ManorCare Exceeds Expectations, in Talks to Strike Post-Acute Partnerships with Health Systems

Skilled nursing giant HCR ManorCare outperformed projections in its first full year as a tenant of Welltower Inc. (NYSE: WELL), the real estate investment trust (REIT) announced Thursday, and could soon expand its footprint to include partnerships with health systems outside of its current orbit.

“[The] ManorCare portfolio did not hit our expectation; it exceeded our expectation significantly,” Welltower chief investment officer Shankh Mitra said on the company’s fourth-quarter 2019 earnings call with investors and analysts.

The REIT had anticipated full-year EBITDAR of $300 million from its ManorCare assets, which it purchased in a $4.4 billion joint-venture deal with health system ProMedica in 2018; ProMedica also serves as the sole operator of the ManorCare portfolio.

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ManorCare instead turned in EBITDAR of $307 million for 2019, Mitra said, with all three business lines — skilled nursing, home health, and memory care — showing fourth-quarter EBITDAR growth for the first time in seven years. Though quality mix remained a headwind, Mitra reported stabilizing lengths of stay, growing occupancy, and solid cost controls as reasons for optimism about the ManorCare properties.

“ProMedica, which is an absolute pioneer in the social determinants of health side, will drive significant value from the HCR platform for years to come,” Mitra said.

Welltower expects ongoing growth of 2.75% for the ManorCare/ProMedica portion of its portfolio, and Mitra hinted that firm partnerships between the post-acute provider and other hospital systems outside of its network could be announced sometime in 2020.

“HCR is in active negotiations with several health systems to help meet their post-acute needs,” he said.

Forging such partnerships has been a goal of Welltower and ProMedica since the early days of their marriage: Back in December 2018, ManorCare president Steve Cavanaugh laid out a growth vision in which his company would take over the skilled nursing assets of hospital systems that no longer wanted to be in the post-acute business.

“In a lot of systems, post-acute is an afterthought, and I tell everybody: One man’s trash is another man’s treasure,” he said. “We’re very glad to try and step in and provide solutions for people on post-acute, and help them run that part of their business better.”

Mitra also reiterated Welltower’s commitment to the ManorCare portfolio — specifically in the wake of a Wednesday announcement that the REIT had reached a $67 million deal to sell three of its ManorCare buildings after receiving an unsolicited offer.

“We are extremely, extremely happy with our relationship. That was an opportunistic sale,” he said, though he added that the partners wouldn’t rule out additional small transactions if the price was right.

In fact, given the current state of skilled nursing prices, Mitra emphasized that Welltower is more than open to selling off post-acute properties in its portfolio, with no firm plans to expand its footprint in the space.

“We’re a buyer of any asset class — skilled nursing included — at a price,” he said in response to an analyst question about Welltower’s SNF pipeline. “We think that today in the skilled nursing market, pricing is so hot that we should be a seller, not a buyer.”

The union between Welltower and ProMedica/ManorCare hasn’t been an easy one, with the health system weathering credit downgrades and suffering significant losses at its Paramount managed-Medicaid plan — red ink that prompted the system to substantially scale back Paramount’s footprint at the start of the year.

But Mitra used the Paramount situation as an opportunity to praise ProMedica’s business sense.

“They have taken really tough calls and exited the business,” he said. “You don’t generally see that in a lot of not-for-profits.”

Welltower also saw gains in its long-term and post-acute assets outside of the ManorCare buildings, which logged 4.3% year-over-year growth according to chief financial officer Tim McHugh — powered in part by solid coverage on a lease with operator Consulate Health Care.

Because the company records its coverage results one quarter in arrears, Welltower’s fourth-quarter earnings didn’t reveal any positive or negative effects stemming from the Patient-Driven Payment Model (PDPM) for Medicare reimbursements, which took effect for nursing homes October 1.

Executives were hesitant to make any predictions about PDPM’s eventual impact on Welltower’s post-acute assets, though Mitra generally posited that the Centers for Medicare & Medicaid Services (CMS) is unlikely to make changes to the model that would negatively affect the nursing home industry given its vital role in the health care continuum — and the bankruptcies that have roiled the sector in recent years.

“Whatever happens will be reasonable, and will have an impact — positive or negative — on different platforms,” he said.

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