ManorCare Deal Validates Skilled Nursing’s Future, Highlights Real Estate Troubles

Welltower (NYSE: WELL) and ProMedica’s blockbuster deal for skilled nursing chain HCR ManorCare and its landlord cements the setting’s place in the future of long-term care, at least according to one prominent ratings firm.

“[The deal] supports Fitch Ratings’ view that skilled nursing will have a place on the continuum of care, despite the subsection’s deteriorating profitability,” the New York City-based financial analytics firm wrote in a Monday credit market commentary on the deal. “Some patients will be best cared for in this setting if they cannot be safely cared for at home, nor do they require the capabilities of long-term acute care hospitals or inpatient rehabilitation facilities.”

The mega-deal, announced last week, saw non-profit hospital chain ProMedica snap up the operations of ManorCare, which recently was taken over by its landlord, real estate investment trust (REIT) Quality Care Properties, Inc. (NYSE: QCP). In the same move, ProMedica and Welltower joined forces to buy the associated real estate from QCP, essentially forming a vertically-integrated hospital and long-term care company with a real estate component.


In trumpeting the deal, Welltower executives pointed to insurance provider Humana’s (NYSE: HUM) recent decision to team up with two private equity firms to buy Kindred Healthcare’s (NYSE: KND) home health business, framing it as a necessary reinvention of the long-term care space.

Fitch echoed that theme in its analysis, though it drew one key difference between the vertical integration that has seized the hospital industry and the Welltower-ProMedica-ManorCare deal.

“Most vertical integration of health systems over the past few years has come in the form of hospitals building and buying lower cost settings, such as ambulatory surgery centers and community access points (e.g. urgent care centers), where patient volumes have been leaking,” the firm observed. “Hospitals have also synthetically integrated lower cost settings, such as skilled nursing and home health, via joint ventures and partnerships, rather than through ownership.”


Of course, the team at Welltower would much prefer if the market didn’t characterize the transaction as a SNF deal, as CEO Tom DeRosa said multiple times on a call with investors last week — and in an interview with Skilled Nursing News.

The difference, in Welltower’s estimation, is that the deal wouldn’t have been viable if it just included the SNF assets; the REIT wouldn’t have signed on the dotted line if it didn’t come with the backing of a hospital network, DeRosa told SNN.

Fitch seemed to concur in its analysis.

“Regardless of its success, the transaction crystallizes the extent to which skilled nursing real estate values declined,” the company noted.

In addition, the firm noted that the success of the deal will rest upon whether it can successfully make the leap from a regional player to a national behemoth — as well as its plans for the significant geographic areas where its hospital and newfound SNF footprints do not overlap.

ProMedica currently has 13 hospitals concentrated in primarily in Ohio and Michigan, while ManorCare’s footprint stretches across 450 sites with more than 50,000 employees. The transaction expands ProMedica’s coverage area from six states to 30 and boosts its staff to nearly 70,000 workers.

ProMedica CEO Randy Oostra emphasized that the company’s long-term plans for its ManorCare footprint remain in flux at this early stage, but he did hint at potentially exploring strategic partnerships with other providers in the Northeast and Florida.

“There are [markets] that offer some intriguing partnership ideas with local systems,” Oostra told SNN last week. “We don’t have any specific target to start with.”

Written by Alex Spanko

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