What Integra Blowback Means for Welltower’s Senior Living Strategy, the SNF Investment Landscape

Welltower (NYSE: WELL) is taking heat.

At issue is the deal to transition 147 skilled nursing facilities from a JV with ProMedica into a newly formed JV with Integra Health. The controversy has implications for Welltower’s senior living strategy and the future of skilled nursing investment generally.

Last week, Hindenburg Research released a lengthy report claiming that Integra is an “unknown, questionable counterparty.” Similar claims had been made in a Nov. 29 Philadelphia Inquirer article.

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Welltower’s stock plunged 8% in premarket trading as the Hindenburg report circulated, and the report has generated terrible headlines for Welltower and Integra across multiple news sources.

In this week’s exclusive, members-only SHN+ Update, I analyze this news and offer key takeaways, including:

  • The Hindenburg report raises important, valid questions but I believe mischaracterizes the deal
  • This is the latest situation driving deep mistrust in the skilled nursing industry and creates more fuel for regulatory oversight that already is increasing
  • I expect the blowback will only make Welltower more determined in its strategy related to senior living, including self-management of lower-acuity communities

A controversial deal

The Hindenburg report and the Inquirer article focused largely on the fact that Integra was formed this year, and CEO David Gefner is 29 years old, according to public records. The Inquirer headline trumpeted that a “new, unknown company” now has a “key role” in 47 nursing homes in Pennsylvania and New Jersey.

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The Hindenburg report made even more extreme claims, calling Integra “little more than a sham” — not the well-capitalized and experienced JV partner that Welltower executives had described during the company’s Q3 2022 earnings call.

But Welltower CEO Shankh Mitra had used careful language during that call, repeatedly referring to Integra’s “parent” entity as an organization familiar to the REIT. And, critically, Welltower explained that Integra will not run the former ProMedica nursing homes but will sub-lease them to regional operators.

“The misstatements and misrepresentations in the report surrounding Integra are frustrating because many were clearly laid out in the transaction press release, most notably that Integra intends to sub-lease facilities to regional operators, not operate the facilities themselves,” Raymond James Analyst Jonathan Hughes and Research Assistant Ravin Reddy wrote in a note issued Dec. 9.

ProMedica also issued a statement regarding “false information” in the Hindenburg report, zeroing in on the sub-leasing aspect of the deal. That statement read, in part:

“ProMedica and Integra are working together to facilitate the re-tenanting of the facilities by identifying best-in-class, local operators that are trusted and proven in their respective markets, and that prioritize quality of care and resident well-being. All individual facility transitions shall occur only in accordance with processes established by local regulatory authorities.”

It seems clear that Integra has little role to play in these nursing homes going forward, but its existence has helped shield the identity of its parent company, which seems intent on remaining unnamed.

There are clues suggesting reasonable guesses as to the parent company. Gefner previously worked for Pinta Partners, and a private equity firm Gefner founded shared an address with the Allure Group. Both Pinta and Allure are associated with Joel Landau, a prolific investor in nursing homes who also co-founded Aurora Health Network.

Mitra stated that Welltower has worked with Integra’s parent on past transactions; among other deals, Aurora was involved in a JV with Welltower to acquire nursing homes formerly operated by Genesis HealthCare (NYSE: GEN). In explaining the newly formed JV with Integra, Mitra highlighted that 21 ManorCare assets previously had been transferred to “Integra and its parent.”

Whether that parent is a company affiliated with Joel Landau is an open question, as neither Landau nor Welltower replied to my requests for comment and no public disclosures have been made.

“We … believe WELL has not disclosed Integra’s parent entity at the request of that party, which is not unique,” Hughes wrote.

Fueling SNF scrutiny

“Not unique” is an understatement. Nursing home ownership has become so complex and difficult to ascertain that the Biden administration has prioritized increased transparency as a key pillar of a sweeping nursing home reform proposal. And steps toward greater public disclosure of ownership have already been undertaken by federal agencies.

Simultaneously, the administration has gone after “private equity” ownership of nursing homes. I put private equity in quotes, as the administration seems to use the term to describe various types of private capital. In his 2022 State of the Union, Biden used the broader phrase “Wall Street firms,” saying that as they “take over nursing homes, quality in those homes has gone down and costs have gone up. That ends on my watch.”

