qcp_Current_Folio

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-37805

Quality Care Properties, Inc.

(Exact name of registrant as specified in its charter)


Maryland		81‑2898967
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7315 Wisconsin Avenue, Suite 550 East

Bethesda, Maryland 20814

(Address of principal executive offices)

(240) 223-4680

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ☐		Accelerated Filer ☐

Non-accelerated Filer ☒ (Do not check if a smaller reporting company)		Smaller Reporting Company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ☐ NO ☒

As of August 3, 2017, there were 93,809,524 shares of the registrant’s $0.01 par value common stock outstanding.

Quality Care Properties, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)


	June 30,		December 31,
	2017		2016
ASSETS
Real estate:
Building and improvements	$	4,363,193	$	4,891,996
Land		594,178		637,601
Accumulated depreciation		(960,207)		(1,111,768)
Net real estate		3,997,164		4,417,829
Real estate and related assets held for sale, net		—		16,019
Cash and cash equivalents		282,359		126,185
Restricted cash		24		17
Intangible assets, net		170,915		199,745
Straight-line rent receivables, net		2,953		3,296
Other assets, net		24,242		26,284
Total assets	$	4,477,657	$	4,789,375
LIABILITIES AND EQUITY
Bank line of credit	$	75,000	$	25,000
Term loan		955,677		957,465
Senior secured notes		731,989		730,604
Tenant security deposits and deferred revenue		6,284		5,587
Accrued interest		10,240		12,526
Accounts payable and accrued liabilities		6,224		4,426
Income taxes payable		—		16,544
Total liabilities		1,785,414		1,752,152
Redeemable preferred stock		1,930		1,930
Equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 93,809,524 and 93,597,519 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		938		936
Additional paid-in capital		3,167,822		3,163,954
Accumulated deficit		(478,944)		(130,094)
Total stockholders' equity		2,689,816		3,034,796
Noncontrolling interests		497		497
Total equity		2,690,313		3,035,293
Total liabilities and equity	$	4,477,657	$	4,789,375

See accompanying Notes to the Combined Consolidated Financial Statements.

Quality Care Properties, Inc.

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Revenues:
Rental and related revenues	$	78,949	$	123,290	$	191,186	$	243,175
Tenant recoveries		399		400		754		762
Total revenues		79,348		123,690		191,940		243,937
Costs and expenses:
Depreciation and amortization		34,410		34,617		68,860		93,991
Operating		992		1,047		1,533		2,024
General and administrative		7,154		4,248		13,495		9,228
Restructuring costs		4,644		—		7,883		—
Interest		35,440		—		69,665		—
Impairments		382,049		—		382,049		—
Total costs and expenses		464,689		39,912		543,485		105,243
Other income:
Gain on sales of real estate		—		—		3,283		6,460
Other income, net		104		21		125		42
Total other income, net		104		21		3,408		6,502
(Loss) income before income taxes		(385,237)		83,799		(348,137)		145,196
Income tax expense		(219)		(206)		(500)		(12,841)
Net (loss) income and comprehensive (loss) income		(385,456)		83,593		(348,637)		132,355
Noncontrolling interests' share in earnings		(17)		—		(41)		—
Net (loss) income and comprehensive (loss) income attributable to the Company		(385,473)		83,593		(348,678)		132,355
Less: preferred share dividends		(61)		—		(172)		—
Net (loss) income and comprehensive (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(348,850)	$	132,355
(Loss) earnings per common share, basic and diluted	$	(4.12)	$	0.89	$	(3.73)	$	1.41

See accompanying Notes to the Combined Consolidated Financial Statements.

Quality Care Properties, Inc.

COMBINED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(Unaudited)


	Common Stock		Additional Paid-In Capital		Net Parent Investment		Accumulated Deficit		Total Stockholders' Equity		Noncontrolling Interests		Total Equity		Redeemable Preferred Stock
January 1, 2017	$	936	$	3,163,954	$	—	$	(130,094)	$	3,034,796	$	497	$	3,035,293	$	1,930
Net (loss) income		—		—		—		(348,850)		(348,850)		41		(348,809)		172
Stock-based compensation		2		3,871		—		—		3,873		—		3,873		—
Distributions		—		(3)		—		—		(3)		(41)		(44)		(172)
June 30, 2017	$	938	$	3,167,822	$	—	$	(478,944)	$	2,689,816	$	497	$	2,690,313	$	1,930

January 1, 2016	$	—	$	—	$	5,087,494	$	—	$	5,087,494	$	—	$	5,087,494	$	—
Net income		—		—		132,355		—		132,355		—		132,355		—
Net distributions to parent		—		—		(297,956)		—		(297,956)		—		(297,956)		—
June 30, 2016	$	—	$	—	$	4,921,893	$	—	$	4,921,893	$	—	$	4,921,893	$	—

See accompanying Notes to the Combined Consolidated Financial Statements.

Quality Care Properties, Inc.

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2017		2016
Cash flows from operating activities:
Net (loss) income	$	(348,637)	$	132,355
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		68,860		93,991
Amortization of market lease intangibles		12		15
Amortization of right of use assets		135		84
Amortization of deferred financing costs		6,056		—
Stock-based compensation expense		3,873		—
Straight-line rents		343		103
Settlement of Tranche A deferred rent obligation		—		91,605
Gain on sales of real estate		(3,283)		(6,460)
Impairments		382,049		—
Deferred income tax expense		—		12,428
Changes in:
Other assets		(756)		(75)
Tenant security deposits and deferred revenue		(303)		887
Accrued interest		(2,286)		—
Accounts payable and accrued liabilities		1,759		(583)
Income taxes payable		(16,544)		—
Net cash provided by operating activities		91,278		324,350
Cash flows from investing activities:
Acquisitions of real estate		—		(106,588)
Leasing costs and tenant and capital improvements		(174)		—
Net proceeds from the sales of real estate		20,287		62,258
(Increase) decrease in restricted cash		(7)		14,526
Net cash provided by (used in) investing activities		20,106		(29,804)
Cash flows from financing activities:
Proceeds from issuance of debt		50,000		—
Repayments of debt		(5,000)		—
Payment of deferred financing costs		(34)		—
Distributions paid		(176)		—
Net distributions to parent		—		(297,956)
Net cash provided by (used in) financing activities		44,790		(297,956)
Net increase (decrease) in cash and cash equivalents		156,174		(3,410)
Cash and cash equivalents, beginning of period		126,185		6,058
Cash and cash equivalents, end of period	$	282,359	$	2,648
Supplemental cash flow information:
Income taxes paid	$	16,910	$	340
Interest paid	$	65,895	$	—
Supplemental disclosure of non-cash financing activities:
Accrued distributions	$	40	$	—

See accompanying Notes to the Combined Consolidated Financial Statements.

NOTE 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited combined consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). All intercompany balances and transactions have been eliminated in combination and consolidation.

These combined consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by GAAP for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The Company believes that the disclosures made are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring adjustments) have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The accompanying unaudited interim financial information should be read in conjunction with the audited combined consolidated financial statements of QCP and notes thereto included in our 2016 Annual Report on Form 10-K, as amended (the “Annual Report”).

The accompanying combined consolidated financial statements include the consolidated accounts of the Company and the combined consolidated accounts of the QCP Business. Accordingly, the results presented reflect the aggregate operations and changes in cash flows and equity of the Company on a consolidated basis for periods subsequent to and including the October 31, 2016 separation date and of the QCP Business on a carve-out basis for periods prior to the October 31, 2016 separation date.

For periods prior to the separation, our combined consolidated financial statements were derived from HCP’s consolidated financial statements and underlying accounting records and reflect HCP’s historical carrying value of the assets and liabilities, consistent with accounting for spin‑off transactions in accordance with GAAP. The accompanying combined consolidated financial statements for periods prior to the separation do not represent the financial position and results of operations of one legal entity, but rather a combination of entities under common control that have been “carved out” from HCP’s consolidated financial statements and reflect significant assumptions and allocations. The combined consolidated financial statements reflect that the Properties have been combined since the period of common ownership. All intercompany transactions have been eliminated in combination and consolidation. Since the Company prior to the separation did not represent one entity, a separate capital structure did not exist. As a result, the combined net assets of this group have been reflected in the combined consolidated financial statements as net parent investment for periods prior to the separation.

For accounting and reporting purposes, the combined consolidated financial statements of QCP include the historical results of operations, financial position and cash flows of the QCP Business transferred to QCP by HCP as if the transferred business was the Company’s business for all historical periods presented.

For periods prior to the separation, the combined consolidated financial statements include the attribution of certain assets and liabilities that have historically been held at the HCP corporate level, but are specifically identifiable or attributable to the Company. All transactions between HCP, its subsidiaries and the Company are considered to be effectively settled in the combined consolidated financial statements at the time the transaction is recorded. All payables and receivables with HCP and its consolidated subsidiaries, including notes payable and receivable, are reflected as a component of net parent investment. The total net effect of the settlement of these transactions for periods prior to the separation is reflected as net distributions to parent in the combined consolidated statements of equity and cash flows.

For periods prior to the separation, the combined consolidated financial statements include expense allocations related to certain HCP corporate functions, including executive oversight, treasury, finance, human resources, tax planning, internal audit, financial reporting, information technology and investor relations. These expenses have been allocated to the Company based on direct usage or benefit where specifically identifiable, with the remainder allocated pro rata based on cash net operating income, property count, square footage or other measures. All of the corporate cost allocations were deemed to have been incurred and settled through net parent investment in the period in which the costs were recorded. Following the Spin‑Off, the Company entered into the Transition Services Agreement and a tax matters agreement with HCP to provide these functions at costs specified in the agreements for an interim period. As of July 1, 2017, the majority of these services are no longer being performed by HCP. Upon expiration or termination of these

Recent Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2017-09 using a prospective approach. The Company does not expect the adoption of ASU 2017-09 on January 1, 2018 to have a material impact on its combined consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in ASU 2017-01 provide an initial screen to determine if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case the transaction would be accounted for as an asset acquisition. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. ASU 2017-01 is effective for fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2017-01 using a prospective approach. The Company adopted ASU 2017-01 on January 1, 2017 and expects to recognize a majority of its real estate acquisitions and dispositions as asset transactions rather than business combinations, which in the case of acquisitions will result in the capitalization of related third party transaction costs. The adoption had no impact on the Company’s combined consolidated financial statements as of and for the three and six months ended June 30, 2017.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”). The amendments in ASU 2016-18 require an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach. The Company does not expect the adoption of ASU 2016-18 on January 1, 2018 to have a material impact on its combined consolidated statements of cash flows as the Company does not have material restricted cash activity.

In August 2016, the FASB issued ASU No. 2016‑15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The amendments in ASU 2016-15 are intended to clarify current guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach. The Company is currently in compliance with substantially all of the clarifications in ASU 2016-15 and as such, the Company does not expect the adoption of ASU 2016‑15 on January 1, 2018 to have a material impact on its combined consolidated statements of cash flows.

In March 2016, the FASB issued ASU No. 2016‑08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016‑08”). ASU 2016‑08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016‑08 is effective for fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted at the original effective date of the new revenue standard (January 1, 2017). The Company is evaluating the impact of the adoption of ASU 2016‑08 on January 1, 2018 on its combined consolidated financial position or results of operations.

