The former HCR ManorCare skilled nursing facilities received a major rent break under their new ownership structure.

HCP Properties, the 80-20 joint venture between Welltower Inc. (NYSE: WELL) and non-profit hospital provider ProMedica, will charge $179 million for the first year of its 15-year lease with the 168 skilled nursing facilities and 58 senior living properties formerly operated by ManorCare, according to a recent analysis by Fitch Ratings.

“This lease payment level is significantly less than HCR ManorCare was paying in its pre-bankruptcy state, where the lease payments were approaching $400 million annually,” Fitch observed in its report.

The Toledo Blade first reported the Fitch numbers.

Under the terms of the $4.4 billion mega-deal, Welltower and ProMedica acquired the real estate assets of Quality Care Properties, which formerly served as ManorCare’s primary landlord. ProMedica also purchased ManorCare out of bankruptcy, with plans to integrate the skilled nursing properties into its overall care continuum.

ProMedica’s lease with HCP Properties also includes a pair of five-year renewals, with a 1.375% increase in the first year and 2.75% for future years, Fitch reported.

The disclosure came as part of Fitch’s overall BBB+ rating for $1.45 billion in bonds that ProMedica plans to issue — primarily to pay down the $1.15 billion bridge loan from Barclays that it used in part to fund the ManorCare acquisition. Of the total, $1.15 billion will come from series 2018B taxable bonds, with the remaining $300 million generated from series 2018A tax-exempt, fixed-rate bonds from the county of Lucas, Ohio.

Like fellow ratings agencies Moody’s and Standard & Poor’s, Fitch expressed some concerns about the effect of the ManorCare deal on ProMedica’s overall financial health; those other firms downgraded the non-profit’s bond rating in the wake of the transaction, citing the debt load and concerns about the long-term future of the skilled nursing industry.

Still, Fitch was overall upbeat about the partnership’s future.

“ProMedica’s historically very strong balance sheet was weakened by the transaction, which included both a debt increase and an equity contribution,” the agency wrote. “However, Fitch’s expectations for an improving financial profile are supported by a strong operational profile assessment, excellent market position, and ProMedica’s platform for expansion and growth through their now more diversified operational capabilities and full continuum of acute and senior care services.”

Fitch also acknowledged that the incorporation of ManorCare’s patient base could have a negative effect on ProMedica’s overall payor mix, but concluded that the diversity of the non-profit’s revenue streams will help the provider weather any issues.

“It is undetermined at this time how much the revenue source characteristics will move; and there is the real possibility that overall revenue source characteristics could deteriorate to a ‘weak’ assessment; however, it is Fitch’s opinion that ProMedica’s strong and broad market reach should mitigate slight deterioration in the payor mix,” the agency observed.

Written by Alex Spanko