After seeing major players like Humana and TPG Capital take billion-dollar bets on vertical health care integration, Welltower Inc. (NYSE: WELL) is getting in on the action as well.
Shankh Mitra, the real estate investment trust’s (REIT) senior vice president of investments, specifically cited those companies — which recently teamed up to buy Kindred Healthcare’s (NYSE: KND) home health business — when discussing Welltower’s decision to partner with hospital provider ProMedica to purchase Quality Care Properties (NYSE: QCP).
“The post-acute industry needs to be reinvented with the proper capital structure, provided by patient and strategic capital, and health system sponsorship that believes in the lower-cost care settings,” Mitra said on a conference call with investors Thursday morning.
The mega-deal will see Welltower take over QCP’s real estate in a joint venture with ProMedica, while the hospital provider will purchase operations of HCR ManorCare, the second-largest nursing home chain in the United States. But observers shouldn’t call it a skilled nursing deal, according to Welltower CEO Tom DeRosa — who went as far as saying that “SNF” has no become something of a “pejorative term.”
“I would caution you to not look at this investment and compare this to other SNF investments,” DeRosa said on the call. “This is really a health system investment.”
Instead, the idea is that ProMedica can use the existing skilled nursing infrastructure to experiment with the delivery of post-acute care.
“They see them as alternate sites to deliver care,” DeRosa said of ProMedica. “I’ve said this for now a couple of years: Skilled nursing has to be reinvented. The real estate is very good quality real estate, and this real estate is in compelling markets.”
He continued with a warning: “Don’t think of the old model, skilled nursing. This is going to be an evolving asset class.”
DeRosa expanded on those thoughts in a Thursday conversation with Skilled Nursing News.
“I believe ProMedica and Welltower will together make this real estate more consequential as sites of care,” he told SNN. “I believe that ProMedica sees this real estate beyond the basic function of the skilled nursing facility, This will allow this major health system to deliver its care model in effective, well-located, lower-cost real estate than an acute care hospital.”
From ‘crazy’ to a deal
ProMedica CEO Randy Oostra framed the deal as part of the general reinvention of the health care system, in which the traditional barriers between settings — acute, post-acute, and home — are rapidly disappearing.
“The lines in health care, the clinical lines are really blurred, the social lines are really blurred,” Oostra told SNN. “We’re hoping to blur that even further.”
Oostra hedged against making any major long-term predictions about ProMedica’s future plans in the skilled nursing space, alluding to the fact that the deal itself was only signed around midnight Wednesday into Thursday, though he did affirm the provider’s desire to retain the ManorCare brand name — while also converting it to a non-profit structure. He additionally pointed to the company’s success with its in-house dental and medical plans as a potential area of growth, as well as potential partnerships with other health providers in ManorCare markets that do not currently have a ProMedica hospital.
ProMedica operates primarily in Ohio and Michigan, and Oostra said he saw potential for partnerships in Northeast and Florida; ProMedica, Welltower, and HCR ManorCare are all based in Toledo, Ohio.
The non-skilled assets in the portfolio — consisting of 58 assisted living and memory care facilities — were particularly attractive to ProMedica due to their profitability.
“We like this strategy, and even though it scared us initially — people thought we were crazy — now we’re looking at it, we’re like, man, we should have done this before,” Oostra said.
SNF isn’t a four-letter word
DeRosa and the rest of the team faced some pushback from analysts on the conference call, largely focusing on the SNF aspect of the deal.
“The gut initial reaction from investors may not be favorable,” financial services company Stifel wrote in a brief note about the deal. “As we’ve noted in prior research reports, the skilled nursing industry is widely under pressure, experiencing slower growth from shorter average lengths of stays and low reimbursement growth.”
However, Stifel said they have a “more positive” take on the deal, pointing out that it reduces Welltower’s reliance on senior housing and citing conversations with management. In addition, Jefferies offered its “kudos” to Welltower on the deal structure.
Like many others in the industry, DeRosa stressed that the buildings themselves have potential, and that the blows to the asset class’s reputation aren’t necessarily related to the quality of care.
In DeRosa’s estimation, the SNF business model suffered at the hands of private equity ownership; HCR ManorCare had been owned by The Carlyle Group since 2007.
“Anyone who knows the ManorCare real estate knows it’s really good-quality real estate in really good markets,” DeRosa said. “It was just capital-starved because the skilled nursing industry had been taken private by private equity firms, and what does a private equity firm do? They over-lever businesses in order to [take] cash out of them. The REITs got left holding the bag here when reimbursements changed.”
DeRosa and Mitra also took pains to emphasize that Welltower isn’t necessarily increasing its exposure to skilled nursing, with ProMedica fully guaranteeing the lease payments, differentiating the play from other major skilled nursing deals in the space.
Welltower stock finished Thursday’s trading down $0.44 or 0.87%, closing at $50.01 per share. QCP stock fell $1.04, or 4.58%, to close at $21.69.
Written by Alex Spanko