Welltower Fields Multiple Offers for ManorCare SNF Assets — with a $150K/Bed Price Tag

Multiple suitors have come knocking at Welltower Inc.’s (NYSE: WELL) door to ask about its recently acquired skilled nursing assets, a top executive said Tuesday, with potential offers that could significantly exceed their most recent sale price.

The real estate investment trust (REIT) has no interest in selling off a large chunk of its HCR ManorCare post-acute and long-term care properties, chief investment officer Shankh Mitra said during Welltower’s third-quarter earnings call. But the company is currently mulling two specific deals for portions of the portfolio with an expected overall price tag of about $150,000 per bed — more than doubling the $57,000-per-bed price that Welltower paid for the assets in a 2018 joint-venture transaction with health system ProMedica.

“The sheer magnitude of this price increase hopefully gives you a sense of what we think the total return looks like today versus when we made that investment,” Mitra said.

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Mitra declined to give any further comments on the potential sale, including the number of beds that could be involved; in response to an analyst question, Mitra also clarified that the anticipated price was based on overall market rates of $120,000 to $180,000 per bed.

Tuesday’s regular earnings update came on the heels of more negative headlines surrounding ProMedica, the major Toledo, Ohio-based health and hospital system that purchased ManorCare’s operations in an a concurrent deal alongside the real estate joint venture. Credit agency Moody’s downgraded ProMedica’s rating for the second time since the transaction closed, blaming both weaker-than-expected upside from the ongoing ManorCare integration and troubles in the system’s managed Medicaid business.

“The post-acute care operation projects margins below initial projections in part because of declining Medicare census at nursing homes, which make up about two-thirds of post-acute revenue,” Moody’s wrote in its downgrade note, which saw ProMedica’s rating slip from Baa1 to Baa3. “Expected synergies from the 2018 acquisition of HCR ManorCare will be slower than expected.”

In response, Mitra and CEO Tom DeRosa rattled off a series of stats pointing to ProMedica’s general financial stability, including reserves totaling $1.5 billion in cash against about $800 million in debt, as well as revenues of about $6.8 billion per year.

“Though I would refrain from commenting on other people’s opinions of our partner’s credit, I want to put things in perspective,” Mitra said.

The company expects its overall return on the ProMedica deal to far exceed the original purchase price, Mitra said, with about $46 million in projected upside this year.

“We feel good about the position that we’re in, and I think we’ve given a lot of metrics that support why we feel good about this investment,” DeRosa said.

Still, the Moody’s downgrade presents a potential problem down the road: Under the terms of ProMedica’s leases with the Welltower joint venture that owns the properties, the health system can’t receive lower than investment-grade ratings from two separate agencies. Back when the deal first closed, DeRosa specifically pointed to ProMedica’s then-A rating as a key factor in the transaction.

Though ProMedica’s ratings still comply with that covenant, one analyst on the call expressed concerns that the Moody’s action could bring Welltower closer to a lease showdown.

In response, DeRosa and Mitra emphasized that the ratings requirement is merely an option that Welltower retains to protect shareholders, and that further downgrades would only trigger a discussion among the parties — and not an automatic lease kill switch.

“We have the right to bring them to the table,” DeRosa said. “It’s not a gun pointed at their head. There is a structure around this investment that brings us to the table to work together to solve whatever bumps in the road may occur over a very long-period investment.”

DeRosa also used the opportunity to tout the company’s recent moves to restructure its overall portfolio, including the sale of multiple properties operated by Genesis HealthCare (NYSE: GEN) and the $265 million disposition of long-term acute care hospitals (LTACs) operated by Vibra Healthcare.

While occasionally “painful” for Welltower’s shareholders, the deals served to rid the REIT of relationships that could “best be characterized as last-generation real estate, bad capital structures, misaligned operating agreements, misguided private equity investments, or frankly simply paying too much for real estate,” he said.

Welltower logged net income of $589 million in the third quarter of 2019, up from $64 million over the same period last year.

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