Investors eye post-acute sector's growing demographic

ProMedica and Welltower's acquisition of HCR ManorCare signals the increasing value investors place in post-acute providers as they aim to serve one of the country's fastest-growing demographics.

Ohio-based hospital operator ProMedica stepped out of its traditional role when it finalized its $1.4 billion acquisition of bankrupt nursing home provider HCR ManorCare in July.

Running parallel to the deal, real estate investment trust Welltower agreed to buy ManorCare's skilled nursing and memory care real estate for about $2.2 billion from fellow REIT Quality Care Properties in a joint venture with ProMedica.

There will be fewer independent post-acute providers as they struggle to raise the additional capital to comply with evolving regulatory regimes, care coordination and new payment systems, according to a new report from Welltower.

Larger health systems are poised to snatch up these providers, offering the infrastructure and capital to keep up with the evolving post-acute space, the report said. Meanwhile, REITs can help health systems transition to smaller footprints and asset-light operations, which allow providers to focus on care delivery rather than real-estate ownership.

The accelerating growth rate of the elderly population is placing a major financial burden on the healthcare system and driving the need for a more cost-effective solution, said Kevin Tyler, vice president of investments for Welltower. The 80-85 year old population cohort is expected to grow at about 5% per year over the next 10 years and will more than double in size in 20 years.

"We believe that as long as these larger health systems have the right capital structure and infrastructure, there is going to be an upside because there is a fair amount of cushion to weather volatility in payment schemes," he said.

ProMedica pledged to invest as much as $400 million of capital into HCR ManorCare over the next five years.

The fragmented nature of healthcare real estate ownership, strong market relationships and attractive capital costs should allow healthcare REITs to remain competitive on the acquisition front, according to a recent investor report from Fitch Ratings, citing real estate investment management firm JLL's analysis that found that healthcare real estate transaction volume grew 13.6% in 2017. Greater institutional investor demand is improving healthcare real estate's capital liquidity, according to Fitch.

Fitch assigned a "BBB+" rating to ProMedica and a stable outlook following the transaction. While ProMedica's historically strong balance sheet was weakened by the transaction, which included a debt increase and an equity contribution, its market position and diversified portfolio will improve operating margins over time, Fitch said.

Health system executives who are facing penalties for costly hospital readmissions are finding that more control further down the healthcare continuum is necessary, according to the Welltower report.

Hospitals that had a skilled nursing network saw a reduction in readmission rates for patients discharged to SNFs that was 4.5 percentage points greater than the reduction for hospitals without formal networks from 2009 to 2013, a 2017 Health Affairs study found.

"If you can control a person's total health journey, that gives you an advantage," Tyler said.