A deal is being hammered out between skilled nursing giant Genesis HealthCare (NYSE: GEN) and its landlord Welltower Inc. (NYSE: HCN), which is meant to improve Genesis’ capital structure.
Welltower, a Toledo, Ohio-based real estate investment trust (REIT), announced the likely transaction in conjunction with releasing its third-quarter 2017 earnings results Tuesday, though details were scarce given that the transaction still is being negotiated.
Reducing its Genesis exposure has been an ongoing goal for Welltower, which sold 28 Genesis properties in a deal one year ago. Currently, its portfolio of 112 Genesis facilities accounts for 7% of Welltower’s total net operating income.
Based in Kennett Square, Pennsylvania, Genesis is the largest skilled nursing provider in the nation. The SNF industry has been beset by challenges, and Genesis has not been immune; its share price has steadily declined over the course of the year and sat at $0.97 as of Tuesday afternoon.
Welltower is confident that Genesis will be a winner in the long term, but changes in skilled nursing reimbursement models over the past several years have negatively impacted skilled mix and occupancy, Welltower Senior Vice President-Investments Shankh Mitra said Tuesday on a call with analysts.
“Their current capital structure is sub-optimal,” he said of Genesis.
Welltower would not disclose several key details of the deal being worked out, including how many properties it might involve. However, executives did share some information:
– It would improve Genesis’ coverage to 1.3x, which is the market average
– It would include, upon closing, a $35 million rent credit and a reduction in existing escalators
– It would result in a “meaningful de-leveraging” for Genesis
This Genesis deal is taking shape as Welltower is pursuing large-scale dispositions; the REIT already has disposed of $1.4 billion in assets this year, and this should reach $2.4 billion by early 2018, according to updated guidance issued Tuesday. Any Genesis dispositions that take place as part of this transaction would be over and above that amount.
Welltower posted strong third-quarter earnings, largely on the strength of its senior housing operating portfolio, but “skilled nursing remains a challenge for the company,” Green Street Advisors analyst Michael Knott told Skilled Nursing News.
Rent coverage for HCN’s skilled nursing portfolio declined six basis points to 1.24x, but disposition activity should shore this up, Knott noted.
“SNF sales seem likely,” he wrote in a note issued Tuesday.
Written by Tim Mullaney