ProMedica Senior Care’s ongoing efforts to rebound its portfolio — most recently through occupancy gains and lower contract labor costs — proved not to be enough to sway Welltower’s (NYSE: WELL) decision to transition and sell 147 of its skilled nursing assets, according to CEO and Chief Investment Officer Shankh Mitra.
Mitra sees the deal announced this week as a “win” for all parties involved.
“ProMedica wants to focus on its core business, and wants to be in the higher margin business … It’s a very significant improvement in their credit. For Welltower it’s obviously a great day for some value realization as well as obviously taking this portfolio to the hands where we can create another round of very significant upstep of values. For Integra, they’re coming in at a very attractive basis and obviously they’re creating the value that they will share the upside with us,” he said during the company’s Q3 earnings call.
“So it’s a win win win on all fronts,” he added.
ProMedica agreed to surrender its 15% interest in the SNF assets involved in their existing 85/15 joint venture with the real estate investment trust (REIT) and is contributing nearly $500 million in a working capital consideration.
The transaction will also bring ProMedica Senior Care’s remaining portfolio, which includes 10 non-Welltower SNFs, back to profitability.
Welltower has chosen Integra Health as the operator that will enter into a new 85/15 joint venture with the REIT, which will include a master lease agreement that results in a combined cash rent increase of more than 4% to Welltower relative to the total current contractual rent from the existing ProMedica JV.
Executing on the operational improvements to drive margin in the SNFs will be left to Integra and regional affiliates, which will sublease the former ProMedica properties. This is unlike Welltower’s senior housing portfolio, where margin improvement will not only be tied to higher occupancy and normalizing expenses but to operational efficiencies that Welltower COO John Burkart’s team is focused on identifying and implementing.
“There’s no question that they are significantly better in the skilled nursing business than we are and will ever be,” Mitra said, referring to Integra. “ … Think about it from an op standpoint; we think we understand operations of senior living, the wellness housing business as well as MOB business.”
Reflecting only briefly on the last few years and Welltower’s decision to bring HCR ManorCare out of bankruptcy by acquiring it with Promedica in 2018, Mitra noted they couldn’t predict Covid and its impact on the cash flow portfolio.
More broadly, net operating income (NOI) for Welltower’s same-store post-acute care portfolio grew 3.1% in the second quarter of 2022. Looking ahead to 4Q22, the Toledo, Ohio-based real estate investment trust (REIT) expects NOI growth for the portfolio of approximately 2.5% to 3.5%.
Welltower has $301 million of cash on the balance sheet and roughly $3.8 billion of available liquidity, Stifel analysts pointed out in an investor note issued Monday.
The REIT’s stock price grew 8.22%, ending the day at $66.51.
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