ManorCare Sees Occupancy Boost as Welltower Plots 45-Building Capital Improvement Plan

Executives from Welltower Inc. (NYSE: WELL) have been largely mum about the company’s ongoing integration of HCR ManorCare’s skilled nursing facilities into its overall portfolio, but when pressed Tuesday, leaders hinted that the metrics are moving in the right direction.

Occupancy at ManorCare SNFs has increased by more than 100 basis points, Welltower chief investment officer Shankh Mitra said during the company’s first-quarter earnings call, with slightly more modest gains at the Arden Court assisted living properties the real estate investment trust (REIT) also inherited as part of its acquisition.

“These things take time, and we are focused on what the long term looks like,” Mitra said. “But we are happy, very happy with how the short term has played out — whether that’s on the reimbursement side, or on the cost side, on the synergy side.”

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Welltower and its operating partner on the ManorCare buildings, non-profit health system ProMedica, are also planning on deploying capital improvements at 45 of the 160 post-acute facilities now in their shared footprint — with the exact investments ranging from complete renovations to “curb appeal” updates.

“Part of our thesis was: These assets, we bought at a very, very low basis that was capital-starved,” Mitra said.

That comment echoes the refrain of Welltower CEO Tom DeRosa, who has put the blame for ManorCare’s financial woes on its previous private-equity ownership, and not the operator itself.

“These are very good assets — great real estate that’s been run by a very effective management team with one hand tied behind its back because they’ve been capital-starved,” DeRosa said during a presentation last year. “This is a very important transaction, because this company, HCR ManorCare, is essentially being rescued by ProMedica and Welltower.”

Other than these few clues, Welltower’s management declined to provide a more detailed check-in on its ManorCare assets, which the REIT acquired in a mega-deal last spring after the operator filed for bankruptcy protection.

Under the terms of the transaction, the three Toledo, Ohio-based companies teamed up in a joint venture arrangement, with Welltower and ProMedica buying the real estate in an 80-20 partnership and the hospital system assuming control of ManorCare’s operations.

In the wake of the $4.4 billion transaction, ProMedica has suffered some setbacks, including credit downgrades, two rounds of layoffs, and losses of $70 million in 2018 — primarily attributed to increased expenses associated with the ManorCare acquisition.

But aside from noting a slight decline in coverage in its post-acute bucket — a shift that Mitra blamed on the handful of long-term acute care hospitals (LTACs) in Welltower’s portfolio — executives were upbeat about the REIT’s long-term success in skilled nursing.

“We’re encouraged by occupancy growth, recent reimbursement announcements, and upcoming PDPM implementation in Q4,” Mitra said.

The REIT also touted its recent disposition of 24 Genesis HealthCare (NYSE: GEN)-operated facilities for a total of $263 million; of that total, 15 went to a joint venture between Genesis and Next Healthcare Real Estate in a deal valued at $202 million.

“Genesis HealthCare now represents 4% of our in-place NOI, with long-term/post-acute care being less than 10%,” Welltower noted in its earnings release.

Welltower’s overall financial picture was solid for the quarter, with net income of $280.4 million and projected same-store net operating income (NOI) growth of 2% to 2.5% for its long-term and post-acute care holdings.

Executives also expressed optimism about the recently proposed $887 million Medicare pay bump for nursing homes, and senior vice president for strategy Mark Shaver emphasized that ongoing trends at the Centers for Medicare & Medicaid Services (CMS) play a vital role in Welltower’s investment outlook.

“We feel it’s moving in the right direction, but just like all of our businesses, in certain markets, value’s accelerating, and in certain markets, fee-for-service and the traditional commercial business is very important,” Shaver said. “So we continue to work with the health systems in different markets that we think are progressive.”

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