Last year was a period demanding “sheer grit and perseverance” from the Welltower (NYSE: WELL) team, and the new skilled nursing joint venture with Integra Health was one result of their efforts, CEO Shankh Mitra said Thursday during the company’s Q4 2022 earnings call.
In that deal, Welltower sold and transitioned 147 skilled nursing facilities formerly operated by ProMedica to a newly formed joint venture with Integra Health.
The first tranche of the deal closed in December 2022, with Integra acquiring 50% of Welltower’s stake in 54 of the assets for $73 million.
“As previously expected, subsequent to year end, the second tranche of assets closed in January,” CFO Tim McHugh said on the call. “Integra required 15% interest in another 31 assets for $74 million. The remaining 62 assets are expected to close in the second half of the year.”
He continued that for underlying operations, the subleasing of the portfolio is progressing and meeting expectations.
“75% of the beds have already transitioned to conditional management with the remainder the portfolio waiting on state-specific approval,” he said, adding that Welltower will continue to update the market as to the progress of management transitions, in addition to underlying property level fundamentals.
Analysts with Stifel shared Burkart’s optimism, based on Welltower’s Q4 2022 earnings results.
“The SNF asset transition to Integra, from ProMedica, appears to be going smoothly,” analysts wrote.
Stifel analysts also wrote that WELL reported NFFO of $0.83/share, beating Stifel ($0.82) and consensus ($0.83), and the reported number only includes $2.3M of provider relief funds.
Progress on a controversial deal
Welltower came under some heat for the joint venture with Integra; In December, Hindenburg Research released a lengthy report claiming that Integra is an “unknown, questionable counterparty,” causing the Welltower stock to plunge 8% in premarket trading as the report circulated.
As a part of the deal, ProMedica has 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 will provide “significant working capital support” to ensure the new operators have a smooth transition of patient care and operations.
This came a few months after ProMedica reported a $105 million operating loss in its senior care division for the second financial quarter of 2022 in a report using unaudited results of operations and its financial position ending June 30.
Integra Health entered into an 85/15 joint venture with Welltower, which included a master lease agreement that resulted in a combined cash rent increase of more than 4% to Welltower relative to the total current contractual rent from the existing ProMedica JV.
The Hindenburg report also drew attention to the fact that Integra was recently formed and is led by a 29-year-old CEO, appearing to not be the well-capitalized and experienced JV partner that Welltower executives had described during the company’s Q3 2022 earnings call.
SNN reported that Welltower CEO Shankh Mitra had used careful language during that call, repeatedly referring to Integra’s “parent” entity as an organization familiar to the REIT. And, critically, Welltower explained that Integra will not run the former ProMedica nursing homes but will sub-lease them to regional operators.
That process is now underway, and has involved such entities as industry giant Genesis HealthCare, which recently took on operations for 38 of the properties.
Welltower has been pursuing a “sharpshooter” strategy to align assets to the right operators, Welltower COO John Burkart said on the earnings call, adding that more than 20 operators will be involved once all the transitions have occurred.
“It’s too soon to have numbers and performance conversations about their performance, but overall transitions have been smooth,” he said. “And in the upcoming months, we’ll have better data to share on performance trends.”
Mitra characterized the Integra deal as a result of the Welltower’s team’s “grit and perseverance.”
“As we face different challenges in our business, be it the expense pressure, development cost pressure, or ProMedica, we remain steadfast in our belief that our job as stewards of our shareholders’ capital is to solve problems we encounter on this journey and not rip the Band-Aid off and give away potential future upside to private equity to profit from — either because, one, it is the easiest thing to do instead of working things out or two, the feeling of instant gratification as Wall Street tends to cheer such decisions,” Mitra said.
