Three months ago, we reported that Welltower’s CEO, Shankh Mitra, seemed a little depressed on his second quarter earnings call. He was not happy with his portfolio’s performance. He is a little happier today with the third quarter performance, and so are investors, who sent the shares up 8% on the results and other news.
Compared with a year ago, Welltower’s same-community SHOP portfolio has seen occupancy increase by 390 basis points, revenues increase by 10.6% and net operating income jump by 17.5%. Now, we are talking about coming from a bad place in the history of the portfolio, so we would expect to see good increases. On the negative side, same-community compensation expense increased 9.7%, food costs soared by 13.1% and utilities jumped by 12.1%. This is why it is crucial for providers to seek rate increases in 2023 of 8% to 12%, or maybe higher, because
operating costs are not going to decrease any time soon.
The big news, of course, was the decision to exit Welltower’s joint venture with ProMedica Health (ProMedica Senior Care) with regard to the JV’s skilled nursing portfolio of 147 facilities. As we mentioned in the 60 Seconds video, ProMedica is giving back its 15% ownership interest in these facilities. In return, they will be relieved of nearly $500 million of future lease payments to Welltower, and will provide working capital support for the new operators.
This is extremely important for ProMedica because as of the second quarter, the overall ProMedica portfolio had a negative EBITDAR coverage, and was just 0.32x when the management fee was added back. We have to assume most of the problem was with the SNF portfolio. Integra Health will now begin to find new regional operators for the SNFs by the end of the year, a process we presume they started weeks ago. When Welltower originally did this transaction with ProMedica, they touted it as a lease with an A-rated credit (ProMedica). Well, that strong credit started to deteriorate almost immediately, and six weeks ago Moody’s cut the rating again from the lowest investment grade level of Baa3 to non-investment grade Ba2. And with ProMedica’s losses mounting, it was a smart move to lessen its exposure.
Concurrent with getting the 15% of the SNF ownership back, Welltower sold the 15% interest to Integra Health, an affiliate of Perigrove, a New York-based PE firm. Welltower will keep the other 85% interest. Welltower will lease the portfolio of 147 SNFs to the new joint venture for $167 million in annual rent, receiving 85% of the rents and Integra 15%. Integra is now in the process of finding regional operators to assume management of these 147 facilities.
As Welltower CEO Shankh Mitra is fond of saying, with a very low basis in the real estate (about $50,000 per bed), it is hard to go wrong. Except, he thought it was great having a rated health system backing the leases, and now it is a PE firm with not as good of a guaranty. The difference, however, is that the performance will undoubtedly improve with a variety of smaller operators. At least, that is the plan.
Apparently, the $167 million in rent Welltower will receive from the new joint venture with Integra Health will be 4% higher than it had been receiving from ProMedica, which is a bit surprising given the poor historical performance. But management stated that occupancy and financial performance at the SNF portfolio has been increasing recently.
With the hoopla four years ago about all the synergies between ProMedica and the HCR ManorCare portfolio touted by ProMedica’s then CEO, Randy Oostra, we were very doubtful at the time. There was a very small geographic overlap between ProMedica’s hospitals and the SNFs, and it seemed as if Mr. Oostra had big plans to expand his hospital and managed care businesses into other states where the SNFs were located.
As it turned out, those synergies never happened, and while COVID can be blamed, it did seem like it was not well thought out at the time, and ego may have been involved. We don’t know whether Oostra’s “retirement” effective November 1 was a result of this bad decision, which has cost the parent company millions in losses, but it had to weigh in. We can’t wait to get an update on the new operators, which may not be disclosed until next year.
In the meantime, Welltower continues to close seniors housing deals, with the highest priced one being the purchase of a 187-unit senior living community from Kisco Senior Living for $114 million, or $609,000 per unit. It is located in the San Francisco MSA, which helps explain the high price. But we don’t see that too often.
