Despite ‘Disruptive’ $600B Health Care Opportunity, Welltower Now Skilled Nursing Seller

Non-profit health systems in the United States have about $600 billion worth of real estate sitting on their balance sheets — and as they look to shake up their operations, the marketplace is ripe for disruption, according to Tom DeRosa, CEO of Welltower Inc. (NYSE: WELL).

But investors shouldn’t expect skilled nursing to be part of the real estate investment trust’s (REIT) near-term buying plans.

“Today, pricing is changing dramatically,” Shankh Mitra, Welltower’s chief investment officer, said Monday at the Citi 2019 Global Property CEO Conference. “Twelve months ago, skilled nursing was [where] the most opportunity was. You saw that today we went from a buyer to a seller.”


Mitra pointed to Welltower’s $204 million sale of 15 properties operated by Genesis HealthCare (NYSE: GEN) last month in a deal that saw the skilled nursing giant team up with Next Healthcare Capital to buy the real estate. With pricing increasing on the private side by 40% to 50%, Mitra said the company’s appetite has firmly shifted to the sell side for skilled nursing assets.

That pessimism contrasted with DeRosa’s upbeat assessment of opportunities in the greater health care real estate marketplace, particularly among non-profit operators.

“Given the challenge in that business and the intense pressure for them to move their services out of acute care hospital beds into lower-cost settings, including ambulatory settings, including home, including seniors housing and skilled nursing, it will be very difficult for them, we believe, to continue to control and own all that real estate on their own balance sheet,” DeRosa said. “So we think this is … a massive disruptive event.”


The Toledo, Ohio-based REIT entered the health system landscape in a major way last year, forging a $4.4 billion joint venture with non-profit hospital operator ProMedica to acquire the portfolio of bankrupt skilled nursing and senior living giant HCR ManorCare.

ProMedica and Welltower believe that they can leverage the ManorCare platform to provide more effective and cost-efficient wrap-around care for the ProMedica patient population and other seniors around the country, reducing their use of hospitals. The operational integration of ProMedica and ManorCare is on track, and Welltower feels even better about its ultimate cash flow than when the deal was first announced, Mitra said Monday.

Other non-profit health systems are realizing that they can’t have so much capital tied up in real estate, as they face drastically declining margins and the need to restructure their businesses to offer more services in the community, DeRosa said.

As the old guard starts to offload properties, REITs like Welltower will have an opportunity to make acquisitions. Hospitals or similar acute-care settings represent about half of the $600 billion real estate currently owned by the health systems, and Welltower does not have much interest in these assets, senior vice president of corporate finance Tim McHugh said.

However, the remaining $300 billion in real estate is promising to the REIT, which currently derives about 46% of its annual net operating income from its senior housing operating portfolio, with the remainder coming from outpatient medical, long-term/post-acute, health system and senior housing triple-net leased properties.

It’s possible that this $300 billion in health system real estate could be acquired and buildings repositioned into new types of ambulatory health care settings to support the emerging health care model. McHugh pointed to a project that the REIT is undertaking with Atrium Health in Charlotte, North Carolina, as an example of what the future might hold.

This isn’t the first time that DeRosa has touted the potential of non-profit health systems’ aging assets: Speaking at the J.P. Morgan Healthcare Conference back in January, DeRosa envisioned a future where REITs put health care properties at the center of retail developments, as consumers increasingly want comfort and convenience when receiving even complex medical care.

“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,” DeRosa said of a California development that blends shopping mall retail stores with an outpatient cancer clinic. “This is just an example of where health care needs to come into the mainstream.”

Tim Mullaney contributed writing and editing to this report.

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