(Reuters) - The second-largest U.S. nursing home operator, HCR ManorCare Inc, filed for Chapter 11 protection late Sunday with $7.1 billion of debt as part of a pre-arranged deal to transfer ownership to its landlord Quality Care Properties Inc QCP.N.
Toledo, Ohio-based ManorCare, which operates skilled nursing, assisted living and memory care locations across the United States, had been battling with its landlord over unpaid rents since last year.
In a bankruptcy filing in Delaware, privately-owned ManorCare said revenues have failed to cover monthly rent obligations since 2012, a year after the master lease was signed. The lease covers 289 facilities.
It blamed shrinking margins at its post-acute and skilled nursing facilities on reduced government reimbursement rates, low occupancy, a shift toward new managed Medicare plans and alternative services such as home health care and retirement communities.
ManorCare said it owed $446 million in rent that was accruing at a minimum of $39.5 million every month.
The company was able to use profits from other growing businesses such as home health, hospice and outpatient rehab to help meet the rent until April 2017, when it defaulted on a prior credit facility.
Under the restructuring agreement reached last week, private equity owner Carlyle Group (CG.O) will hand over full ownership to Quality Care, which will give up its status as a real estate investment trust.
The deal includes a settlement agreement for ManorCare’s former chief executive, Paul Ormond, who was owed more than $100 million when he stepped down in September.
ManorCare posted $3.7 billion in revenue in 2017, with 82 percent of it coming from its long-term care business, while its pre-tax loss from continuing operations totaled $268 million. Assets were worth $4.3 billion, it said.
The company has set aside $305 million to cover legal defense and settlement costs, including litigation for hundreds of claims against its long-term care business, for which it said it does not believe it is liable.
The company is also facing four lawsuits by shareholders of its previous landlord HCP Inc (HCP.N), which in 2016 spun off the ManorCare real estate portfolio it had acquired from Carlyle in 2011. Carlyle bought ManorCare in a 2007 leveraged buyout.
A first-day Chapter 11 hearing will be held on Tuesday.
Reporting by Tracy Rucinski in Chicago; Editing by Paul Simao