ManorCare wins court approval to exit bankruptcy under landlord

By Tracy Rucinski (Reuters) - No. 2 U.S. nursing home chain HCR ManorCare Inc won court approval on Friday for a plan to exit a $7.1 billion Chapter 11 bankruptcy by transferring ownership to its landlord, Quality Care Properties Inc . U.S. Bankruptcy Judge Kevin Gross in Delaware approved the prepackaged reorganization that will give Quality Care, with 10 employees and $318 million in annual revenue, control over ManorCare. Toledo, Ohio-based ManorCare has more than 50,000 employees in more than 450 senior living facilities and clinics across the country, with annual revenue of $3.7 billion. ManorCare, which filed for bankruptcy in March, is one of many chains that has struggled to make rent on leases signed before declining Medicaid and Medicare reimbursements started cutting into margins in 2012. It is the largest chain to declare bankruptcy since the downturn hit post-acute and skilled nursing facilities, its biggest business. It is the only one to be taken over by its smaller landlord. Quality Care will give up its status as a publicly traded real estate investment trust and has appointed a management team led by Guy Sansone, managing director at turnaround advisory firm Alvarez & Marsal, to oversee the planned sale of 74 skilled nursing facilities. In its annual report, Quality Care said a challenging operating environment continued to plague the skilled nursing sector but new management would mitigate conditions that raise substantial doubt about ManorCare's ability to stay in business. ManorCare has received full support for the reorganization plan from all of its other creditors, vendors and suppliers, who will receive full payment. The takeover ends a rocky chapter in the chain's history following its purchase by private equity fund Carlyle Group for $6.3 billion in 2007 just before the financial crisis. Carlyle spun off ManorCare's real estate to Quality Care's predecessor HCP Inc for $6.1 billion in 2010 to unlock value. For HCP, the deal put what Chief Executive Jay Flaherty called "a winner" into the portfolio. He assured investors that 3.5 percent rental bumps on an already above-market lease would "fund an awful lot of dividend increases over the next 25 years." But a year after signing the master lease on 289 facilities, ManorCare's revenues were failing to cover monthly rent, according to court papers. When it filed for bankruptcy in March, it owed Quality Care $446 million in rent that was accruing at a minimum of $39.5 million every month. Eager to remove ManorCare from its portfolio, HCP in 2016 spun it into Quality Care, which has relied on ManorCare for more than 90 percent of its revenues. Under the reorganization plan, Carlyle loses its equity stake and ManorCare's properties and operations will rejoin under one roof. The deal is expected to close in the third quarter following government and regulatory approvals. The agreement includes a $116.7 million settlement for ManorCare's former chief executive, Paul Ormond, who was owed compensation when he stepped down in September. (Reporting by Tracy Rucinski in Chicago; Editing by Bernadette Baum and Richard Chang)

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