Welltower’s DeRosa: Health Care Real Estate is the New Retail

While remaining relatively mum on the status of his company’s major skilled nursing play, Welltower Inc. (NYSE: WELL) CEO Tom DeRosa this week presented a vision of the future in which health care assets replace retail as the cornerstone of real estate development.

“For generations, we thought of anchors as retail — it’s retail that would establish that sense of community for a real estate development,” DeRosa said in a Wednesday night presentation at the J.P. Morgan Healthcare Conference in San Francisco. “In the future, it’s going to be health care.”

The real estate investment trust (REIT) CEO described the Shops at Mission Viejo development, a shopping mall in California where Welltower is developing a 110,000-square-foot outpatient cancer treatment center for the non-profit Providence St. Joseph Health. Because patients generally bring family or friends along with them for often lengthy chemotherapy appointments, DeRosa said, the location serves as a natural fit.

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“When you bring someone with you to your chemotherapy, they can actually walk across the street and bring you back a Frappuccino or buy themselves a pair of shoes,” he said. “This is just an example of where health care needs to come into the mainstream.”

The market for health care real estate in the United States currently sits at around $1 trillion, with about 51% of that in the hands of non-profit health systems, according to the Welltower presentation. But those properties are aging and ill equipped for future health care needs, DeRosa said, positioning Welltower and other REITs as vehicles to help those companies re-deploy capital toward technology and new ambulatory care centers.

“It needs to be in settings where consumers want to be, and health care in the future, we believe, is going to create sense of community,” he said.

It’s unclear how much that strategy will extend to Welltower’s new portfolio of skilled nursing assets, acquired in its $4.4 billion mega-deal to purchase former REIT Quality Care Properties. That transaction, executed as an 80-20 joint venture with hospital system ProMedica, brought the real estate associated with the HCR ManorCare nursing home chain into the REIT’s portfolio; in a related transaction, ProMedica purchased ManorCare’s operations.

In brief comments about the deal, DeRosa again placed the blame for headwinds in skilled nursing on private equity companies that over-levered chains before entering sale-leaseback arrangements with REITs.

“CMS responded by cutting reimbursement, and we’ve had a very sad story around the post-acute career sector for many years,” he said.

ManorCare had previously been owned by private equity giant The Carlyle Group, and DeRosa has described the acquisition as a rescue mission of an operationally sound health care company hamstrung by lack of capital investment. Though he punted discussion of the merger progress in his remarks Wednesday, DeRosa did emphasize demand for post-acute care services among national hospital operators such as ProMedica.

“When you sit with the leaders of the U.S. non-for-profit health systems, they all say: We need a viable post-acute strategy, post acute partners, in order for us to meet our promise,” he said.

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