In August 2014, the FASB issued ASU No. 2014‑15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014‑15”). The amendments in ASU 2014‑15 provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The Company adopted ASU 2014-15 on January 1, 2017, resulting in the requirement for management to evaluate for each annual and interim reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued, and provide certain disclosures for such conditions or events identified, if any.

In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (“ASU 2014‑09”). This update changes the requirements for recognizing revenue. ASU 2014‑09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015‑14”). ASU 2015‑14 defers the effective date of ASU 2014‑09 by one year to fiscal years, and interim periods within such years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within such years, beginning after December 15, 2016. A reporting entity may apply the amendments in ASU 2014-09 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company is evaluating the complete impact the adoption of ASU 2014‑09 on January 1, 2018 will have on its combined consolidated financial position or results of operations. Since revenue for the Company is primarily generated through leasing arrangements, which are excluded from ASU 2014-09, the Company expects that it will be impacted in its recognition of non-lease revenue and its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control versus continuing involvement under current guidance. As a result, the Company generally expects that the new guidance will result in more transactions qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance.

Adoption of Accounting Standards Codification Topic 842, Leases

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) (“ASU 2016‑02” or “ASC 842”). ASU 2016‑02 supersedes the current accounting for leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard (see above). ASU 2016‑02 is effective for fiscal years beginning after December 15, 2018, and interim periods within such years. Early adoption is permitted. Entities are required to use a modified retrospective approach when transitioning to ASU 2016‑02 for leases that exist as of or are entered into after the beginning of the earliest comparative period presented in the financial statements.

The Company elected to early adopt ASU 2016‑02, effective as of April 1, 2016 (the “Adoption”), which was a change in accounting principle. Upon the Adoption, the Company elected a permitted practical expedient to use hindsight in determining the lease term under the new standard. The Adoption results in a material change to the accounting for the Company’s Master Lease entered into by the Company and HCRMC in April 2011 upon the acquisition of the HCRMC Properties. Given the decline in HCRMC’s performance subsequent to the 2011 acquisition (see Note 3), it was concluded that the lease term (as defined by ASC 842) was shorter than originally determined at (i) the lease commencement date in April 2011 and (ii) the lease classification reassessment date in March 2015 when the Company and HCRMC amended the Master Lease (the “HCRMC Lease Amendment”) (see Note 3). When applying hindsight, the lease classification reassessment in April 2011 resulted in the Master Lease being reclassified from a direct financing lease (“DFL”) to an operating lease. When applying hindsight, the lease classification reassessment in March 2015 resulted in the Master Lease continuing to be classified as an operating lease. Under the transition guidance required by ASU 2016‑02, the Master Lease, which was previously accounted for as a DFL, has been accounted for as an operating lease as of the earliest comparable period presented.

While the Company is primarily a lessor, it also considered the lessee transition and application requirements under ASU 2016‑02.

NOTE 3. Operating Leases

Master Lease with HCRMC including an Event of Default, Lease Modifications and Related Impairments

The Company acquired 334 post‑acute/skilled nursing and memory care/assisted living properties in its 2011 transaction with HCRMC and entered into the Master Lease supported by a guaranty from HCRMC. The HCRMC Properties are divided into four pools, as described within the Master Lease, with initial lease terms of 13 to 17 years.

HCRMC has the option to renew leases by pool whereby all properties within a pool must be renewed. The renewal terms vary by subpools within each pool and range from five to 17 years.

During the three months ended March 31, 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non‑strategic properties under the Master Lease. HCRMC receives an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by the Company.

On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the Master Lease effective April 1, 2015 (the “HCRMC Lease Amendment”). The HCRMC Lease Amendment reduced initial annual rent by a net $68 million from $541 million to $473 million. Commencing on April 1, 2016, the minimum rent escalation was reset to 3.0% for each lease year through the expiration of the initial term of each applicable pool of properties. Prior to the HCRMC Lease Amendment, rent payments would have increased 3.5% on April 1, 2015 and 2016 and 3.0% annually thereafter. The initial term was extended five years to an average of 16 years, and the extended expirations under the available extension options remained the same. See Note 7 for commitments for capital additions.

As consideration for the rent reduction, the Company received a DRO from the Lessee equal to an aggregate amount of $525 million, which was allocated into two tranches: (i) a Tranche A DRO of $275 million and (ii) a Tranche B DRO of $250 million (together the “DROs”). The DROs are considered minimum rental payments and were initially included in the calculation of straight‑line rent. The Lessee made rental payments on the Tranche A DRO equal to 6.9% of the outstanding amount (representing $19 million for the initial lease year) until the entire Tranche A DRO was paid in full in March 2016 in connection with the nine property purchases discussed below. Commencing on April 1, 2016, until the Tranche B DRO is paid in full, the outstanding principal balance of the Tranche B DRO will be increased annually by (i) 3.0% initially, (ii) 4.0% commencing on April 1, 2019, (iii) 5.0% commencing on April 1, 2020 and (iv) 6.0% commencing on April 1, 2021 and annually thereafter for the remainder of its term. The Tranche B DRO is due and payable on the earlier of (i) certain capital or liquidity events of HCRMC, including an initial public offering or sale, or (ii) March 31, 2029, which is not subject to any extensions. The HCRMC Lease Amendment also imposes certain restrictions on the Lessee and HCRMC until the Tranche B DRO is paid in full, including with respect to the payment of dividends and the transfer of interest in HCRMC.

Additionally, HCRMC agreed to sell, and the Company agreed to purchase, nine post‑acute/skilled nursing properties for an aggregate purchase price of $275 million (see Note 4). The Company acquired seven properties during the year ended December 31, 2015 for $183.4 million, the proceeds of which were used to settle a portion of the Tranche A DRO, and reduce the straight‑line rent receivable. During the first quarter of 2016, the Company completed the remaining two of the nine post‑acute/skilled nursing property purchases from HCRMC for $91.6 million, which settled the remaining portion of the Tranche A DRO and reduced the straight‑line rent receivable. Following the purchase of a property, the Lessee leases such property from the Company pursuant to the Master Lease. The nine properties initially contribute an aggregate of $19 million of annual rent (subject to escalation) under the Master Lease.

As part of the Company’s fourth quarter 2015 review process, it assessed the collectability of all contractual rent payments under the Master Lease. The Company’s evaluation included, but was not limited to, consideration of: (i) the continued decline in HCRMC’s operating performance and fixed charge coverage ratio during the second half of 2015, with the most significant deterioration occurring during the fourth quarter, (ii) the reduced growth outlook for the post‑acute/skilled nursing business and (iii) HCRMC’s 2015 audited financial statements. The Company determined that the timing and amounts owed under the Master Lease were no longer reasonably assured as of December 31, 2015. As a result, the Company placed the Master Lease on nonaccrual status and utilizes the cash basis method of accounting beginning January 1, 2016, in accordance with its policies.

As a result of placing the Master Lease on nonaccrual status, the Company further evaluated the carrying amount of its straight‑line rent receivables as of December 31, 2015. Due to the significant decline in HCRMC’s fixed charge coverage ratio in the fourth quarter of 2015, combined with a lower growth outlook for the post‑acute/skilled nursing business, the Company determined that it was probable that its straight‑line rent receivables were impaired and an allowance for straight‑line rent receivables was recognized as of December 31, 2015. An impairment charge of $180.3 million related to the straight‑line rent receivables was recorded, net of $17.2 million that was reclassified to equity income as a result of the Company’s ownership interest in HCRMC. The impairment charge was recorded in impairments, net in the combined consolidated statement of income and comprehensive income for the year ended December 31, 2015.

In November 2016, the Company provided to HCR III reductions of contractual rent due under the Master Lease as follows: a $5 million reduction for the month of November 2016, a $15 million reduction for the month of December 2016 and a $10 million reduction for the month of January 2017. HCR III paid in full the contractual rent due for the months of February 2017 and March 2017.

During the first quarter of 2017, the Company collected an impound deposit of $4.0 million from HCRMC for real estate taxes and insurance as a result of HCRMC not meeting certain covenant requirements, which amount was returned in connection with entering into the Agreement (defined below).

On April 5, 2017, the Company entered into a forbearance agreement (the "Agreement") with HCR III and HCRMC (together, "HCR ManorCare"). Among other things, the Agreement required HCR ManorCare to make cash rent payments of $32 million for each of April, May and June of 2017, with a deferral of payment of the additional $7.5 million per month otherwise due until the earlier of (i) July 5, 2017 and (ii) an early termination of the Agreement, with all deferred amounts becoming immediately due and payable upon an early termination. The Agreement also required HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which were received on April 10, 2017 and included a "going concern" exception for HCR ManorCare in the auditor opinion. During the term of the Agreement, QCP also agreed to provide HCR ManorCare with a temporary secured extension of credit of up to $7 million per month during each of April, May and June of 2017 (up to $21 million in the aggregate), which would be due and payable in full not later than December 31, 2017, subject to acceleration upon certain events.

HCR ManorCare made the reduced cash rent payments of $32 million for each of April and May of 2017. HCR ManorCare borrowed $7 million for April 2017 under the temporary secured credit agreement.

On June 2, 2017, QCP received $15 million from HCR ManorCare, constituting $8 million of rent and repayment of the $7 million secured loan extended pursuant to the Agreement, rather than the full $32 million in rent required to be paid for June 2017 under the terms of the Agreement.

HCR ManorCare is currently required to pay approximately $39.5 million in monthly rent under the Master Lease. On July 7, 2017, QCP received approximately $8.2 million from HCR ManorCare. On July 7, 2017, QCP delivered a notice of default under the Master Lease relating to nonpayment of rent due and other matters. The notice of default demanded payment of all current and past due rent, totaling approximately $79.6 million, by the end of the day on July 14, 2017. Such amount was not paid, and therefore, an Event of Default exists under the Master Lease, requiring the immediate payment of an additional approximately $265 million of Tranche B DRO and permitting the QCP lessors to terminate the Master Lease, appoint receivers or exercise other remedies with respect to any and all leased properties. On August 3, 2017, QCP received approximately $23.0 million in rent from HCR ManorCare. QCP continues to be in discussions with HCR ManorCare about the Event of Default and related matters.

As of June 30, 2017, in connection with management’s belief that an Event of Default was imminent and the closing of our fiscal quarter, the Company expected to have the ability to sell or re-lease any HCRMC Property unencumbered by the Master Lease. This resulted in a reduction in the expected holding period of certain facilities, which resulted in an impairment charge of $382.0 million during the three months ended June 30, 2017. See Note 4 for additional information on the impairment analysis performed.

The Company incurred legal and diligence costs related to the potential restructuring of the Master Lease totaling $4.6 million and $7.9 million during the three and six months ended June 30, 2017, respectively.

The Company recognized HCRMC rental and related revenues totaling $72.0 million and $116.4 million for the three months ended June 30, 2017 and 2016, respectively, and $177.3 million and $229.4 million for the six months ended June 30, 2017 and 2016, respectively.

Other Leases

The non‑HCRMC Properties are leased on a triple-net basis to other national and regional operators and other tenants unaffiliated with HCRMC. These operating leases expire between years 2019 and 2025 with renewal options of five years or greater. One of the non‑HCRMC Properties contains variable lease payments structured as a percentage of gross revenues once a gross revenue threshold is exceeded.

As of June 30, 2017 and December 31, 2016, the straight‑line rent receivables, net balance was $3.0 million and $3.3 million, respectively.