Such pronouncements hardly incentivize private investors to be more open about their deals, and is not reflected in other parts of the health care continuum. As former CMS chief Seema Verma put it:

“We’re not sitting here trying to figure out who owns home health or who owns dialysis facilities or who owns providers. We’re kind of going through this exercise just in nursing homes because somehow we think that that’s going to increase quality of care.”

Nursing home owners also create complex structures as legal shields, given that they face a constant threat of litigation, which has been exacerbated during Covid-19.

Essentially, there is a toxic cycle of the government underfunding nursing homes yet scaring off capital by going after private-sector investors, while investors that remain in the sector cloak themselves in byzantine ownership structures that stoke suspicion over their intentions or ability to deliver quality care — sometimes those suspicions are warranted, sometimes not.

While I have some sympathy for why owners want to remain under the radar, it seems obvious that the situation with Welltower and Integra will only fuel the calls for greater transparency.

Welltower struggled over the course of 2022 to find takers for the struggling ProMedica buildings, at least according to a “high-ranking ProMedica employee” cited by Hindenburg. So, perhaps Welltower transacted on this Integra deal due to a lack of better options and a ticking clock.

But surely all the parties involved had to expect that analysts, reporters, investors and other stakeholders would find information easily enough about Integra’s short history and Gefner’s inexperience, and raise questions.

Now that those questions have been raised, the lack of answers will further stoke those who want to force greater disclosure and will deepen the distrust between owners and operators on the one side, and regulators, lawmakers, consumer advocates and consumers on the other.

Welltower’s senior living strategy

I doubt Welltower will suffer much longer-term fallout from this Integra deal. The REIT’s share price has ticked back up over the last week, with gains after the note from Raymond James.

That note pointed out that the Integra nursing homes represent about 7% of Welltower’s net operating income (NOI), and this number will decline as senior housing fundamentals improve. Welltower has previously identified $543 million in embedded NOI growth for the seniors housing operating portfolio, as occupancy increases to pre-Covid levels.

The nursing homes have become an outlier in Welltower’s portfolio, and I would not be surprised if the company fully exits the space at the earliest opportunity. The risks of owning skilled nursing were amplified during the pandemic, and the current administration’s antipathy toward private owners adds another deterrent.

At the same time, Welltower is poised to make bigger senior living plays in 2023 and beyond, particularly in active adult and independent living. About a month ago, an IRS private letter ruling granted the REIT “significant flexibility” in self-operating its roughly 45,000 active adult and IL units in the United States and Canada.

Welltower in 2020 put its brand name on welltowerLIVING communities, offering a 55+ active adult rental product at an accessible price point. The IRS ruling might pave the way for Welltower to truly make good on that brand by both owning and operating such sites — as well as others under different brand names — leveraging the platform being devised by COO John Burkart.

Stifel analysts postulated that half of the eligible 45,000 units might transition to Welltower management in 2023, while the REIT might opt to keep profitable operators in place at other communities.

Welltower already has been a leader in syncing up low-acuity senior living communities with health care services offered through local health systems, supported by Medicare Advantage plans. As such models increasingly gain favor, it might be low-acuity, private-pay senior living that gains the most upside through health system and payer integration, with these entities seeking to keep their older adult patient/beneficiary populations healthy and out of hospitals.

Such a situation is similar to what Welltower hoped and expected for the ProMedica nursing home portfolio — a steady stream of referrals and elevated care delivery from a system seeking to more effectively manage population health. Whether due to Covid-19 or poor execution, this failed to materialize in the case of ProMedica, Mitra stated bluntly in the Q3 earnings call. 

Whatever the reasons, it’s a discouraging end to the ProMedica/Welltower JV, which started with high hopes for changing the skilled nursing paradigm, as leaders with both organizations said at the outset of the partnership.

But as I recently wrote, losses for skilled nursing could translate into gains for senior living — if providers can both support resident wellness in lower-acuity communities and find ways to deliver more advanced care to fill in gaps left by a shrinking skilled nursing sector.

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