Welltower Inc. (NYSE: WELL) this week released an upbeat report on its acquisition of skilled nursing giant HCR ManorCare — just a few days after its joint-venture partner revealed plans for a $1.45 billion debt offering to help recoup the costs of the mega-deal.
The Toledo, Ohio-based Welltower positioned its major investment in ManorCare as one part of a growing move toward post-acute care integration, pointing to the strength of its partner, the non-profit ProMedica chain of hospitals.
“Welltower Inc. capitalized on this shift by investing $2.2 billion in ManorCare’s post-acute and memory care real estate with ProMedica guaranteeing the leases and committing to substantial capital expenditures,” the real estate investment trust (REIT) wrote in a report released late Monday. “This risk transformation — a sponsor health system standing behind skilled nursing operational performance — makes skilled nursing real estate more investable.”
The two Toledo-based buyers shook the skilled nursing industry earlier this year with the $4.4 billion transaction. Welltower purchased Quality Care Properties, the REIT that had served as ManorCare’s primary landlord, in a joint venture arrangement with ProMedica. In turn, the hospital chain snapped up ManorCare’s operations, marking the end of a protracted bankruptcy process for the struggling network of 160 skilled nursing facilities and 58 assisted living/memory care properties.
But the immediate wake of the deal has been choppy for ProMedica, which saw its credit downgraded by Standard and Poor’s and Moody’s — in part citing concerns over the $1.15 billion in debt it assumed to close on the deal — in August. Later in the summer, the provider laid off about 100 employees and slashed an additional 60 unfilled positions, though the company noted that the staffing reductions weren’t related to ManorCare facilities or other direct-care positions.
To help repay that $1.15 billion bridge loan from Barclays, ProMedica will soon issue a $1.45 billion debt offering, the Toledo Blade reported over the weekend. That will increase the company’s overall debt load from $972 million to $2.3 billion, according to the publication.
Still, Welltower remained upbeat in its analysis of health systems’ role in the overall skilled nursing marketplace.
“Health systems are looking to care sites beyond the acute care hospital — with post-acute care seen as an integral setting — in the evolving value-based health care delivery world,” the REIT wrote in its report.
Welltower also predicted the rise of “asset-lite” health system partnerships. The trend toward vertically integrated health systems has been well-documented, especially as new payment models force hospitals to assume more and more risk related to a patient’s total episode of care: If a hospital’s eventual reimbursement depends on whether a particular patient doesn’t come back, the thinking goes, big systems have an incentive to buy their post-acute care vendors to control the entire process from start to finish.
And in that landscape, the REIT sees an opportunity to become a key partner going forward.
“If enhanced connectivity and control involves the acquisition of a skilled nursing or post-acute care provider, ownership of the real estate underlying the operations may not be a strategic fit for the acquirer,” Welltower noted. “Instead, providers may be willing to lease this real estate, applying their credit backing, because of the strategic importance of post-acute care in the patient’s health episode.”
Written by Alex Spanko