April 26, 2018, Tim Mullaney, Skilled Nursing News - The fates of skilled nursing giant HCR ManorCare and its former landlord, Quality Care Properties (NYSE: QCP), have been determined. Welltower Inc. (NYSE: WELL), one of the largest U.S. health care real estate investment trusts (REITs), has reached an agreement to acquire QCP in a $1.95 billion all-cash deal.
Going forward, Welltower will own the real estate of one-time QCP tenant HCR ManorCare in a joint venture with ProMedica, a nonprofit health system. ProMedica is acquiring the operations of HCR ManorCare for about $1.35 billion in cash plus the assumption of net liabilities.
The partnership will “redefine the skilled nursing value paradigm and connect the continuum of care for the patients in the communities we serve,” Welltower and ProMedica stated in a joint announcement released late Wednesday night. Rumors of the deal had begun circulating earlier in the day.
Welltower, ProMedica and HCR ManorCare are all based in Toledo, Ohio.
By acquiring ManorCare, ProMedica will establish itself as one of the 15 largest nonprofit U.S. health systems, with more than $7 billion in annual revenue on a pro forma basis. The system encompasses 13 acute care hospitals, six ambulatory surgery centers and about 300 other facilities—and with the addition of ManorCare, it will be the largest health system operator of private-pay senior housing and gain significant scale in the post-acute and home health sectors.
“We want to take down the wall between traditional hospital and post-acute care services in an effort to enhance the health and well-being of our aging population,” said Randy Oostra, ProMedica president and CEO, in a press release announcing the deal. “The lines are blurring between where health care begins and stops. This acquisition provides us the platform to think differently about health and aging.”
This is an effort that Welltower is eager to participate in, CEO Tom DeRosa stated.
“ProMedica’s unique wellness focused strategy and investment commitment to the HCR ManorCare assets will make them more consequential sites of care and enhance their value,” DeRosa said in the release. “We are very happy to be the real estate capital behind this transformative transaction.”
Start of a new chapter
HCR ManorCare is the second-largest nursing home chain in the country and also has a sizable private-pay senior housing portfolio. In 2007, it was acquired by private equity firm Carlyle Group, and in 2010, it sold the real estate of nearly 338 facilities to HCP (NYSE: HCP), a REIT based in Irvine, California.
But as of 2016, ManorCare’s financial situation was becoming dire, and HCP spun off the portfolio into QCP, which became a separate, independent REIT. ManorCare’s position continued to deteriorate, it fell behind on its rent, and after months of negotiation, QCP moved to sacrifice its REIT status and take over the operator. That was announced in March 2018; the plan was to take ManorCare into bankruptcy protection and execute on a prepackaged plan of reorganization.
Now, with Welltower acquiring all the outstanding shares of QCP and forging its JV with ProMedica, the real estate is moving back into the hands of a REIT. The $1.95 billion price for QCP equates to about $20.75 per share, which is close to its recent market value.
The joint venture portfolio consists of 58 assisted living and Arden Courts memory care properties, and 160 post-acute care facilities. Welltower has an 80% stake in the JV. The REIT is assuming sole ownership of 28 additional outpatient medical and post-acute properties. A total of 74 skilled nursing and/or senior housing facilities considered to be non-core are currently in the process of being sold.
For the JV, Welltower and ProMedica have struck a lease agreement consisting of a 15-year absolute triple-net lease with full corporate guarantee of A1/A+ rated ProMedica. Welltower expects an 8% initial cash yield with rent coverage of 1.8x. The year-one rent escalator is 1.375%, followed by 2.75% annually thereafter.
ProMedica has agreed to invest up to $400 million in capital expenditures over the next five years to upgrade the properties.
Currently, the skilled nursing sector is facing a barrage of challenges, ranging from reimbursement pressures to regulatory burdens to tight labor markets to loss of census to other parts of the care continuum. Publicly traded SNF companies such as Genesis HealthCare (NYSE: GEN)—also a Welltower tenant—have been battered in the markets, while privately held companies have also faced financial crises.
Yet, Welltower’s DeRosa has spoken up in defense of skilled nursing and recently described his concept for a “new-age” SNF. Welltower and ProMedica are describing their partnership in similarly transformative terms, as is QCP CEO Mark Ordan.
“ProMedica and Welltower together are redefining the settings where health care will be delivered and ProMedica is committed to the investment necessary to enhance the HCR ManorCare platform,” Ordan stated in the press release. “QCP is happy to have played a part in facilitating this exciting next chapter for HCR ManorCare.”