ProMedica, Welltower reach deal to purchase HCR ManorCare

April 27--ProMedica CEO Randy Oostra has long felt that his company needed to look outside its traditional footprint to keep pace with the evolving nature of healthcare.

Acquiring HCR ManorCare Inc. in a $3.3 billion blockbuster transaction Wednesday is just the kind of outside-the-box move Mr. Oostra was seeking to expand ProMedica's national scope and push the Toledo-based healthcare system deep into the post-acute care sector.

"It seemed completely logical to us," Mr. Oostra said Thursday of the mega-deal, which was completed just before midnight Wednesday. "Two years ago, we wouldn't have said that."

VIDEO: ProMedica President/CEO Randy Oostra

The complex deal, in which ProMedica partnered with Toledo-based real estate investment trust Welltower Inc., gives ProMedica ownership of the nation's second largest nursing home chain. The acquisition will make ProMedica a $7 billion health-care entity and the 15th largest not-for-profit health system by revenue.

ManorCare, currently in Chapter 11 bankruptcy, operates nearly 500 assisted living, skilled nursing, and home-health and hospice centers. Its bankruptcy was planned so that it would become the property of Quality Care Properties Inc., the Bethesda, Md., landlord that owns the properties in which ManorCare operated.

Under the new deal, ProMedica will buy ManorCare for $300 million in cash and the assumption of $1.1 billion in ManorCare debt. Welltower will pay $1.95 billion in cash to acquire all the properties of Quality Care Properties.

ManorCare chose bankruptcy after failing to meet monthly rent obligations of about $39 million to Quality Care.

ProMedica said it will convert ManorCare to a not-for-profit status and make it one of its divisions. The change should make it easier to meet new lower rent obligations to a joint venture between Welltower and ProMedica that will control the properties.

A new 15-year lease will charge less than half of what ManorCare had been paying, yet still allow Welltower a profit. ProMedica also will invest $400 million over the next five years for properties upgrades and acquisitions.

The deal is expected to close late in the third quarter.

Acquiring ManorCare has been a ongoing quest for ProMedica nearly two years, Mr. Oostra said.

The deal gives ProMedica opportunities to build new facilities, integrate new services, and create growth and new revenue streams.

Discussions to acquire ManorCare occurred even before it defaulted on its rent to Quality Care last June, Mr. Oostra added.

When former ManorCare CEO Paul Ormond left the company in September, negotiations resumed and in late November, ProMedica and ManorCare made an offer to buy the firm but it was rejected.

But the partnership remained persistent and eventually the deal came to fruition.

The current ManorCare management team headed by CEO Steve Cavanaugh will remain in place.

"I think this is a great day for our company and a great day for Toledo," Mr. Cavanaugh said Thursday from his office in the 18-story HCR ManorCare headquarters downtown, where 700 of the company's employees work.

"What's really exciting here is you've got two really great organizations that have been partnering."

Mr. Cavanaugh said ProMedica and Welltower bring complementary abilities that will allow ManorCare to grow going forward.

"And that means job security for our people and the opportunity to create more jobs going forward," he said. "...I think this is about as good as it gets for our employees quite honestly."

In a conference call with Wall Street analysts, Tom DeRosa, CEO of Welltower, said the acquisition of ManorCare's assets made strategic sense, even though some company shareholders might disagree.

"You've heard me discuss our strategy of aligning Welltower's seniors housing and post-acute assets more closely with health systems. We believe this is an imperative if we are to drive down the cost of health-care delivery and improve health outcomes, particularly in view of the aging of the population," Mr. DeRosa said.

The Welltower CEO said the partnership wasn't just about buying skilled nursing centers, but rather an investment in ProMedica -- a company with $2 billion in cash on its balance sheet and a AAA+ bond rating -- and its plan for expanding its national footprint.

"I think this is a very compelling opportunity for both Welltower and ProMedica. Promedica sees this real estate beyond the classic view of a skilled nursing facility. What these are delivering are new care sites for ProMedica to extend its health-care delivery model now to 30 states," Mr. DeRosa said.

"You have to think about these very well-located buildings that they will have a joint venture interest in and that they are investing in. They see them as alternate sites to deliver care. I've said this for now a couple of years. Skilled nursing has to be reinvented. The real estate is very good quality real estate and this real estate is in compelling markets where ProMedica can extend its service offerings. So don't think of the old model skilled nursing," he said.

ProMedica currently operates 13 hospitals, seven urgent care sites, four ambulatory surgery centers, and more than 300 other sites across 28 counties in Ohio and Michigan.

Quality Care as of the end of 2017 owned 320 facilities -- 292 under the ManorCare banner -- across 29 states, according to SEC filings.

As part of ManorCare bankruptcy proceedings,Quality Care announced plans to sell 74 noncore skilled-nursing or senior-housing ManorCare facilities with the proceeds going to pay off debt. Mr. Oostra said that sale is now canceled and other options are being explored.

ProMedica, which considers itself an "anchor institution" -- an entity that anchors its community and controls significant assets, including real estate, enabling it to have an impact on its locale -- had previously worked with ManorCare successfully on a post-acute facility at Flower Hospital.

With ProMedica's headquarters literally steps away from HCR ManorCare's offices, Mr. Oostra said the thought of a struggling ManorCare emerging from bankruptcy and possibly being dismantled by Quality Care to sell off its lucrative parts worried him.

"They would just start to sell off parts of it, and what would be left? ... So you need to think of that and you just don't know what would happen," Mr. Oostra said.

Mark Ordan, CEO of Quality Care Properties, said there were efforts to sell some of the lower performing assets, but that wasn't enough.

"Even if we were to sell assets to reduce our debt, that would not of course change the directory and health of our core business," he said, adding it would have been very difficult for his firm to take over and operate ManorCare the way it needed to be run.

"The fact is it would have been a 10 person REIT taking over a 40,000-plus person operating platform. To make it viable we were looking to possibly substantially change the platform and its operating footprint to change the operations and address its decline," he said.

Mr. Ordan said ProMedica and Welltower are well positioned and will not face the same risks and constraints Quality Care did.

"Together ProMedica and Welltower have also made an admirable commitment to Toledo and the employees of HCR ManorCare and we believe the combination of ProMedica and Welltower will be matched in ensuring quality patient care going forward," he added.

Contact Jon Chavez at [email protected] or 419-724-6128.

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