ManorCare seeks court approval to exit bankruptcy under landlord

(Reuters) - No. 2 U.S. nursing home chain HCR ManorCare Inc heads to court on Friday to seek approval for a plan to exit a $7.1 billion Chapter 11 bankruptcy under the ownership of the real estate investment trust whose steep rents lent to its financial demise.

Toledo, Ohio-based ManorCare, with more than 450 senior living facilities and clinics across the country, is one of many chains that has struggled to make rent on leases signed before declining reimbursements started cutting into margins in 2012.

Yet it is the largest chain to file for bankruptcy since the downturn hit post-acute and skilled nursing facilities, its biggest business, and the one to be taken over by its smaller landlord, publicly traded REIT Quality Care Properties ().

ManorCare had more than 50,000 employees and $3.7 billion in revenues in 2017, versus Quality Care’s 10 employees and $318 million in revenue.

The two companies agreed the pre-packaged reorganization in March along with ManorCare’s private equity owner Carlyle Group (), which bought the chain 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.

That agreement called for ManorCare to pay $472.5 million of rent in the first year, with annual increases of 3 percent to 3.5 percent over the rest of the lease. Analysts say the amount was above the market and unsustainable. When ManorCare filed for bankruptcy, it owed $446 million in rent that was accruing at a minimum of $39.5 million every month.

If approved by U.S. Bankruptcy Judge Kevin Gross in Delaware on Friday, the deal will put ManorCare’s properties and operations back under one roof. A new management team appointed by Quality Care will be led by Guy Sansone, managing director at turnaround advisory firm Alvarez & Marsal, who analysts said is likely to oversee the sale of facilities.

The reorganization plan provided for full payment to creditors, vendors and suppliers, besides Quality Care, while Carlyle will lose its entire equity stake.

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.

The deal is expected to close in the third quarter following government and regulatory approvals.