Welltower CEO Tom DeRosa on Wednesday defended the decision to keep HCR ManorCare’s leadership team in place as the real estate investment trust gains a stake in the operator through a deal with the ProMedica health system.
His remarks came after an attendee of the Nareit REITweek: 2018 Investor Conference in New York City called the company a “steaming pile of real estate.”
ManorCare, DeRosa countered, has “great real estate that’s been run by a very effective management team with one hand tied behind its back because they’ve been capital-starved.” Operations were not sustainable, but that was due to leverage put on ManorCare by private equity firms, he said.
As part of the deal announced in April, nonprofit ProMedica is acquiring ManorCare for approximately $1.35 billion and Welltower simultaneously is acquiring the assets of ManorCare’s landlord, Quality Care Properties, for $20.75 per share. ManorCare will become a wholly owned indirect subsidiary of QCP.
A new 80/20 joint venture between Welltower and ProMedica will lease ManorCare’s real estate to ProMedica for 15 years. ProMerica also is acquiring ManorCare’s operations.
The real estate is located across 18 states and includes 160 post-acute communities and 58 assisted living communities, said Shankh Mitra, senior vice president of investments at Welltower. “The rough split of EBITDAR [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs] is 70% post-acute and 30% senior housing,” he added.
As proof of the quality of the ManorCare assets, DeRosa said that the company’s skilled nursing facilities have an overall 4.7 star rating by the Centers for Medicare & Medicaid Services. “That’s out of five,” he added.
And skilled nursing, DeRosa said, is becoming attractive to health systems as “a viable, low-cost alternative to discharge people more quickly and effectively out of acute care hospital beds.”
Further, he said, ManorCare’s Arden Courts memory care communities, despite being “capital-starved” over the past several years, operate “at very attractive margins.”
And it’s likely that health systems increasingly will look to work more closely with such memory care communities, DeRosa said. Health systems, he added, “are not really equipped to manage all of the complex needs of someone with dementia and Alzheimer’s disease, and that population is just going to start increasing exponentially in 2020.”
In fact, DeRosa said, “If you spend time with major health systems as I do, and when you sit down with the CEO of a major health system — and I don’t care if that’s the CEO of the Cleveland Clinic or that’s the CEO of Providence St. Joseph — they will tell you, ‘Where you can help us is, we need a viable post-acute care option.’ We have been trying to figure that out for a number of years, and this is that opportunity, so we could not be more excited about it.”
So rather than seeking to change the management team, DeRosa said he was thankful that members have stayed.
“HCR ManorCare is essentially being rescued by ProMedica and Welltower,” he said. “And it’s astounding that the management team has stayed very much intact.”
ProMedica will benefit from having the existing team remain at ManorCare, DeRosa said. That group will be led by Steve Cavanaugh, the company’s former executive vice president and chief operating officer who became CEO after the September 2017 departure of Paul Ormond.
“People have said, ‘What does ProMedica know about running a skilled nursing and assisted living platform?’ ” DeRosa said. “Well, the fact is, the management team of HCR ManorCare is going to run this business under the ProMedica umbrella.”
Investors and others may be worried about “integration risk” due to the large size of the transaction, but much of that potential risk is mitigated by circumstances particular to the deal, the CEO said. ProMedica and ManorCare both are based in Toledo, OH, as is Welltower.
“The fact is, these companies are headquartered literally across the street from each other,” DeRosa said. “The management teams live in the same community, their kids go to the same schools, they worship at the same houses of worship and they play golf at the same country club.”
On Wednesday, QCP filed a preliminary proxy statement with the Securities and Exchange Commission in advance of the meeting at which shareholders will vote whether to be acquired by Welltower.
“The board of directors of the company … has unanimously approved the merger and determined that the merger agreement is advisable and in the best interests of the company and its stockholders. The board unanimously recommends that the stockholders of the company vote for the proposal to approve the merger,” stated a letter to shareholders that was part of the filing.
The date of the shareholder meeting has not been announced.
