We would be lying if we said we were not surprised by the announcement that Welltower will be buying Quality Care Properties for about $2 billion plus assumed debt, that ProMedica Health Systems would be buying the operating assets of HCR ManorCare, and that Welltower and ProMedica would be joint venturing. Strange bedfellows, for sure.
While we are sure there was some time pressure to get the news out, we are also sure there were some unhappy analysts who were asleep at 11.58 pm on April 25 when Welltower announced to deaf ears that it moved up its second quarter earnings call to……8 hours later at the bright and early time of 8:00 am the following morning. Looks like management pulled a Brookdale on the transparency front, except they may have had an excuse if they thought it was necessary to get ahead of the rumors that had started to circulate.
The only pricing detail disclosed so far is that Welltower will be purchasing QCP for $20.75 per share, which equates to about $1.95 billion plus assumed debt. Apparently, this includes the 74 “non-core” skilled nursing facilities with 9,089 beds and 76.4% occupancy that QCP has been marketing for sale for several months. This will lower Welltower’s effective price once these sales close.
Coinciding with this, Welltower formed an 80/20 joint venture with not-for-profit health system ProMedica Health System that will own the real estate of HCRMC, which will be 160 SNFs with 22,106 beds (84.4% occupancy) and 58 assisted living/memory care communities with 3,774 units (80.1% occupancy) after the 74 properties are sold. This joint venture will lease the properties to ProMedica at an 8% yield with a 1.8x EBITDAR coverage, which will be $0.20 per share accretive to Welltower. We guess ProMedica will sort of be paying rent to itself.
It is nice to finally see a conservative rent coverage on a large SNF portfolio (and one that includes assisted living), but we wonder what the EBITDAR is based on since HCRMC’s operating income, at least at the property level, had been steadily declining for the past several years. Therefore, we assume the initial 1.8x coverage is based on the expectation that HCRMC’s financial performance at the property level will continue to decline until there is an industry turnaround. It may settle at the traditional 1.5x coverage in a year or two.
ProMedica is also buying the HCRMC operations, which will include the remaining skilled nursing and assisted living operations and the large home health and hospice business. The price appears to be $1.35 billion, which seems appropriate given the home health and hospice business has been steadily growing with 2017 revenues and NOI of $589.5 million and $103.5 million, respectively. The home health/hospice business was always mentioned as having a billion-dollar value, but at 8x NOI, it comes to $800 million or so. And the excess cash flow after lease payments could be close to $140 million, which would make up the rest of the value to ProMedica.
The Big Three REITs have been making no secret about exiting the SNF business, so it was surprising to see Welltower make such a large bet. One big difference is that the tenant (ProMedica) is quite strong financially with $2.0 billion of cash on the balance sheet. It must be doing something right. Plus, an 8% initial yield is attractive with solid credit behind the lease payments. The real question we have is for ProMedica. What are they thinking? Stay tuned for the May issue for our thoughts on that one. And, what will be next for Mark Ordan? Brookdale Senior Living? Nah.
