Back when Welltower announced its agreement to let health system ProMedica Senior Care off the hook with its leases for 147 nursing facilities, leases that were drowning in red ink for ProMedica, we joked about it because, 1) we had just written that not-for-profit ProMedica’s board could not let the red ink flow for much longer, and 2) the new joint venture partner called Integra was not one of the commonly known “Integras” in senior living or health care, and there are many of them. But we did discover the relationship between Welltower’s Integra and an entity called Perigrove, which claimed to be an institutional investor with years and billions of dollars of investments under its belt. Except the CEO, David Gefner, is 29 and apparently no one has ever heard of him.
Along comes Hindenburg Research, a forensic financial research company with a focus on equity, credit and derivatives analysis. It also has a focus on investigating accounting irregularities, undisclosed related-party transactions and illegal or unethical financial reporting practices, among other things. We would guess that Hindenburg’s primary customers are short sellers who hope the share price of their target drops and they can buy it back at a lower price. Hindenburg’s reports are known for slamming a company for whatever reason it finds. Their latest report about Welltower and its joint venture partner Integra would certainly fit the bill.
Hindenburg has basically accused this Integra and Perigrove of being a sham. They were not able to find any records of them with the SEC or any other regulatory body, the addresses listed had no one home, including one on the outskirts of New York City above an auto parts store with a paper sign taped to the door with the company name misspelled. This reminds us of the Skyline Healthcare scandal several years ago with their “office” above a pizza parlor and basically no operating team despite leasing well over 100 nursing homes. Skyline ended up defaulting on more than 100 nursing home leases in one of the worst scandals to ever hit the nursing home sector. Amazingly, former Skyline executives are still allowed to be in the business. Some states just never learn.
So, what do we make of this Hindenburg report, which obviously had an ax to grind. First of all, when Welltower announced this new JV with “Integra,” the information was not very transparent at all. Investors were left thinking that Integra was going to be the operator (it had no operations) and that it was well capitalized (it does not appear to be so). The plan from the get-go, as far as we can determine, was for Integra to sub-lease the nursing facilities to regional operators, who could in theory turn these properties around, and certainly better than giant ProMedica. The whole description of the new arrangement, who the parties were, where the money was really coming from, was murky, and confusing to investors.
Welltower and ProMedica were in a bind because the facilities were losing millions of dollars, ProMedica wanted out, the sector was still suffering from the pandemic and on and on. So it was not a great time to find new operators for these 147 properties transferred into the new joint venture, and a solution had to be found. But where we do find fault is that given Integra is not going to “operate” these 147 facilities, they still need a good back office to be the landlord, unless they are going to use Welltower’s back office, which would be seamless, and make sense. We were told that Integra was well-capitalized, but we don’t know by whom and with how much. It seems like this Integra is simply a vehicle to move these 147 assets away from ProMedica
From a short-selling perspective, Welltower has become so big that they can basically bury any problems with this portfolio. Their cost basis is so low that it provides them with flexibility as the recovery continues. And we know from experience that if they get smaller regional operators in there, profits will increase.
Most everyone thought it was odd that this new JV would be paying rents that are 4% higher than the rents ProMedica could not even cover. Why would Integra agree to that? Who knows, other than either someone is backstopping operating losses for the first year, or with a turnaround, they expect cash flow to more than cover the higher rent by 2024. Perhaps both. Or to look good to investors, who did not seem to question it. And there is that $250 million contribution from ProMedica into the new JV, so that can cover a lot of rent. It is all tied in. But from a percentage-of-revenue perspective, ProMedica was very important and investors need more transparency as to what is really going on.
If the point of the report was to tank Welltower’s stock price, it did not work. Initially, it dropped 6% on heavy volume, but that did not last long and the next day the total damage was just a 3% decline, hardly a short-seller’s dream. If this new JV ends up being a bust, there will be other ways to skin the cat for Welltower. The bigger concern for investors is that with all the buying and selling that Welltower has done in the past several years, it is difficult to determine how it is really performing from an apples-to-apples perspective.
By the way, did we mention that Hindenburg is short Welltower? Hmmm.
