Welltower Gains Confidence in Post-Acute as Industry Fundamentals Improve

Executives at Welltower Inc. (NYSE: WELL) are becoming more confident in the post-acute business, noting that skilled nursing acquisition prices have increased.

In fact, in the past 12 months, the company has gone from being “an opportunistic buyer to opportunistic seller,” at least when it comes to skilled nursing, Welltower chief investment officer Shankh Mitra said in response to analyst questions on the real estate investment trust’s (REIT) fourth-quarter 2018 earnings conference call Tuesday.

The Toledo, Ohio-based REIT reported fourth-quarter net income of 27 cents per share, compared with a net loss of 30 cents a share in the year-ago period, and fiscal 2018 net income of $2.02 per share, compared with fiscal 2017 net income of $1.26 per share.

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Skilled nursing fundamentals are improving

Welltower’s optimism in the post-acute space is growing almost a year after the announcement of its deal with ProMedica to acquire the real estate of skilled nursing operator HCR ManorCare in a joint venture with the non-profit hospital operator, with ProMedica acquiring the operations.

“While it is unlikely to be a V-shaped recovery, it appears that the industry fundamentals are on the mend,” Mitra said in prepared remarks on the call. “Meanwhile, pricing of skilled nursing assets have materially increased due to the flood of capital deploying in that space.”

As an example, Mitra cited selling 22 Genesis HealthCare (NYSE: GEN) assets that were below market coverage for $252 million, at a 8.95% yield.

“While we keep reading about how SNFs should be around 2x EBITDARM coverage, the Genesis transaction highlights the significant gap between theoretical assertions versus how practitioners behave,” he said.

While the Genesis sales are dilutive to earnings in the short-term, Welltower believes shareholders received significant value and an improved growth profile for the firm going forward, Mitra added.

Currently, about 4% of net operating income (NOI) is attributed to Genesis, a decline of 70% from the peak value of NOI attributed to the operator, he said on the call.

“A significant portion of what remains is in PowerBack format,” Mitra said. “We continue [our] investment in the model through purpose-built developments. PowerBack Piscataway, which just opened 13 months ago, is currently 64% occupied, demonstrating the power of that product.”

Genesis’s PowerBack Rehabilitation service was launched in 2012 as a response to demand for shorter post-hospital recovery times, and the company opened its 12th such location in September of last year.

Health systems coming to Welltower

Welltower is encouraged by the post-acute sector, though Mitra did not dive too deeply into the specifics of ProMedica’s integration, pointing to the fact that the leadership at ProMedica spoke at Welltower’s investor day in October 2018.

At the time, he noted that “ProMedica and HCR leadership now expect higher synergies than we expected previously.”

He did not give more updates on the fourth-quarter call, but reiterated that Welltower is encouraged by the post-acute sector.

“We are encouraged overall by what’s going on in the post-acute sector,” he said. “I’m not going to make too many comments, given that Genesis is a public company, but look for their release and see how that sector is playing out. But we’re definitely encouraged by the sector.”

The possibility of health system acquisitions accelerating could open some doors, CEO Tom DeRosa said on the call.

“As health systems start to see a future for their business model that is different from the very focused acute-care model that drove so much of their real estate investment in the past, I think that opens up opportunities for partners like Welltower,” DeRosa said.

Welltower could help with two main trends that health systems face, senior vice president of strategy Mark Shaver said. Health care systems have to right-size their clinical delivery offerings and build out ambulatory, outpatient, and other care sites, and Welltower is active in those dialogues, he said. Health systems will likely continue to face challenges in funding the clinical growth on their own, which is where the opportunity for Welltower lies.

The other trend could lead to more deals like the one with ProMedica, he argued.

“There’s going to continue to be vertical integration with health system partners, just like you see across the health spectrum,” he said. “That’s going to create these ProMedica-type transactions where they’re looking to grow additional margin businesses. Again, I think we’re very well-positioned to support that.”

Welltower shares closed trading Tuesday at $76.65, down 78 cents, or 1.01%.

Tim Mullaney contributed reporting.

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