When Genesis HealthCare announced last year that it may not make it in the following 12 months, you knew something had to be done. And then at the beginning of this year when its longstanding CEO, George Hager, departed, you knew that replacing one person with another was just not going to cut it. But perhaps it enabled the Board to move on what had to be done to salvage a desperate situation.
Late on Tuesday, Welltower announced that it has substantially exited its 10-year operating relationship with Genesis HealthCare. The move cannot be seen as much of a surprise considering Genesis’ “going concern” notice last year, multiple major write downs associated with Genesis-operated properties, and Welltower’s switch to cash-based reporting for lease payments from the struggling operator. In a press release, Welltower stated that the transactions would meaningfully de-risk its portfolio, which we can’t really argue.
To complete the exit, Welltower has entered into definitive agreements to sell 35 skilled nursing facilities for $500 million to a joint venture including Aurora Health Network and Peace Capital in which Welltower will retain a participating preferred equity position. Regional operators will take over management at the facilities.
Welltower also leases seven skilled nursing facilities, which it subleases to Genesis, but it agreed to transition operations of these properties into a new lease agreement with a regional operator. The REIT holds a bargain purchase option on the portfolio which can be executed in April 2023 and has entered into a forward sale agreement for the portfolio, valued at $182 million, with the Aurora Health Network JV that is intended to close simultaneously with the execution of the purchase option.
Welltower will also contribute nine purpose-built former “PowerBack” rehabilitation facilities, which provide short-term rehab care to a higher acuity patient population, into its 80/20 joint venture with ProMedica Senior Care at a total value of $292 million. ProMedica will take over operations at these locations. In a separate deal, Welltower’s joint venture with ProMedica will also divest 25 skilled nursing facilities in eight states for $265 million, or $82,000 per bed.
Welltower will pay Genesis a lease termination fee of $86 million upon the successful transition of all properties, which Genesis will then immediately use to repay indebtedness to Welltower. But upon achievement of certain restructuring milestones and capital infusion into Genesis by Aurora, Welltower will reduce Genesis’ indebtedness by an additional $170 million in exchange for increasing its equity interest in Genesis from 6% to 15% on a fully diluted basis. So, the relationship is not absolutely terminated, and Welltower hopefully be able to enjoy any operational upside as Genesis tries to recover from the pandemic.
The 51 facilities being divested by Genesis had a combined $640 million in revenue, but before the pandemic took its toll, and $79 million in cash rent.
On the capital side, ReGen Healthcare, LLC will make a $50 million debt investment in Genesis that will convert into a 25% equity interest on a fully diluted basis. ReGen has the option to make another $25 million debt investment exercisable no later than March 31, 2021, which if completed would take the ownership to 33.3%. A warrant exercisable for equity will be issued, which with all the debt conversions, would take ReGen’s ownership to 43%. As part of the agreement, ReGen has named two Board members replacing two others who have resigned. As part of the restructuring, Genesis will delist its shares from the New York Stock Exchange. Its shares will then trade in the OTC Pink Open Market (Pink Sheets).
The maneuvers took a $0.05 negative hit on Welltower’s normalized funds from operations on an annualized basis, and the transactions are expected to be approximately $0.16 per share dilutive to normalized FFO on an annualized basis. But Welltower will also have around $745 million of anticipated proceeds from the deals. We hope much of that finds its way into the M&A market. Difficult times result in difficult decisions, but we believe this was not a difficult decision to make, as the alternative was potentially disappearing as a company.
In initial trading, Genesis’ stock price dropped by 20% on heavy volume.
