Jefferson's new deal with real estate investor could help pay for continued expansion

Jan. 14--Thomas Jefferson University is exploring a deal to raise money by selling ownership in some of its real estate to a large health-care real estate investor.

Under an initial agreement signed between Jefferson and Toledo, Ohio-based Welltower Inc., the two would "create a joint venture whereby Welltower would acquire a stake in certain real estate assets of Jefferson."

Jefferson did not say what real estate assets it might sell as part of its new deal with Welltower, which has $30 billion in real estate investments.

If Jefferson reaches a final agreement, it could help the rapidly expanding nonprofit pay for the pending acquisition of Fox Chase Cancer Center from Temple University and for Temple's interest in Health Partners Plans, a Medicaid insurer.

"It is a creative way for Jefferson to finance some of its activities off balance sheet," said Joshua Nemzoff, a New Hope investment banker for the nonprofit hospital sector. Nemzoff called the proposal "more thinking outside the box from a system in a very competitive market."

Jefferson has grown significantly through acquisitions -- from three hospitals in 2015 to 18 now -- including the pending deal for Einstein Healthcare Network. Under CEO Stephen Klasko, Jefferson also acquired Philadelphia University. Only two of those transactions required any cash payment.

In addition to the real estate joint venture, Welltower could help Jefferson both pay for new outpatient centers and decide where to put them. A third component of the partnership would place Jefferson clinicians at senior housing, assisted living, and memory care facilities owned by Welltower in the region.

Welltower properties in the Philadelphia region include 14 Genesis Healthcare nursing homes, eight Brandywine Living assisted living facilities, and eight ManorCare nursing homes, according to third-quarter 2019 data posted on the company's website. In addition, Welltower owns South Jersey medical office buildings used by Cooper University Health Care and Virtua.

If the Welltower deal is completed, it could help relieve some financial pressure on Jefferson's balance sheet.

When Standard & Poor's Global Ratings downgraded Jefferson last June by one notch to the still-strong "A" rating, the rating agency cited "limited cash flow and heightened debt levels." Jefferson had about $2 billion in debt at the end of June.

That move did not reflect the pending addition of Einstein Healthcare Network, which has nearly $450 million in debt and has struggled historically to break even financially. Nor did it include any debt Jefferson may have to take on to pay for Fox Chase Cancer Center and Temple's interest in Health Partners.

Neither Temple nor Jefferson has yet publicly disclosed the price tag on their deal, but S&P said in a note last month that it expects the sale to generate "significant capital that [Temple] will use to pay down its currently elevated debt position and grow its unrestricted reserve cushion." Temple had about $500 million in debt at the end of June.

One way of looking at unrestricted reserves is the amount of cash on hand to calculate the number of days an entity can continue operating without new revenue. That figure is typically a very low 60 to 80 days for Temple Health.

Jefferson's annual operating income, excluding extraordinary items, has drifted down since the financial year ended June 30, 2016, the first full year it owned the former Abington Health. That year, Jefferson's operating income was $94 million on $3.1 billion in revenue.

In the year ended June 30, Jefferson had an operating loss of $7 million on $5.2 billion in revenue -- excluding a $58 million gain from the sale of a controlling interest in a dialysis business by Kennedy University Hospitals Inc. Jefferson acquired Kennedy, which has three hospitals in South Jersey, in 2017.

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