NOTE 4. Real Estate Acquisitions, Dispositions and Impairments

Acquisitions

During 2016, the Company completed the remaining two of the nine post‑acute/skilled nursing property purchases from HCRMC for $91.6 million, which proceeds were used to settle the remaining portion of the Tranche A DRO (see Note 3). The purchase price was allocated $86.4 million to real estate and $5.2 million to intangible assets, with no goodwill recognized.

Additionally, during 2016, the Company acquired a memory care/assisted living property for $15.0 million. The property was developed by HCRMC and was added to the Master Lease. The purchase price was allocated $14.1 million to real estate and $0.9 million to intangible assets, with no goodwill recognized. The actual revenues and earnings of the property since the acquisition date, as well as the supplementary pro forma information assuming the acquisition had occurred as of the beginning of the prior period, are deemed insignificant to the Company.

One of the three acquisitions during 2016 (the “acquired property”) was structured as a reverse like‑kind exchange pursuant to Section 1031 of the Internal Revenue Code (a “reverse 1031 exchange”). On September 9, 2016, the Company completed the reverse 1031 exchange and as such, the acquired property is no longer in the possession of the EAT, which had been classified as a VIE as it is a thinly capitalized entity. The Company had consolidated the EAT because it was the primary beneficiary as it had the ability to control the activities that most significantly impacted the EAT’s economic performance. As of December 31, 2015, the EAT held property reflected as real estate with a carrying value of $27.1 million, for which the Company closed on the property in the first quarter of 2016.

Dispositions

During 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non‑strategic properties that were leased to HCR III under the Master Lease (see Note 3). During 2015, the Company completed 22 of the sales for $218.8 million, resulting in gain on sales of $39.1 million. From the proceeds, $14.5 million was held by a Qualified Intermediary for a 1031 exchange that was not completed at December 31, 2015 and was classified as restricted cash as of December 31, 2015. The 1031 exchange closed in the first quarter of 2016.

During 2016, the Company completed 21 of the non-strategic property sales, bringing the total sold to 43 through December 31, 2016, and sold one additional HCRMC Property for an aggregate amount of $114.6 million, resulting in gain on sales of $10.6 million. During the six months ended June 30, 2016, the Company completed 11 of the 21 sales for an aggregate amount of $62.3 million, resulting in gain on sales of $6.5 million.

During the six months ended June 30, 2017, the Company sold the seven remaining non-strategic properties for aggregate net proceeds of $19.3 million, resulting in gain on sales of $3.3 million.

Impairments

During the three months ended June 30, 2017, the Company recognized an impairment charge of $382.0 million related to certain skilled nursing properties classified as held for use. The properties were determined to be impaired in connection with the closing of the quarter under the recoverability test because the carrying value of the respective properties exceeded the expected undiscounted cash flows over the estimated holding period for the respective properties, due to a reduction in the expected holding period for the properties (see Note 3) and the continued financial deterioration of the post-acute/skilled nursing sector. The impairment charge is equal to the aggregate amount by which the carrying value of the respective properties exceeds the estimated fair value of the respective properties. Fair value of the properties was estimated using market-based data, including recent comparable sales, market knowledge, brokers’ opinions of value and the income approach, which are considered Level 3 inputs in the fair value measurement hierarchy. A significant assumption used in determining the estimated fair value of these properties was a per bed market rate specific to each individual market, the range of which was $15,000 to $88,000 per bed.

Real Estate and Related Assets Held for Sale

The seven remaining non‑strategic properties sold during 2017 were classified as held for sale, net as of December 31, 2016, as follows (in thousands):


Real estate:
Building and improvements	$	19,170
Land		2,380
Accumulated depreciation		(7,405)
Net real estate		14,145
Intangible assets, net		1,252
Straight-line rent receivables, net		622
Real estate and related assets held for sale, net	$	16,019

NOTE 5. Debt

Overview

In anticipation of the Spin‑Off, the Company entered into certain debt arrangements which, upon completion and closing of the Spin‑Off and related transactions on October 31, 2016, were binding upon QCP. The proceeds from the Company’s borrowings, less applicable financing costs, fees and expenses, were transferred to HCP as partial consideration for the QCP Business.

Debt as of June 30, 2017 and December 31, 2016 consisted of the following (in thousands):


			Balance Outstanding as of
	Interest	Maturity	June 30,		December 31,
Debt	Rate	Date	2017		2016
Senior secured revolving credit facility(1)	Floating	October 31, 2021	$	75,000	$	25,000
Senior secured term loan(2)	Floating	October 31, 2022		955,677		957,465
Senior secured notes	8.125%	November 1, 2023		731,989		730,604
Unsecured revolving credit facility(3)	Floating	October 31, 2018		—		—
Total			$	1,762,666	$	1,713,069

(1)

The interest rate was 6.29% and 5.86% as of June 30, 2017 and December 31, 2016, respectively. On April 26, 2017, the Company borrowed an additional $50.0 million under the senior secured revolving credit facility, the proceeds of which were available for working capital and other corporate purposes, resulting in remaining availability under the facility of $25.0 million.

(2)

The interest rate was 6.29% and 6.25% as of June 30, 2017 and December 31, 2016, respectively.

(3)

We are the borrower under a $100 million unsecured revolving credit facility, on which we may only draw prior to October 31, 2017. However, under the terms of the facility, the availability has been reduced to zero as of June 30, 2017. HCP is the sole lender.

Covenants

Our secured and unsecured debt agreements contain certain customary affirmative covenants, including maintaining a minimum debt service coverage ratio, negative covenants, including limitations on the incurrence of additional debt, issuance of preferred shares, payment of dividends, sale of properties and modification of the Master Lease, and events of default. As of June 30, 2017, management believes the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under its debt agreements.

On May 25, 2017, the Company issued 10,177 fully vested shares of common stock to the independent members of the Board of Directors, representing partial compensation for their service on the Board of Directors.

The Company recorded total stock-based compensation expense related to the outstanding restricted stock units, stock options and performance-based stock awards of $2.1 million and $3.9 million during the three and six months ended June 30, 2017, respectively, which is included within general and administrative expense in the accompanying combined consolidated statements of operations and comprehensive (loss) income.

NOTE 7. Commitments and Contingencies

Legal Proceedings in General

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition, results of operations or cash flows. The Company’s policy is to record a liability when a loss is considered probable and the amount can be reasonably estimated and to expense legal costs as they are incurred.

Legal Proceedings related to HCRMC

On April 20, 2015, the U.S. Department of Justice (“DOJ”) unsealed a previously filed complaint in the U.S. District Court for the Eastern District of Virginia against HCRMC and certain of its affiliates in three consolidated cases following a civil investigation arising out of three lawsuits filed by former employees of HCRMC under the qui tam provisions of the federal False Claims Act. The DOJ’s complaint in intervention is captioned United States of America, ex rel. Ribik, Carson, and Slough v. HCR ManorCare, Inc., ManorCare Inc., HCR ManorCare Services, LLC and Heartland Employment Services, LLC (Civil Action Numbers: 1:09cv13; 1:11cv1054; 1:14cv1228 (CMH/TCB)). The complaint alleges that HCRMC submitted claims to Medicare for therapy services that were not covered by the skilled nursing facility benefit, were not medically reasonable and necessary, and were not skilled in nature, and therefore not entitled to Medicare reimbursement. Summary judgment motions are scheduled for September/October 2017. While HCRMC has indicated that it believes the claims are without merit and it will vigorously defend against them, the ultimate outcome is uncertain and a significant adverse judgment against HCRMC or significant settlement obligation could impact HCRMC’s ability or willingness to make rent payments under the Master Lease.

Legal Proceedings related to HCP

Pursuant to a separation and distribution agreement that QCP and HCP entered into in connection with the completion of the Spin‑Off: (i) any liability arising from or relating to QCP’s business has been assumed by QCP and QCP has indemnified HCP and its subsidiaries (and its respective directors, officers, employees and agents and certain other related parties) against any losses arising from or relating to such liability, and (ii) HCP has indemnified QCP (including its subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving HCP’s real estate investment business prior to the Spin‑Off and its retained properties. HCP is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its business, which are subject to the indemnities provided by HCP to QCP, including the actions described below.

HCP has reported that, on May 9, 2016, a purported stockholder of HCP filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16‑cv‑01106‑JJH, in the U.S. District Court for the Northern District of Ohio against HCP, certain of its officers, HCRMC, and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and alleges that HCP made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the DOJ in a pending suit against HCRMC arising from the False Claims Act. The plaintiff in the suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. The DOJ lawsuit against HCRMC is described in greater detail above. As the Boynton Beach action is in its early stages and a lead plaintiff has not yet been

named, the defendants have not yet responded to the complaint. HCP has reported that it believes the suit to be without merit and intends to vigorously defend against it.

HCP has also reported that, on June 16, 2016 and July 5, 2016, purported stockholders of HCP filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al., Case No. 30‑2016‑00858497‑CU‑PT‑CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30‑2016‑00861646‑CU‑MC‑CJC, in the Superior Court of California, County of Orange, against certain of HCP’s current and former directors and officers and HCRMC. The Stearns action was subsequently consolidated by the Court with the Subodh action. HCP is named as a nominal defendant. The consolidated derivative action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. The plaintiffs demand damages (in an unspecified amount), pre-judgment and post-judgment interest, a directive that HCP and the individual defendants improve HCP’s corporate governance and internal procedures (including putting resolutions to amend the bylaws or charter to a stockholder vote), restitution from the individual defendants, costs (including attorneys’ fees, experts’ fees, costs, and expenses), and further relief as the Court deems just and proper. As the Subodh action is in the early stages, the defendants are in the process of evaluating the suit and have not yet responded to the complaint. On April 18, 2017, the Court approved the parties’ stipulation staying the action pending further developments, including in the related securities class action litigation. The Court also adjourned the status conference scheduled for April 27, 2017 to January 10, 2018.

HCP has also reported that, on April 10, 2017, a purported stockholder of HCP filed a derivative action, Weldon v. Martin et al., Case No. 3:17cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of HCP’s current and former directors and officers and HCRMC. HCP is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative actions. In addition, the complaint asserts a claim under Section 14(a) of the Securities Exchange Act of 1934, alleging that HCP made false statements in its 2016 proxy statement by not disclosing that HCP’s performance issues in 2015 were the direct result of billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. The defendants have not yet been served or responded to the complaint. On July 11, 2017, the court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action.

HCP has also reported that, on July 21, 2017, a purported stockholder of HCP filed a derivative action, Kelley v. HCR ManorCare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of HCP’s current and former directors and officers and HCRMC. HCP is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in the California and Ohio derivative actions and, like the Ohio action, asserts a claim under Section 14(a) of the Securities Exchange Act of 1934, alleging that HCP made false statements in its 2016 proxy statement by not disclosing that HCP’s performance issues in 2015 were the direct result of billing fraud at HCRMC. The defendants have not yet been served or responded to the complaint.

Commitments for Capital Additions

Under the terms of the Master Lease, the Company is required through April 1, 2019, upon the Lessee’s request, to provide the Lessee an amount to fund Capital Additions Costs (as defined in the Master Lease) approved by the Company, in the Company’s reasonable discretion. Such an amount may not exceed $100 million in the aggregate (“Capital Addition Financing”) and the Company is not obligated to advance more than $50 million in Capital Addition Financing in any single lease year. In connection with any Capital Addition Financing, the minimum rent allocated to the applicable property will be increased by an amount equal to the product of: (i) the amount disbursed on account of the Capital Addition Financing for the applicable property times (ii) at the time of any such disbursement, the greater of (a) 7.75% and (b) 500 basis points in excess of the then current 10‑year Treasury Rate. Any such Capital Addition Financing shall be structured in a REIT tax‑compliant fashion. Through June 30, 2017, approximately $2.8 million in Capital Addition Financing has been funded by the Company.

