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Welltower execs defend continued relationship with Genesis Healthcare

Welltower Inc. executives defended their decision to maintain a relationship with Genesis Healthcare Inc., an operator of skilled nursing properties that hinted in late 2017 that it could face bankruptcy.

Executives at Welltower, a real estate investment trust that owns skilled nursing and other healthcare facilities, said on a conference call in November 2017 that the company would sell some properties leased to Genesis. Around the same time, the operator recognized a $523.4 million impairment charge and said it would be unable to generate sufficient cash flow to cover its obligations as it was currently structured.

On Feb. 21, another major Genesis landlord, Sabra Health Care REIT Inc., said it was in the process of selling all but eight of the 54 properties it leases to Genesis.

In its fourth-quarter 2017 earnings release on Feb. 22, Welltower detailed extensive efforts to prop up Genesis, including a $35 million rent cut, $24 million in new term loans and a restructuring of an existing $275 million in bridge loans. Welltower disclosed little new information about any sales of Genesis assets, however.

On an earnings conference call, analysts pressed Welltower executives to explain whether they had changed their minds about selling Genesis properties. In particular, Morgan Stanley analyst Vikram Malhotra said he interpreted the executives' November 2017 comments to imply that Welltower would be selling "a fairly large chunk" of its Genesis portfolio.

In response, Senior Vice President for Investments Shankh Mitra said the Genesis assets are still for sale for the right price, but called the tenant "drastically a different operator than it was 90 days ago." He noted Genesis' efforts to improve its capital structure, tapping new sources of financing, and said Welltower's past efforts to prune the Genesis portfolio have yielded stronger operating performance.

CEO Tom DeRosa added: "The strongest statement I can make to you is, because Genesis is a dramatically stronger credit based on this restructuring going forward, it means that Welltower is a stronger credit going forward."

Both executives said they believe Welltower is near the end of a "journey" of re-evaluating its portfolio and its tenant relationships, and DeRosa reaffirmed the company's commitment to skilled nursing, a property sector from which competing major healthcare REITs, including Ventas Inc. and HCP Inc., have distanced themselves.

"You've heard me say consistently that we are not going to abandon this sector," DeRosa said. "Why do I say that? Because when you interact with the leaders of healthcare in this country, which are the CEOs that run the major regional health systems, they all say they need a viable post-acute care option."

Cuts in government reimbursement to skilled nursing operators have rendered capital structures in the industry unsustainable, and "the industry kicked the can down the road," DeRosa said. Yet he added that in recent moves, along with other lenders, "We have fixed the Genesis capital structure."

After planned asset sales and the rent cut, Genesis is expected to account for 5.2% of Welltower's property net operating income.

DeRosa acknowledged that many observers had expected Welltower to cut ties with the operator.

"Like any business, things change, and we have to be able to be flexible to do what's in the best interest of the business, which is ultimately in the best interest of the shareholder," he said. "The public markets were screaming at us to have taken a different approach with Genesis. I think we took the right approach. You may want to debate that with us, and we're happy to debate that. But I think ... we did the responsible thing for Genesis and for our shareholders, and I think that will prove out versus other roads we could've gone down."