, expected increases in skilled nursing spending, and a lack of competition from newly built properties, he wrote.
But in the intervening years, Castellano added, "the operating environment for post-acute/skilled nursing facility operators has become significantly more challenging," as competition from alternative healthcare services has increased and government reimbursements to operators have shrunk.
Beginning in 2012, ManorCare frequently used funds from smaller and financially healthier parts of its business — including units operating home healthcare and hospice facilities and outpatient rehabilitation clinics — to subsidize its long-term care unit, which operates nursing homes and other seniors housing properties. Since 2011, the long-term care unit received more than $500 million from the company's other business segments to help it meet its financial obligations, Castellano wrote.

HCP spun Quality Care off into a separate company in late 2016, largely as a means of jettisoning government-reimbursed skilled nursing properties — particularly those leased to HCR ManorCare — from its portfolio.
While executives at both HCP and Quality Care have been circumspect about the courses of action Quality Care could pursue to deal with ManorCare's troubles, they have long left open the possibility that it could acquire the operator and give up its REIT status. As a larger company with an established institutional shareholder base and an investment-grade credit rating, HCP would be practically unable to pursue such a drastic option, the executives argued, whereas Quality Care — a smaller, less established company with more opportunistic investors — had more to gain and less to lose from aggressive action.
Investors tracking Quality Care would have seen the company's move to give up REIT status coming, Vanacore said. Quality Care investors greeted news of the deal warmly, sending the company's share price up more than 30% in the days after the companies announced their agreement.
Another winner in the transaction was former HCR ManorCare CEO Paul Ormond, who left the company in September 2017. The parties
