The skilled nursing facility (SNF) industry has been pressured recently by reimbursement changes, regulatory changes and high fixed costs.
This has led to multiple SNF operators to negotiate a restructuring with both its landlords and secured working capital lenders as its either late on rental payments or has liquidity issues. Outcomes could include a third party receiver being appointed to takeover operations of all or a portion of the facilities, negotiating an out-of-court restructuring or a last resort chapter 11 filing, said four industry sources.
Landlord Quality Care Properties announced earlier this month (18 August) that it had begun a process to appoint an independent receiver to oversee operation of skilled nursing facilities managed by HCR ManorCare after the latter defaulted on its leases. Separately, healthcare investor Formation Capital filed a motion in a Wisconsin Circuit Court in July to appoint a receiver for one of its lessees Fortis Management Group, an operator of 65 facilities in the US.
Finally, another operator, Signature HealthCARE has been proceeding without going into receivership, in spite of having hired advisors earlier this year for strategic and financial alternatives.
The national skilled nursing facility occupancy rate was 82.6% for 1Q, according to National Investment Center for Seniors Housing & Care. While that represented a slight increase from the 5-year low of under 82% in 4Q 2016, rates have been steadily decreasing year over year and have not exceeded 85% since April 2015.
Skilled nursing facility operators’ cash flows have been hindered by lower reimbursement rates from Medicare, as well as federal programs that incentivize shorter outpatient stays, and emphasize in-home treatment.
These issues are compounded by the high fixed costs associated with managing skilled nursing facilities, the foremost of which can be rent payments.
“Skilled nursing is going through a big correction,” a healthcare-focused lender said. “I don’t know any that are doing well. It’s tough times.”
How to proceed
In the case of Quality Care Properties, the landlord’s announcement about receivership came after HCR ManorCare had defaulted on its rent obligations. If appointed, the receiver would “transition…properties to new owners and/or operators,” according to Quality Care’s press release.
While a receivership can signal a high level of distress in an asset, it can also be an orderly way to change management of an underperforming facility.
“I would say appointing a receiver as a bridge to transition to a permanent successor operator is one strategy, even though it’s not workable in every case, that seems to be the preference of the (landlord) REIT,” said a healthcare-focused financial advisor.
The appointment of a receiver does mean that there is little expectation a healthy sale or rent deferral can save the operator.
“The toughest scenario is one where you don’t think it’s a temporary situation and it’s not an operator-driven issue and the only option is a reset of your rent,” a healthcare REIT CEO said.
Absent a rent reset by the landlord, finding a buyer or transferring the properties to a new operator become difficult given the high fixed costs still in place.
“The biggest threat to an operator is to be replaced, but if the new operator won’t pay the rent at that level, you have problem,” a healthcare restructuring lawyer said. “You won’t find an operator to come in and pay the rent for these projects that are defaulting.”
While putting a defaulted operator into receivership can be attractive for a landlord, other key stakeholders may disagree. Secured lenders, for example, could object under certain circumstances.
“Receivership would not be a preferred strategy of a secured lender unless they are very well covered by collateral,” the financial advisor said. “If there is any stretch they might not think it’s such a great idea.”
Another option is a traditional out-of-court restructuring, which allows the incumbent management group to remain in place. While some lenders or landlords may be willing to accept that path, it can be difficult to fully eliminate some obligations.
Finally, sources agreed that Chapter 11 were the least likely outcome in skilled nursing facility workouts.
“In typical cases with an opco/propco structure and leases, there is very little you can do in Chapter 11,” the lawyer said.
There is less uncertainty when you engage in restructuring out of court,” the FA said. “You control the process a little more…And in some states there are a lot of professional liability tort claims.”