Tenant Purchase Options

On May 30, 2017, the Company and Tandem Health Care, LLC (“Tandem”), a tenant with an option to purchase the nine properties it leases from us at a favorable purchase price, entered into a lease amendment extending the option expiration date from May 31, 2017 to July 31, 2017 and increasing the purchase price. If exercised, the

NOTE 9. Earnings Per Common Share

We determine basic earnings per common share based on the weighted average number of shares of common stock outstanding during the period and we consider any participating securities for purposes of applying the two-class method. We determine diluted earnings per common share based on the weighted average number of shares of common stock outstanding combined with the incremental weighted average shares that would have been outstanding assuming all potentially dilutive securities were converted into common shares at the earliest date possible. As described in Note 1, the common shares outstanding at the separation date are reflected as outstanding for all periods prior to the separation.

The following table sets forth the computation of our basic and diluted earnings per common share (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Numerator:
Net (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(348,850)	$	132,355
Denominator:
Weighted average common shares outstanding - basic		93,602		93,598		93,600		93,598
Compensation-related shares		—		—		—		—
Weighted average common shares outstanding - diluted		93,602		93,598		93,600		93,598
(Loss) earnings per common share - basic and diluted	$	(4.12)	$	0.89	$	(3.73)	$	1.41

For the three and six months ended June 30, 2017, additional potentially dilutive securities include outstanding stock options, restricted stock units, deferred stock units and performance-based stock awards. For the three and six months ended June 30, 2017, diluted shares exclude the impact of any such securities because their effect would be anti-dilutive. There were no such securities outstanding during the three and six months ended June 30, 2016. We accrue distributions when they are declared.

NOTE 10. Concentration of Credit Risk

Concentrations of credit risk arise when one or more tenants or operators related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors its portfolio to assess potential concentrations of risks.

Assets related to HCRMC represented 90% and 94% of the Company’s total assets as of June 30, 2017 and December 31, 2016, respectively. The Company derived 91% and 92% of its total revenues from the Master Lease with HCRMC for the three and six months ended June 30, 2017, respectively, and 94% of its total revenues from the Master Lease with HCRMC for the three and six months ended June 30, 2016.

NOTE 11. Subsequent Events

See Note 3 for activity related to HCR ManorCare and Note 7 for the exercise of a tenant purchase option subsequent to June 30, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the combined consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”). See “—Overview – Basis of Presentation” below for defined terms. Our financial statements may not necessarily reflect our future financial condition and results of operations, or what they would have been had we been a separate, stand‑alone company during all periods presented.

Cautionary Language Regarding Forward-Looking Statements

Statements in this Quarterly Report that are not historical statements of fact may be deemed “forward-looking statements.” We intend to have our forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with those provisions. Forward-looking statements include, among other things, statements regarding our intent, belief or expectations, including, but not limited to, statements regarding: the anticipated structure, benefits and tax treatment of the Spin‑Off; future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations.

Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward‑looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward‑looking statements are reasonable, we can give no assurance that our expectations will be attained. Further, we cannot guarantee the accuracy of any such forward-looking statement contained in this Quarterly Report, and such forward-looking statements are subject to known and unknown risks and uncertainties that are difficult to predict. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

the HCR ManorCare, Inc. (“HCRMC”) properties representing substantially all of our assets and our reliance on HCRMC for substantially all of our revenues;

the impact of the Event of Default under the Master Lease (defined below) and ongoing negotiations with HCRMC (as further discussed under “—Portfolio Overview”), including risks related to the following:

The uncertainty that negotiations with HCRMC will result in an agreement, or that any such agreement would be beneficial to the Company;

The Company's ability to enforce remedies under the Master Lease and the costs associated with enforcing such remedies;

In the event the Company terminates the Master Lease with respect to any or all HCRMC Properties, HCRMC's willingness to comply with contractual provisions requiring HCRMC to cooperate with the transfer of facility operations to new tenants or operators of such facilities;

In the event the Company terminates the Master Lease with respect to any or all HCRMC Properties, the impact to the Company under the Company's credit agreements of such termination; and

In the event of a possible HCRMC bankruptcy, the impact to the Company under the Company's credit agreements of a rejection of the Master Lease by HCRMC and of limitations and delays in bankruptcy on the Company’s ability to exercise remedies and seek recoveries under the Master Lease.

our dependency on HCRMC’s ability and willingness to meet its contractual obligations under the Master Lease and guaranty thereof, including risks related to the following:

the impact of HCRMC’s decline in operating performance and fixed charge coverage;

the impact of the “going concern” exception in the auditors’ opinion to HCRMC’s audited consolidated financial statements as of December 31, 2016 and 2015 and for the three years in the period ended December 31, 2016, resulting from recurring losses and negative working capital; and

the U.S. Department of Justice (“DOJ”) lawsuit against HCRMC and other legal proceedings involving HCRMC, including litigation costs and the possibility of adverse results and related developments.

the financial condition and operations of HCRMC and our other existing and future tenants and operators, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which has resulted in uncertainties regarding our ability to realize the full benefit of such tenants’ and operators’ leases, including the recovery of any investments made by us in their operations, and which may result in further impairment charges with respect to underperforming facilities;

ongoing trends in the healthcare industry, including a shift away from a traditional fee‑for‑service model and increased penetration of government reimbursement programs with lower reimbursement rates, average length of stay and average daily census, and increased competition in the industry, including for skilled management and other key personnel;

the effect on our tenants and operators of legislation and other legal requirements, including licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements;

the potential impact on us, our tenants and operators from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;

competition for, and our ability to negotiate the same or better terms with and obtain regulatory approvals for, new tenants or operators if our existing leases are not renewed or we exercise our right to replace HCRMC or other tenants upon default;

negative economic conditions in our geographies of operation;

uninsured or underinsured losses that our properties may experience and other unanticipated expenses, including environmental compliance costs and liabilities;

our non‑investment grade rating from credit rating agencies;

our ability, as a highly levered company, to manage our indebtedness level, changes in the terms of such indebtedness and changes in market interest rates;

covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial position or results of operations;

our ability to pay dividends and the tax treatment of such dividends for our stockholders;

loss of key personnel;

our ability to qualify or maintain our status as a real estate investment trust (“REIT”);

the ability to achieve some or all of the benefits that we expect to achieve from the Spin‑Off (defined below) or to successfully operate as an independent, publicly‑traded company;

the ability and willingness of HCP to meet and/or perform its obligations under any contractual arrangements that are entered into with us in connection with the Spin‑Off and any of its obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

unexpected liabilities, disputes or other potential unfavorable effects related to the Spin‑Off; and

additional factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed on March 31, 2017, as amended (the “Annual Report”).

Forward‑looking statements speak only as of the date of this Quarterly Report. Except as may be required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we expressly disclaim any obligation to release publicly any updates or revisions to any forward‑looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based.

Overview – Basis of Presentation

Quality Care Properties, Inc. (“QCP” or the “Company”) is a Maryland corporation that was formed in 2016 to hold the HCR ManorCare, Inc. (“HCRMC”) portfolio (“HCRMC Properties”), 28 other healthcare related properties (“non‑HCRMC Properties,” and, collectively with the HCRMC Properties, the “Properties”), a deferred rent obligation (“DRO”) due from HCRMC under a master lease (the “Tranche B DRO”) and an equity method investment in HCRMC (together, the “QCP Business”) previously held by HCP, Inc. (“HCP”). Prior to the separation from HCP, which was completed on October 31, 2016, QCP was a wholly owned subsidiary of HCP. In connection with the separation, HCP transferred to certain subsidiaries of QCP the equity of entities that hold the QCP Business. Pursuant to the separation agreement, dated as of October 31, 2016, by and between HCP and QCP, HCP effected the separation by means of a pro rata distribution of substantially all of the outstanding shares of QCP common stock to HCP stockholders of record as of the close of business on October 24, 2016, the record date (the “Spin‑Off”). At the time of the Spin-Off, the Properties contributed to QCP consisted of 274 post‑acute/skilled nursing properties, 62 memory care/assisted living properties, one surgical hospital and one medical office building, including 18 properties then held for sale.

Unless the context otherwise requires, references to “we,” “us,” “our,” and “the Company” refer to QCP on a consolidated basis after giving effect to the transfer of assets and liabilities from HCP as well as to the QCP Business prior to the date of the completion of the separation. Before the completion of the separation, the QCP Business was operated through subsidiaries of HCP, which operates as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). QCP expects to operate as a REIT under the applicable provisions of the Code, commencing with its initial taxable year ended December 31, 2016. REITs are generally not liable for federal corporate income taxes as long as they continue to distribute not less than 100% of their REIT taxable income. If we determine to maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.

As of June 30, 2017, the Properties consisted of 257 post‑acute/skilled nursing properties, 61 memory care/assisted living properties, one surgical hospital and one medical office building. The Properties are primarily located in Pennsylvania, Illinois, Ohio, Florida and Michigan. As of June 30, 2017, 292 of the 320 properties were leased to HCRMC under a master lease agreement (as amended and supplemented from time to time, the “Master Lease”). The Master Lease properties are leased to HCRMC’s wholly owned subsidiary, HCR III Healthcare, LLC (“HCR III” or the “Lessee”). All of HCR III’s obligations under the Master Lease are guaranteed by HCRMC. The non‑HCRMC Properties are leased on a triple-net basis to other national and regional operators and other tenants unaffiliated with HCRMC.

The Master Lease is structured as a triple‑net lease, in which HCRMC, either directly or through its affiliates and sublessees, operates the properties and is responsible for all operating costs associated with the properties, including the payment of property taxes, insurance and repairs, and providing indemnities to us against liabilities associated with the operation of the properties. HCR III is required to expend a minimum amount during each lease year for capital projects (as defined in the Master Lease), which, as of June 30, 2017, is equal to approximately $31 million for all of the HCRMC Properties in the aggregate. Under the terms of the Master Lease, we are required through April 1, 2019 to, upon HCR III’s request, provide HCR III an amount to fund Capital Addition Costs (as defined in the Master Lease)

approved by us, in our reasonable discretion, with such amount not to exceed $100 million in the aggregate, but we are not obligated to advance more than $50 million in any single lease year. See “—Liquidity and Capital Resources—Capital Expenditures.”

Before the separation, QCP had not conducted any business as a separate company and had no material assets or liabilities. The operations of the business transferred to us by HCP on the Spin-Off date are presented as if the transferred business was our business for all historical periods described and at the carrying value of such assets and liabilities reflected in HCP’s books and records. Additionally, the financial statements reflect the common shares outstanding at the separation date as outstanding for all periods prior to the separation.

As a result of the Spin‑Off, QCP is a publicly‑traded company (NYSE: QCP) primarily engaged in the ownership and leasing of post‑acute/skilled nursing properties and memory care/assisted living properties. Our primary source of revenues is rent payable under the Master Lease. We expect HCR III will generate revenues primarily from patient fees and services. As a result of the Event of Default under the Master Lease, payment of the Tranche B DRO currently outstanding under the Master Lease is now due. See “—Liquidity and Capital Resources—Deferred Rent Obligation” for additional information regarding the Tranche B DRO.

