Welltower Optimistic on ManorCare-ProMedica Deal, Pushes Back on Downgrade Concerns

The headlines in the immediate wake of the blockbuster $4.4 billion ProMedica-HCR ManorCare deal haven’t been positive, but executives from Welltower Inc. (NYSE: WELL) on Tuesday were upbeat about the progress so far — even if they didn’t dig too far into the details.

Welltower chief investment officer Shankh Mitra said the real estate investment trust (REIT) has already seen occupancy gains in the memory care portion of the ManorCare portfolio, even before the implementation of a planned $400 million capital injection over the next five years.

“We continue to believe we’ll create extraordinary value for our shareholders in the long term from this transaction, perhaps even more than what we anticipated,” Mitra said on the company’s third quarter earnings call with investors and shareholders.

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But he stopped short of providing more details about the nuts and bolts of the integration process, deferring to a planned presentation by ProMedica CEO Randy Oostra and HCR ManorCare president Steve Cavanaugh at Welltower’s upcoming Investor Day in New York City on December 4.

“The only financial update we want to provide you is that ProMedica and HCR leadership now expect higher synergies than we expected previously,” he said.

The $4.4 billion three-way deal among the Toledo, Ohio-based companies dominated the mergers-and-acquisitions landscape in skilled nursing in 2018. Welltower teamed with ProMedica, a major non-profit health system, to acquire the real estate associated with struggling SNF chain HCR ManorCare in an 80-20 joint venture; ProMedica also purchased ManorCare’s operating business as part of the transaction, which closed in July.

In total, the deal brought 160 post-acute care facilities and 60 Arden Court-branded memory care facilities into the Welltower portfolio.

The REIT positioned the deal as a transformative play in post-acute and long-term care, creating a vertically integrated continuum that could follow patients from the hospital to the nursing facility setting and eventually home. But the ProMedica system suffered a series of credit downgrades in the aftermath of the ManorCare acquisition, with several ratings agencies questioning the $1.15 billion in debt used to fund the deal, as well as the shaky macroeconomic picture for long-term care operators. The operator also announced 100 layoffs and the elimination of 60 unfilled jobs in late August, though those positions were not related to ManorCare’s operations.

Welltower CEO Tom DeRosa pushed back on analysts who questioned whether the REIT’s leadership was concerned about the downgrades, specifically because the executives cited the health system’s solid ratings in justifying the deal to shareholders.

“We said investment-grade …  We expected that they could be downgraded to triple-B plus,” DeRosa said.

ProMedica currently has a BBB rating from Standard & Poor’s, a Baa1 rating from Moody’s, and BBB+ rating from Fitch Ratings. In a press release issued back in April, when the companies first announced the deal, Welltower touted a “15-year absolute triple-net master lease with full corporate guarantee of A1/A+ rated ProMedica,” and DeRosa mentioned the A rating in an interview with Skilled Nursing News.

Mitra emphasized that Welltower’s predictions about eventual increased cash flows could improve those ratings in the future, however.

“As ratings follow cash flow, you can come to your own conclusion,” he said. “But because ProMedica’s bonds trade in the public market, we’re not going to sit here and talk specifically about that.”

Welltower reported net income of $64.3 million for the third quarter during the earnings presentation, and also announced the $80 million acquisition of a medical office building on the campus of Howard County General Hospital, operated by Johns Hopkins Medicine, in Columbia, Md.

Executives also pointed to the potential expansion of that relationship going forward, as Welltower attempts to differentiate itself in the REIT space as an investor in both health care real estate and health system operating partners.

“I don’t think I have that much in common with other REITs in other sectors because they invest in different property types. We invest in health care assets. But our business model is much more than buying and managing real estate assets in a fund-like operating structure,” DeRosa said. “We are intimately involved in the operations of this business, whether it be our senior housing business, whether it be our medical office business. But I would remind you that REIT is not an industry. It’s a tax election.”

Written by Alex Spanko

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