We initially lacked certain non‑management administrative capabilities, and accordingly, we entered into an agreement pursuant to which HCP will provide certain administrative and support services to us on a transitional basis (the “Transition Services Agreement”), which is customary for a transaction such as the Spin‑Off, expiring on the earlier of October 31, 2017 or completion of all services to be provided by HCP under the agreement, unless extended or earlier terminated. As of July 1, 2017, the majority of these services are no longer being performed by HCP.

For periods prior to the separation, the historical combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report include the combined consolidated accounts of the QCP Business as derived from HCP’s consolidated financial statements and accounting records at their historical carrying values. The historical combined consolidated financial statements reflect our financial position, results of operations and cash flows as “carved out” from HCP prior to the Spin‑Off, in conformity with U.S. generally accepted accounting principles (“GAAP”). The combined consolidated financial information reflects the adoption of ASU 2016‑02, Leases (see Note 2 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report).

We discuss and provide our analysis in the following order:

Portfolio overview;

Results of operations;

HCRMC financial information;

Liquidity and capital resources;

Dividends;

Contractual obligations;

Off‑balance sheet arrangements;

Inflation;

Non-GAAP financial measures;

Critical accounting policies; and

Recent accounting pronouncements.

PORTFOLIO OVERVIEW

As of June 30, 2017, our portfolio consisted of 320 properties as follows:


Operator	Property Type	Property Count	Operating Beds/Units(1)	Occupancy %(1)
HCRMC	Post-acute/skilled	232	30,785	82.5
	Senior housing	60	4,208	79.6
Tandem Consulate Health Care	Post-acute/skilled	9	932	91.9
Covenant Care	Post-acute/skilled/ Senior housing	12	1,261	74.5
Genesis HealthCare	Post-acute/skilled/ Senior housing	5	477	68.6
Remaining	Hospital/ Medical office	2	37 Beds/ 88,000 Sq. Ft.	N/A
Total		320

(1)

Data was derived by us solely from information provided to us by the operators.

Master Lease with HCRMC including an Event of Default, Lease Modifications and Related Impairments

The Company derived 91% and 92% of its total revenues for the three and six months ended June 30, 2017, respectively, from the 292 properties leased to HCRMC under the Master Lease and operated by HCRMC through HCR III. See “—HCRMC Financial Information” below for more information on HCRMC’s financial results.

During 2015, we and HCRMC agreed to market for sale the real estate and operations associated with 50 non‑strategic properties that were leased to HCR III under the Master Lease. Pursuant to the agreement, HCRMC received an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by us.

On March 29, 2015, we and HCRMC agreed to amend the Master Lease (“HCRMC Lease Amendment”). Commencing April 1, 2015, we provided an annual net rent reduction of $68 million, which equated to first year rent under the amendment of $473 million, compared to the $541 million annual rent that would have commenced April 1, 2015, prior to the HCRMC Lease Amendment. The contractual rent increases by 3.0% annually during the initial term, commencing April 1, 2016. In exchange, we received the following consideration:

A right to acquire fee ownership in nine post‑acute/skilled nursing properties valued at $275 million with a median age of four years, owned and operated by HCRMC. We retained a lease receivable of equal value, (the “Tranche A DRO”) earning income of $19 million annually (included in the amended initial lease year rent of $473 million above), which was reduced as the property purchases were completed. Following the purchase of a property, HCRMC leases such property from us pursuant to the Master Lease. The nine properties contribute an aggregate of $19 million of annual rent (subject to escalation) under the Master Lease;

The Tranche B DRO with an initial principal amount of $250 million, is payable by HCRMC upon the earlier of: (i) March 31, 2029, which is the end of the initial term of the first renewal pool under the Master Lease; or (ii) certain capital or liquidity events of HCRMC, including an initial public offering or sale. The Tranche B DRO increases each year as follows: 3.0% in April 2016 through 2018, 4.0% in 2019, 5.0% in 2020 and 6.0% in 2021 and annually thereafter until the end of the initial lease term. As a result of the Event of Default under the Master Lease, payment of the Tranche B DRO currently outstanding is now due; and

Extension of the initial lease term by five years, to an average of 16 years.

During 2015, 22 of the 50 non‑strategic property sales were completed for $218.8 million. As of December 31, 2015, the remaining 28 properties that had not yet been sold were classified as real estate and related assets held for sale. During 2015, we recognized an impairment charge of $47.1 million related to the anticipated sale of the 50 non‑strategic properties based on expected net cash flows amounting to the projected sales price. During 2016, we completed an

additional 21 of the 50 non‑strategic property sales and sold one additional HCRMC property, generating proceeds of $114.6 million, with the remaining seven properties classified as real estate and related assets held for sale as of December 31, 2016. The seven remaining non‑strategic properties were sold in the first quarter of 2017 for an aggregate amount of $19.3 million. During 2016, we recognized an additional impairment charge of $21.4 million related to the 18 properties held for sale as of September 30, 2016. We received all of the proceeds from the property sales.

Additionally, during the fourth quarter of 2016, the Company recognized an impairment charge of $145.7 million related to seven skilled nursing properties classified as held for use as a result of their expected future undiscounted cash flows being less than their carrying values due in large part to the continued financial deterioration of the post-acute/skilled nursing sector.

We acquired seven HCRMC properties during 2015 for $183.4 million, the proceeds of which were used to settle a portion of the Tranche A DRO. During 2016, we acquired two additional properties for $91.6 million. The aggregate $275 million purchase price proceeds for the nine properties were used to settle the Tranche A DRO in full. For additional information regarding the DRO, see “—Liquidity and Capital Resources—Deferred Rent Obligation.”

In February 2016, we acquired a new 64‑bed memory care property in Easton, Pennsylvania for $15.0 million, which opened in January 2016 and is located adjacent to one of our existing post‑acute properties. The property was developed by HCRMC and added to the Master Lease with a term of 16 years.

In November 2016, we provided to HCR III reductions of contractual rent due under the Master Lease as follows: a $5 million reduction for the month of November 2016, a $15 million reduction for the month of December 2016 and a $10 million reduction for the month of January 2017. HCR III paid in full the contractual rent due for the months of February 2017 and March 2017.

HCR ManorCare made the reduced cash rent payments of $32 million for each of April and May of 2017. HCR ManorCare borrowed $7 million for April 2017 under the temporary secured credit agreement.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Results for the three months ended June 30, 2017 and 2016 (in thousands):


	Three Months Ended
	June 30,				Change
	2017		2016		$
Revenues:
Rental and related revenues	$	78,949	$	123,290	$	(44,341)
Tenant recoveries		399		400		(1)
Total revenues		79,348		123,690		(44,342)
Costs and expenses:
Depreciation and amortization		34,410		34,617		(207)
Operating		992		1,047		(55)
General and administrative		7,154		4,248		2,906
Restructuring costs		4,644		—		4,644
Interest		35,440		—		35,440
Impairments		382,049		—		382,049
Total costs and expenses		464,689		39,912		424,777
Other income:
Other income, net		104		21		83
Total other income, net		104		21		83
(Loss) income before income taxes		(385,237)		83,799		(469,036)
Income tax expense		(219)		(206)		(13)
Net (loss) income and comprehensive (loss) income		(385,456)		83,593		(469,049)
Noncontrolling interests' share in earnings		(17)		—		(17)
Net (loss) income and comprehensive (loss) income attributable to the Company		(385,473)		83,593		(469,066)
Less: preferred share dividends		(61)		—		(61)
Net (loss) income and comprehensive (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(469,127)

Total revenues. Total revenues decreased by $44.3 million to $79.3 million for the three months ended June 30, 2017 primarily due to a $46.5 million aggregate deferral of rent due under the Master Lease for the 2017 period. This decrease was partially offset by a net $2.2 million increase primarily from rent escalations under the Master Lease, net of reductions related to the sale of 28 non‑strategic properties and one additional property during 2017 and 2016.

General and administrative expenses. General and administrative expenses increased by $2.9 million to $7.2 million for the three months ended June 30, 2017 primarily due to additional compensation-related and other costs being incurred by the Company on a stand-alone basis after the Spin-Off.

Restructuring costs. Restructuring costs of $4.6 million incurred during the three months ended June 30, 2017 consist primarily of legal and diligence costs related to the potential restructuring of the Master Lease.

Interest. During the three months ended June 30, 2017, we incurred interest expense of $35.4 million primarily related to the indebtedness incurred in connection with the Spin-Off, which was completed on October 31, 2016. There was no debt outstanding during the three months ended June 30, 2016.

Impairments. During the three months ended June 30, 2017, we recognized an impairment charge of $382.0 million related to certain properties classified as held for use. The properties were determined to be impaired under the recoverability test and the impairment charge is equal to the aggregate amount by which the carrying value of the respective properties exceeds the estimated fair value of the respective properties (see Note 4 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report). No impairments were recorded during the three months ended June 30, 2016.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Results for the six months ended June 30, 2017 and 2016 (in thousands):


	Six Months Ended
	June 30,				Change
	2017		2016		$
Revenues:
Rental and related revenues	$	191,186	$	243,175	$	(51,989)
Tenant recoveries		754		762		(8)
Total revenues		191,940		243,937		(51,997)
Costs and expenses:
Depreciation and amortization		68,860		93,991		(25,131)
Operating		1,533		2,024		(491)
General and administrative		13,495		9,228		4,267
Restructuring costs		7,883		—		7,883
Interest		69,665		—		69,665
Impairments		382,049		—		382,049
Total costs and expenses		543,485		105,243		438,242
Other income:
Gain on sales of real estate		3,283		6,460		(3,177)
Other income, net		125		42		83
Total other income, net		3,408		6,502		(3,094)
(Loss) income before income taxes		(348,137)		145,196		(493,333)
Income tax expense		(500)		(12,841)		12,341
Net (loss) income and comprehensive (loss) income		(348,637)		132,355		(480,992)
Noncontrolling interests' share in earnings		(41)		—		(41)
Net (loss) income and comprehensive (loss) income attributable to the Company		(348,678)		132,355		(481,033)
Less: preferred share dividends		(172)		—		(172)
Net (loss) income and comprehensive (loss) income attributable to common shareholders	$	(348,850)	$	132,355	$	(481,205)

Total revenues. Total revenues decreased by $52.0 million to $191.9 million for the six months ended June 30, 2017 primarily due to a $56.5 million aggregate reduction/deferral of rent due under the Master Lease for the 2017 period. This decrease was partially offset by a net $4.5 million increase primarily from rent escalations under the Master Lease, net of reductions related to the sale of 28 non‑strategic properties and one additional property during 2017 and 2016.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $25.1 million to $68.9 million for the six months ended June 30, 2017 primarily due to reductions related to depreciable assets with estimated useful lives of five years becoming fully depreciated in the first quarter of 2016.

General and administrative expenses. General and administrative expenses increased by $4.3 million to $13.5 million for the six months ended June 30, 2017 primarily due to additional compensation-related and other costs being incurred by the Company on a stand-alone basis after the Spin-Off.

Restructuring costs. Restructuring costs of $7.9 million incurred during the six months ended June 30, 2017 consist primarily of legal and diligence costs related to the potential restructuring of the Master Lease.

Interest. During the six months ended June 30, 2017, we incurred interest expense of $69.7 million primarily related to the indebtedness incurred in connection with the Spin-Off, which was completed on October 31, 2016. There was no debt outstanding during the six months ended June 30, 2016.

Impairments. During the six months ended June 30, 2017, we recognized an impairment charge of $382.0 million related to certain properties classified as held for use. The properties were determined to be impaired under the

recoverability test and the impairment charge is equal to the aggregate amount by which the carrying value of the respective properties exceeds the estimated fair value of the respective properties (see Note 4 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report). No impairments were recorded during the six months ended June 30, 2016.

Gain on sales of real estate. During the six months ended June 30, 2017, we recognized a gain of $3.3 million from the sale of seven non‑strategic properties. During the six months ended June 30, 2016, we recognized a gain of $6.5 million from the sale of 11 non-strategic properties.

Income tax expense. Income tax expense decreased by $12.3 million to $0.5 million for the six months ended June 30, 2017. The decrease is primarily the result of recognizing deferred tax liabilities of $12.4 million, representing our estimated potential exposure to state built‑in gain tax from determining that we may sell assets during the next five years, during the six months ended June 30, 2016, which estimate was subsequently revised (see Note 8 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report).

HCRMC FINANCIAL INFORMATION

HCRMC is our principal operator and lessee, representing approximately 91% and 92% of our total revenues for the three and six months ended June 30, 2017, respectively. HCRMC, along with other post-acute/skilled nursing operators, has been and continues to be adversely impacted by a challenging operating environment in the post-acute/skilled nursing sector, which has put downward pressure on revenues and operating income. Ongoing trends in the post-acute/skilled nursing sector include, but are not limited to the following:

A shift away from a traditional fee for service model towards new managed care models, which base reimbursement on patient outcome measures;

Increased penetration of Medicare Advantage plans (i.e., managed Medicare), which has reduced reimbursement rates, average length of stay and average daily census, particularly for higher acuity patients;

Increased competition from alternative healthcare services such as home health agencies, life care at home, community based service programs, senior housing, retirement communities and convalescent centers;

Increased regulatory scrutiny on government reimbursements; and

Increased wage pressure from tightening labor markets.

In addition to the industry trends, HCRMC’s recent performance has been impacted by, among other things, the following:

HCRMC’s exit from 50 non-strategic properties;

Certain costs and expenses related to HCRMC’s restructuring initiatives; and

In April 2015, the U.S. Department of Justice (“DOJ”) filed a civil complaint against HCRMC for alleged false claims related to Medicare reimbursement. HCRMC continues to defend against the complaint and is incurring associated legal and regulatory defense costs, which were approximately $11 million and $9 million for 2016 and 2015, respectively, and approximately $9 million for the six months ended June 30, 2017. The outcome of the DOJ civil complaint remains uncertain and HCRMC expects to continue to incur additional legal and regulatory defense costs (see Note 7 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report).

Due to the above-described factors, HCRMC’s performance continued to deteriorate in 2015, 2016 and 2017, despite the amendment reducing annual rent due under the Master Lease effective April 2015 and subsequent rent relief and forbearance. As a result of the continued financial deterioration and nonpayment of total rent obligations due, on

July 7, 2017, we delivered to HCRMC a notice of default under the Master Lease (see “—Portfolio Overview” above for more information).

HCRMC’s continued financial deterioration has resulted in eroded operating margins and lease and fixed charge coverages, as indicated below (all HCRMC data was provided to us by HCRMC or derived by us solely from information provided to us by HCRMC):

On a trailing 12-month basis, normalized earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”) declined from $460.0 million for the period ended March 31, 2017 to $427.0 million for the period ended June 30, 2017.

On a trailing 12-month basis, normalized fixed charge coverage (“FCC”) declined from 0.95x for the period ended March 31, 2017 to 0.87x for the period ended June 30, 2017.

On a trailing 12-month basis, facility (excluding corporate items and non-QCP properties) cash flow coverage (“CFC”) declined from 0.83x for the period ended March 31, 2017 to 0.76x for the period ended June 30, 2017, net of the impact of the sale of negatively performing non-strategic properties.

Based on forecast information provided to us by HCRMC, operating results for 2017 are trending significantly downward when compared to the historical results for 2016.

The report of HCRMC’s independent auditors in its year-end 2016 financial statements included in the Annual Report includes a “going concern” exception, which indicates substantial doubt about HCRMC’s ability to continue as a going concern, resulting from recurring losses and negative working capital. In July 2017, HCRMC indicated that they financed debt that was in default with a new facility.

For a more detailed description of risks we are subject to due to our dependence on HCRMC, including adverse business and financial conditions and developments, see Part I, Item 1A. “Risk Factors—Risks Related to Our Business” in the Annual Report.

The following tables summarize HCRMC’s reported consolidated financial information (in millions)(1):


	June 30,		December 31,
	2017		2016
Real estate and other property, net	$	2,499.8	$	2,534.6
Cash and cash equivalents		79.4		130.6
Goodwill, intangible and other assets, net		1,535.9		1,602.3
Total assets	$	4,115.1	$	4,267.5
Debt and financing obligations	$	5,740.3	$	5,726.3
Accounts payable, accrued liabilities and other		1,092.5		1,170.1
Redeemable preferred stock		2.1		2.1
Total deficit		(2,719.8)		(2,631.0)
Total liabilities and equity	$	4,115.1	$	4,267.5


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Revenues	$	935.4	$	957.7	$	1,884.7	$	1,942.2
Operating, general and administrative expense		(840.9)		(831.4)		(1,691.0)		(1,688.6)
Depreciation and amortization expense		(32.2)		(32.6)		(64.2)		(65.1)
Interest expense		(114.2)		(115.1)		(226.7)		(230.2)
Other income, net		2.8		4.8		6.9		8.3
(Loss) gain on disposal of assets		(0.8)		(5.9)		(2.1)		(2.6)
Impairment		—		(6.0)		—		(6.0)
Loss from continuing operations before income tax benefit		(49.9)		(28.5)		(92.4)		(42.0)
Income tax benefit		2.9		5.3		4.0		8.2
Loss from continuing operations		(47.0)		(23.2)		(88.4)		(33.8)
Income from discontinued operations, net of taxes		(0.1)		(0.1)		(0.1)		—
Net loss	$	(47.1)	$	(23.3)	$	(88.5)	$	(33.8)

(1)

All data was provided to us by HCRMC or derived by us solely from information provided to us by HCRMC.

The following table summarizes HCRMC’s reported operating results on a trailing 12-month basis (in millions)(1):


	Trailing 12 Months Ended
	June 30,		March 31,
	2017		2017
HCRMC Results of Operations
Revenues	$	3,785.2	$	3,807.5
Operating and general and administrative expenses		(3,376.9)		(3,367.5)
Depreciation and amortization expense		(128.8)		(129.1)
Asset impairment(2)		(1,941.4)		(1,947.4)
(Loss) income before other (expenses) income and income taxes		(1,661.9)		(1,636.5)
Interest expense		(455.1)		(456.1)
(Loss) gain on disposal of assets		(8.4)		(13.4)
Equity in earnings, interest income and other		15.4		17.4
Loss from continuing operations before income taxes		(2,110.0)		(2,088.6)
Income tax expense		(1,105.1)		(1,102.7)
Loss from continuing operations		(3,215.1)		(3,191.3)
Loss from discontinued operations:
Facility EBITDARM		(0.1)		(0.1)
Other income, net of taxes		—		(0.1)
Loss from discontinued operations		(0.1)		(0.2)
Net loss	$	(3,215.2)	$	(3,191.5)
EBITDAR and FCC Calculation
Revenues	$	3,785.2	$	3,807.5
Operating and general and administrative expenses		(3,376.9)		(3,367.5)
Equity in earnings, interest income and other		15.4		17.4
Facility EBITDARM from discontinued operations		(0.1)		(0.1)
Other adjustments		3.4		3.4
EBITDAR		427.0		460.7
Normalizing adjustments(3)		—		(0.7)
Normalized EBITDAR	$	427.0	$	460.0
Fixed charges:
Cash rent(4)	$	467.0	$	465.0
Interest expense - term loan and other		23.0		21.6
Total fixed charges	$	490.0	$	486.6
As Reported FCC(5)		0.87x		0.95x
Normalized FCC(5)		0.87x		0.95x
Facility Level Coverage
Facility EBITDAR(6)	$	327.9	$	356.2
Facility CFC(7)		0.76x		0.83x

(1)

Results include revenues and expenses related to all businesses managed by HCRMC including (i) Facility EBITDARM (EBITDAR before management fees) for communities owned by the Company, (ii) home health care, hospice and rehabilitation services and (iii) general and administrative, depreciation, interest and income tax expenses. All data was provided to us by HCRMC or derived by us solely from information provided to us by HCRMC.

(2)

Primarily relates to the impairment of goodwill and deferred tax assets.

(3)

Primarily relates to non-cash accrual charges for general and professional claims that are excluded for the purposes of calculating normalized FCC.

(4)

Cash rent for purposes of calculating the coverage ratios is not reduced by the $46.5 million aggregate rent deferral for April, May and June 2017, the $10 million rent reduction for January 2017, and the $20 million aggregate rent reduction for November and December 2016.

(5)

Represents EBITDAR (as reported FCC) or normalized EBITDAR (normalized FCC) divided by total fixed charges. EBITDAR for the trailing 12 months ended June 30, 2017 and March 31, 2017 includes losses of $15.5 million and $17 million, respectively, related to the 50 non-strategic assets sold.

(6)

Includes an imputed management fee of 4%.

(7)

For purposes of calculating Facility CFC, cash rent is not reduced by the $46.5 million aggregate rent deferral for April, May and June 2017, but is reduced by the $10 million rent reduction for January 2017 and the $20 million aggregate rent reduction for November and December 2016.

LIQUIDITY AND CAPITAL RESOURCES

We anticipate: (i) funding recurring operating expenses, (ii) meeting debt service requirements, including principal payments and maturities and (iii) satisfying our distributions to our stockholders, as required for us to qualify as a REIT, for the next 12 months primarily by using cash flow from operations, available cash balances and borrowings under the senior secured revolving credit facility (see “—Debt” below for details on the facilities). In addition, we may elect to meet certain liquidity requirements through proceeds from the sale of assets or from borrowings and/or equity and debt offerings.

These expectations are forward‑looking and subject to a number of uncertainties and assumptions, which are described under Part I, Item 1A. “Risk Factors” in the Annual Report. If our expectations about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.

Cash Flow Summary

The following summary discussion of our cash flows is based on the combined consolidated statements of cash flows and is not meant to be an all‑inclusive discussion of the changes in our cash flows for the periods presented below.

Cash and cash equivalents were $282.4 million and $126.2 million at June 30, 2017 and December 31, 2016, respectively, representing an increase of $156.2 million. The following table sets forth changes in our cash flows (in thousands):


	Six Months Ended
	June 30,
	2017		2016		Change
Net cash provided by operating activities	$	91,278	$	324,350	$	(233,072)
Net cash provided by (used in) investing activities	$	20,106	$	(29,804)	$	49,910
Net cash provided by (used in) financing activities	$	44,790	$	(297,956)	$	342,746

Net cash provided by operating activities decreased by $233.1 million for the six months ended June 30, 2017 compared to the same period in 2016. The decrease was primarily the result of the following: (i) $91.6 million of cash received from the settlement of a portion of the Tranche A DRO in the 2016 period, (ii) a $56.5 million aggregate reduction/deferral of rent paid under the Master Lease, (iii) a $16.6 million increase in income taxes paid, and (iii) $65.9 million of interest paid in the 2017 period.

Net cash provided by (used in) investing activities increased by $49.9 million for the six months ended June 30, 2017 compared to the same period in 2016. The increase was primarily the result of $106.6 million from (i) the purchase of two HCRMC Properties during 2016 (the proceeds of which were used by HCRMC to settle a portion of the Tranche A DRO described above) and (ii) the investment in a memory care property in 2016. This increase was partially offset by the following: (i) a $42.0 million decrease in proceeds received from the sale of properties in the 2017 period compared to the 2016 period and (ii) a decrease in restricted cash of $14.5 million recognized during the 2016 period.

Net cash provided by (used in) financing activities increased by $342.7 million for the six months ended June 30, 2017 compared to the same period in 2016. The increase was primarily due to the following: (i) a $298.0 million decrease in net distributions to parent (none in the 2017 period since after the October 31, 2016 Spin-Off date) and (ii) $50.0 million in proceeds from issuance of debt received during the 2017 period. This increase was partially offset by $5.0 million in repayments of debt in the 2017 period.

Deferred Rent Obligation

In addition to the fixed annual rent under the Master Lease, in 2015 we received a DRO from HCR III equal to an aggregate amount of $525 million, which was allocated into two tranches: (i) a Tranche A DRO of $275 million and (ii) a Tranche B DRO of $250 million. HCR III made rental payments on Tranche A equal to 6.9% of the outstanding amount (representing $19 million) for the initial lease year until the entire Tranche A DRO was paid in full in March 2016 in connection with the nine aggregate property purchases. We recognized the 6.9% Tranche A rental payments in rental and related revenues when earned and included the Tranche A DRO in our calculation of straight‑line rent. As properties were acquired from HCRMC, the straight‑line rent calculation was adjusted to reflect the corresponding partial settlement of the Tranche A DRO. Commencing on April 1, 2016, until the Tranche B DRO is paid in full, the outstanding principal balance of the Tranche B DRO will be increased annually by (i) 3.0% initially, (ii) 4.0% commencing on April 1, 2019, (iii) 5.0% commencing on April 1, 2020, and (iv) 6.0% commencing on April 1, 2021 and annually for the remainder of its term. The Tranche B DRO is due and payable on the earlier of (i) certain capital or liquidity events of HCRMC, including an initial public offering or sale, or (ii) March 31, 2029, which is not subject to any extensions. See “—Portfolio Overview” for a discussion of the impact of the Event of Default on the Tranche B DRO. The HCRMC Lease Amendment also imposes certain restrictions on HCR III and HCRMC until the Tranche B DRO is paid in full, including with respect to the payment of dividends and the transfer of interest in HCRMC. The outstanding principal balance of the Tranche B DRO was $265.2 million as of June 30, 2017. The Tranche B DRO is being accounted for as a minimum lease rental payment and was initially included in our straight‑line rent calculation. The annual escalations of the principal balance are considered variable lease rental payments, as the Tranche B DRO is prepayable at the option of HCRMC, and as such, are not included in our straight‑line rent calculation. As a result of placing the Master Lease on nonaccrual status, we further evaluated the carrying amount of our straight-line rent receivables and determined that it was impaired at December 31, 2015 (see Note 3 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report).

Debt

Overview

In connection with the Spin-Off and related transactions, we transferred approximately $1.7 billion in cash to HCP (together with our common stock) in exchange for the transfer to us of the equity of the entities that hold the QCP Business, approximately $60 million of which was used to pay fees, costs and expenses incurred in connection with the Spin-Off transaction. The cash requirements of the Spin‑Off were financed through our borrowings pursuant to the senior secured term loan and the sale of the senior secured notes.

After the consummation of the Spin‑Off and related transactions, we are highly levered. As of June 30, 2017, we had outstanding approximately $1.8 billion face value of aggregate indebtedness. Our total debt is comprised of the senior secured notes, the senior secured term loan and any outstanding borrowings under the senior secured revolving

credit facility and the unsecured revolving credit facility. Our liquidity requirements are significant, primarily due to debt service requirements.

Debt as of June 30, 2017 consisted of the following (in thousands):


			Principal		Net
	Interest	Maturity	Balance		Balance
Debt	Rate	Date	Outstanding		Outstanding
Senior secured revolving credit facility(1)	Floating	October 31, 2021	$	75,000	$	75,000
Senior secured term loan(2)	Floating	October 31, 2022		995,000		955,677
Senior secured notes	8.125%	November 1, 2023		750,000		731,989
Unsecured revolving credit facility(3)	Floating	October 31, 2018		—		—
Total			$	1,820,000	$	1,762,666

(1)

The interest rate was 6.29% as of June 30, 2017. Remaining availability under the facility was $25.0 million as of June 30, 2017.

(2)

The interest rate was 6.29% as of June 30, 2017.

(3)

Covenants

Our secured and unsecured debt agreements contain certain customary affirmative covenants, including maintaining a minimum debt service coverage ratio, negative covenants, including limitations on the incurrence of additional debt, issuance of preferred shares, payment of dividends and sale of properties, and events of default. As of June 30, 2017, management believes the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under its debt agreements.

Equity

Prior to the Spin-Off, the financial statements were carved out from HCP’s books and records; thus, there was no separate capital structure and the net assets were reflected as net parent investment in the combined consolidated financial statements. Upon becoming a separate company on October 31, 2016, our ownership is now classified under the typical stockholders’ equity classifications of common stock, capital in excess of par value and accumulated deficit in the combined consolidated financial statements.

Common Stock

Our charter authorizes the issuance of 200,000,000 shares of common stock, $0.01 par value per share (“common stock”). On October 31, 2016, 93,594,234 shares of QCP common stock were issued to stockholders of HCP pursuant to the Spin-Off. HCP distributed QCP common stock to HCP’s stockholders on a pro rata basis, with each HCP stockholder receiving one share of QCP common stock for every five shares of HCP common stock held on the record date. Holders of HCP common stock received cash in lieu of any fractional shares of QCP common stock which they would have otherwise received.

Preferred Stock

Our charter authorizes the issuance of up to 50,000,000 shares of our preferred stock, par value $0.01 per share. Prior to the Spin‑Off, we issued 2,000 shares of Class A Preferred Stock with an aggregate liquidation preference of $2 million to HCP, which it later sold to institutional investors following the completion of the Spin-Off. The Class A Preferred Stock ranks prior to our common stock with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up. The Class A Preferred Stock entitles the holders thereof to cumulative cash dividends in an amount equal to 12% per annum of the aggregate liquidation preference, payable quarterly. Pursuant to the terms of the Preferred Stock, we may, at our option at any time on or after October 14, 2017, redeem the Class A Preferred Stock at any time in whole, or from time to time in part, for cash at a price per share equal to the liquidation preference, plus any accumulated, accrued and unpaid dividends, to, but excluding, the date of redemption.

Stock-Based Compensation

On October 31, 2016, the Company’s Board of Directors adopted the Quality Care Properties, Inc. 2016 Performance Incentive Plan (the “Plan”), which permits the Company to grant awards to officers, employees, directors and consultants of the Company or a subsidiary. An aggregate of 9,500,000 shares of common stock has been reserved for issuance under the Plan. In addition, the maximum number of awards to be granted to a participant in any calendar year is 3,000,000 shares and the maximum value of awards to be granted to a non-employee director in any consecutive 12-month period is $500,000. Awards may be in the form of stock options, stock appreciation rights, stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, any similar rights to purchase or acquire shares, any other award with a value derived from the value of or related to the common stock, or performance-based cash rewards.

On March 8, 2017, the Company, upon receiving the approval of the compensation committee of the board of directors, issued the 2017 performance-based stock awards to Messrs. Ordan, Neeb and Richards in the maximum amounts of 107,642 shares, 61,894 shares, and 32,292 shares, respectively, that may be earned upon satisfaction of certain performance criteria.

The Company recorded total stock-based compensation expense related to the restricted stock units, options and performance-based stock awards of $2.1 million and $3.9 million during the three and six months ended June 30, 2017, respectively, which is included within general and administrative expense in the combined consolidated statements of operations and comprehensive (loss) income.

Capital Expenditures

Capital expenditures for the Properties leased under the various lease agreements are generally the responsibility of the respective lessee, which may submit requests seeking financing from us to cover all or a portion of such expenditures as described below. Capital expenditures of the lessee are expected to be primarily for complying with its obligations to make certain expenditures at each of the Properties each lease year. We anticipate that these capital expenditures will be funded by the lessee through the cash flow from its operation of our properties, along with additional borrowings, if necessary.

Under the terms of the Master Lease, we are required through April 1, 2019 to, upon HCR III’s request, provide HCR III an amount to fund Capital Additions Costs (as defined in the Master Lease) approved by us, in our reasonable discretion, with such amount not to exceed $100 million in the aggregate (“Capital Addition Financing”), but we are not obligated to advance more than $50 million in Capital Addition Financing in any single lease year. In connection with any Capital Addition Financing, the minimum rent allocated to the applicable property will be increased by an amount equal to the product of: (i) the amount disbursed on account of the Capital Addition Financing for the applicable property times (ii) at the time of any such disbursement, the greater of (a) 7.75% and (b) 500 basis points in excess of the then current 10‑year Treasury Rate. Any such Capital Addition Financing shall be structured in a REIT tax‑compliant fashion. Through June 30, 2017, we have provided approximately $2.8 million in Capital Addition Financing.

DIVIDENDS

We will elect to qualify as a REIT under the applicable provisions of the Code, commencing with our taxable year ended December 31, 2016. We intend to distribute at least 90% of our REIT taxable income to our stockholders out of assets legally available for distribution. To help create additional liquidity and flexibility to execute our strategy, and in light of our high tenant concentration in one operator, HCRMC, and the ongoing headwinds facing HCRMC and the broader post‑acute/skilled nursing industry, we instituted a conservative distribution policy. Our board of directors will regularly evaluate, determine and, if it deems appropriate, adjust our distribution levels.

If we determine to continue to qualify as a REIT, we must distribute to our stockholders an amount at least equal to: (i) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus (ii) 90% of the

excess of our net income from foreclosure property over the tax imposed on such income by the Code; less (iii) any excess non‑cash income (as determined under the Code).

Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, funds from operations and results of operations, the revenues we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, the annual REIT distribution requirements and such other factors as our board of directors deems relevant.

Our distributions may be funded from a variety of sources. To the extent that our cash available for distribution is less than 90% of our taxable income, we may consider various means to cover any such shortfall, including borrowing under a revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity or debt securities or declaring taxable share dividends. In addition, our charter allows us to issue shares of preferred stock, including our Class A Preferred Stock, that could have a preference on distributions, and if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. Accordingly, no dividends may be declared or paid on our common stock unless dividends have been paid or set aside for payment on all outstanding shares of preferred stock that have a preference on distributions, including the Class A Preferred Stock.

Due to the lack of REIT taxable income following the Spin-Off and the ongoing financial difficulties experienced by our primary tenant, HCRMC, we did not declare a dividend for the fourth quarter of 2016 or the first or second quarter of 2017.

CONTRACTUAL OBLIGATIONS

The following table summarizes our material contractual obligations and commitments at June 30, 2017, by year through initial maturities, excluding any debt premiums, discounts or issuance costs (in thousands):


	2017		2018-2019		2020-2021		After 2021		Total
Senior secured term loan	$	5,000	$	20,000	$	20,000	$	950,000	$	995,000
Senior secured revolving credit facility		—		—		75,000		—		75,000
Senior secured notes		—		—		—		750,000		750,000
Interest(1)		64,953		257,094		253,723		172,299		748,069
Total contractual obligations and commitments(2)	$	69,953	$	277,094	$	348,723	$	1,872,299	$	2,568,069

(1)

Interest on variable-rate debt is calculated using rates in effect at June 30, 2017.

(2)

This table excludes the Capital Addition Financing pursuant to the Master Lease as the timing and amount of payments are uncertain.

OFF‑BALANCE SHEET ARRANGEMENTS

We own an equity interest in HCRMC, which is deemed an unconsolidated variable interest entity (“VIE”) as described in Note 2 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report. Our risk of loss with respect to this VIE is generally limited to our investment in the VIE and any outstanding loans receivable from the VIE.

INFLATION

Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Our medical office building leases require the tenants to pay the property operating costs such as real estate taxes, insurance and

utilities. All of our post‑acute/skilled nursing, memory care/assisted living and surgical hospital leases require the tenant to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the tenant expense reimbursements and contractual rent increases.

NON‑GAAP FINANCIAL MEASURES

We believe that net income (loss), as defined by GAAP, is the most appropriate earnings measure. Below is a summary of important non‑GAAP supplemental measures that our management believes are useful in evaluating our business.

Funds From Operations (“FFO”) and FFO as Adjusted

We believe FFO is an important non‑GAAP supplemental measure of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight‑line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.

FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) (computed in accordance with GAAP):

excluding gains or losses from sales of depreciable property, which exclusion includes any current and deferred taxes directly associated with sales of depreciable property;

excluding impairments of, or related to, depreciable real estate;

excluding real estate and other depreciation and amortization;

plus the allocable portion of FFO of unconsolidated entities accounted for under the equity method of accounting based upon economic ownership interest. Adjustments for our equity method investment in HCRMC are calculated to reflect FFO on the same basis.

FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss) determined in accordance with GAAP. We compute FFO in accordance with the current NAREIT definition; however, other REITs may report FFO differently or have a different interpretation of the current NAREIT definition from ours.

In addition, we present FFO before the impact of transaction costs, impairments of non‑depreciable assets and severance‑related charges (“FFO as adjusted”). Management believes that FFO as adjusted provides a meaningful supplemental measure of our FFO run‑rate and is frequently used by analysts, investors and other interested parties in the evaluation of our performance as a REIT. At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe investors and financial analysts who review our operating performance are best served by an FFO run rate earnings measure that includes, in addition to adjustments made to arrive at the NAREIT defined measure of FFO, other adjustments to net income (loss) determined in accordance with GAAP. FFO as adjusted is used by management in analyzing our business and the performance of our properties, and we believe it is important that investors and financial analysts understand this measure used by management. We use FFO as adjusted to: (i) evaluate our performance in comparison with expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared with similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. This non-GAAP supplemental measure is a modification of the NAREIT definition of FFO and should not be used as an alternative to net income (loss) (determined in accordance with GAAP) or FFO. Other REITs or real estate companies may use different methodologies for calculating adjusted FFO, and accordingly, our FFO as adjusted may not be comparable to those reported by other REITs.

Funds Available for Distribution (“FAD”)

FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of right of use assets and market lease intangibles, net; (ii) straight‑line rents; (iii) amortization of deferred financing costs; and (iv) stock-based compensation expense. Also, FAD includes adjustments to compute our share of FAD from our equity method investment in HCRMC. Other REITs or real estate companies may use different methodologies for calculating FAD, and accordingly, our FAD may not be comparable to those reported by other REITs. Although our FAD computation may not be comparable to that of other REITs, management believes FAD provides a meaningful supplemental measure of our performance and is frequently used by analysts, investors and other interested parties in the evaluation of our performance as a REIT. We believe FAD is an alternative run rate earnings measure that improves the understanding of our operating results among investors and makes comparisons with (i) expected results, (ii) results of previous periods and (iii) results among REITS more meaningful. FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as it excludes the following items which generally flow through our cash flows from operating activities: (i) adjustments for changes in working capital or the actual timing of the payment of income or expense items that are accrued in the period; (ii) transaction-related costs; and (iii) severance-related expenses. FAD is a non-GAAP supplemental financial measure and should not be considered as an alternative to net income (loss) determined in accordance with GAAP.

The following table reconciles net income attributable to common shareholders, the most directly comparable GAAP financial measure, to FFO, FFO as adjusted and FAD (in thousands):


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2017		2016		2017		2016
Net (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(348,850)	$	132,355
Depreciation and amortization		34,410		34,617		68,860		93,991
Gain on sales of real estate		—		—		(3,283)		(6,460)
Taxes associated with real estate disposition(1)		—		—		—		12,428
Impairments of real estate		382,049		—		382,049		—
FFO	$	30,925	$	118,210	$	98,776	$	232,314
Restructuring costs		4,644		—		7,883		—
FFO as adjusted	$	35,569	$	118,210	$	106,659	$	232,314
Straight‑line rents		197		78		343		103
Amortization of right of use assets and market lease intangibles		48		49		98		99
Amortization of deferred financing costs		3,465		—		6,056		—
Stock-based compensation expense		2,140		—		3,873		—
FAD	$	41,419	$	118,337	$	117,029	$	232,516

(1)

For the six months ended June 30, 2016, we recognized a deferred tax liability and related income tax expense of $12.4 million, representing our estimated potential exposure to state built‑in gain tax resulting from the determination that we may sell our HCRMC assets prior to satisfying the 10‑year holding requirement.

Net Operating Income (“NOI”) and Adjusted NOI

NOI and Adjusted NOI are non‑GAAP supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as rental and related revenues and tenant recoveries, less property level operating expenses and bad debt expense. NOI excludes all other financial statement amounts included in net income as presented in the combined consolidated financial statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight‑line rents, amortization of right of use assets and market lease intangibles. Adjusted NOI is oftentimes referred to as “cash NOI.” We use NOI and Adjusted NOI to make decisions about resource allocations, and to assess and compare property level performance. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since

it does not reflect various excluded items. Further, our definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating NOI.

The following table reconciles net income attributable to common shareholders, the most directly comparable GAAP financial measure, to NOI and Adjusted NOI (in thousands):


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2017		2016		2017		2016
Net (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(348,850)	$	132,355
Depreciation and amortization		34,410		34,617		68,860		93,991
General and administrative		7,154		4,248		13,495		9,228
Restructuring costs		4,644		—		7,883		—
Interest expense		35,440		—		69,665		—
Impairments		382,049		—		382,049		—
Gain on sales of real estate		—		—		(3,283)		(6,460)
Other income, net		(104)		(21)		(125)		(42)
Income tax expense		219		206		500		12,841
NOI	$	78,278	$	122,643	$	190,194	$	241,913
Non‑cash adjustments to NOI
Straight‑line rents		197		78		343		103
Amortization of right of use assets and market lease intangibles		48		49		98		99
Adjusted NOI	$	78,523	$	122,770	$	190,635	$	242,115

Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA

EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA after eliminating the effects of gain (loss) on sales of real estate, impairments, severance‑related charges and transaction costs. We consider EBITDA and Adjusted EBITDA important supplemental measures to net income (loss) because they provide an additional manner in which to evaluate our operating performance. We believe that net income (loss) is the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be viewed as alternative measures of operating performance to net income (loss) as defined by GAAP since they do not reflect various excluded items. Further, our definition of EBITDA and Adjusted EBITDA may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating EBITDA and Adjusted EBITDA.

The following table reconciles net income attributable to common shareholders, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA (in thousands):


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2017		2016		2017		2016
Net (loss) income attributable to common shareholders	$	(385,534)	$	83,593	$	(348,850)	$	132,355
Interest expense		35,440		—		69,665		—
Income tax expense		219		206		500		12,841
Depreciation and amortization		34,410		34,617		68,860		93,991
EBITDA	$	(315,465)	$	118,416	$	(209,825)	$	239,187
Gain on sales of real estate		—		—		(3,283)		(6,460)
Impairments		382,049		—		382,049		—
Restructuring costs		4,644		—		7,883		—
Adjusted EBITDA	$	71,228	$	118,416	$	176,824	$	232,727

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our combined consolidated financial statements. From time to time, we re‑evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Critical accounting policies are those that may require complex judgment in their application or require estimates about matters that are inherently uncertain. Through the period covered by this Quarterly Report, there were no material changes to the “Critical Accounting Policies” included within Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report for the impact of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Concentration of Risk

Substantially all of our properties are leased to HCR III, consisting of 232 post‑acute/skilled nursing properties and 60 memory care/assisted living properties as of June 30, 2017, pursuant to the Master Lease. The Master Lease is structured as a triple‑net lease, in which HCR III, either directly or through its affiliates and sublessees, operates and manages the properties thereunder and is responsible for all operating costs associated with the HCRMC Properties, including the payment of taxes, insurance and all repairs, and providing indemnities to us against liabilities associated with the operation of the HCRMC Properties. In addition, all obligations under the Master Lease are guaranteed by HCRMC, the parent of HCR III. As our revenues predominantly consist of rental payments under the Master Lease, we are dependent on HCRMC for substantially all of our revenues. Consequently, any material decline in HCRMC’s business is likely to have a material adverse effect on our business as well. On July 7, 2017, we delivered to HCRMC a notice of default under the Master Lease (see “—Portfolio Overview” above for more information).

The geographic concentration of the Properties makes us susceptible to adverse economic developments in certain states, including Pennsylvania, Ohio, Illinois, Michigan and Florida, each of which has historically generated over 10% of our revenues. Thus, any adverse conditions affecting these regions, including downturns in the local economies or changes in local real estate conditions, increased competition or decreased demand, changes in state‑specific legislation and local climate events and natural disasters (such as earthquakes, wildfires and hurricanes), could adversely affect our operating results and our ability to make distributions to stockholders.

For additional information regarding concentration and how we monitor our credit risk with HCRMC, see Note 10 to the combined consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Interest Rate Risk

We are exposed to interest rate risk with respect to our variable-rate debt, including indebtedness that we incurred in connection with the Spin‑Off. In connection with the Spin‑Off, we entered into the senior secured credit facilities which are comprised of the $100 million senior secured revolving credit facility and the $1.0 billion senior secured term loan. See “—Liquidity and Capital Resources—Debt” within Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further description of our indebtedness.

Item 1A. Risk Factors

Through the period covered by this Quarterly Report, there were no material changes to the “Risk Factors” included in Part I, Item 1A of the Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

10.1		Forbearance Agreement, dated April 5, 2017, among Quality Care Properties, Inc., HCR III Healthcare, LLC and HCR ManorCare, Inc. (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K (File No. 001-37805), filed on April 5, 2017)

10.2*		Form of Director Deferred Stock Unit Award Agreement under Quality Care Properties Inc.’s 2016 Performance Incentive Plan

10.3*		Form of Performance-Based Restricted Stock Award Agreement under Quality Care Properties Inc.’s 2016 Performance Incentive Plan

31.1*		Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document


Date: August 10, 2017		QUALITY CARE PROPERTIES, INC.


		/s/ C. MARC RICHARDS
		C. Marc Richards
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3

	Combined Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2017 and 2016	4

	Combined Consolidated Statements of Equity for the Six Months Ended June 30, 2017 and 2016	5

	Combined Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	6

	Notes to the Combined Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

Signature		45