The transaction answers a question that the industry had been wondering about — would there be private investors willing to make large-scale deals in the increasingly cost-pressured skilled nursing space, especially after Welltower CEO Tom DeRosa colorfully knocked down the possibility of spinning off these assets into another publicly-traded REIT (more on that in a minute).

So yes, Second Spring Healthcare and its equity backer, has stepped up the plate. As Omega's CEO Taylor Pickett said in a prepared statement about the deal, “the joint venture structure allows Lindsay Goldberg to deploy substantial capital into the skilled nursing industry alongside an experienced REIT management team.”

They did so with their eyes wide open, willing to make necessary concessions in the lease with Genesis to keep the portfolio operating.

The Problem With Skilled Nursing

The skilled nursing asset subsector has been struggling since the implementation of the Affordable Care Act, which by focusing on preventative care led to a decline in medicare reimbursements.

Recently, a Fitch Ratings note focused on federal programs' push to contain costs through such measures as bundled payments — specifically, the Center for Medicare and Medicaid Services' announcement that various cardiac procedures would be added to the existing bundled payments for care improvements program. But the industry is clearly going through a wider, broader period of transition that goes beyond just one program.

Healthcare REITs Ventas and HCP have spun off their skilled nursing portfolios as skilled nursing began to decline, ostensibly to focus on their core product of senior housing. But skilled nursing's uncertain future was suspected to have played a role in these spinoffs as well.

A 'Leaking, Steaming Bag of Real Estate'

In what turned out to be a preview to this week's massive sell off of properties, Welltower CEO DeRosa discussed some of these issues in a presentation at NAREIT's REITWeek 2016 event.

He promised he would never spin off the REIT's skilled nursing portfolio, disparaging the very concept, according to a SNL blog post [PDF] on his presentation.

We will not hand you a leaking, steaming bag of real estate and say, 'Here, you go, do what you want to do with it, but I'm washing my hands of it.' That's not what you pay us for. You pay us to find you good opportunities to deploy capital into, and you also pay us to recycle that capital for you, as we have done for over 40 years.

I will say here, you will not see us spin out our real estate to you. We will not do that as long as I'm sitting in this seat.

The author of the blog post, Jake Mooney, also wrote that:

Welltower executives argued that private markets are valuing skilled nursing properties much more highly than public markets at the moment, and said the company can move to take advantage of that imbalance. “We always sell real estate,” DeRosa said in an interview after his presentation. “That is not classically done by REITs. REITs get penalized for selling real estate, but we've always sold real estate, and we've managed it in a way that we've still been able to deliver growth for the shareholder, and still been able to delever the balance sheet.

Amending Lease Terms

That said — and said in quite vivid terms — it is clear that any buyers will have to take into account the transition period skill nursing is undergoing.

In its report, Fitch said that some healthcare REITS have had to amend lease terms on their SNF properties and provide debt to a key common tenant. “These actions likely reflect REITs' expectation that a short- or medium-term reversal in operators' prospects is not forthcoming and tenants may need additional financial flexibility as they manage through the transition,” Fitch wrote.

Indeed, Second Spring Healthcare's renegotiated lease terms with Genesis reflects these dynamics.

Under the new lease the initial annual rent for the 64 facilities has been reduced approximately 5% and annual escalators trimmed as well from their previous 3.4% annual escalators, which were scheduled to decrease to 2.9% effective April 1, 2017.

The more favorable lease terms will reduce Genesis' cumulative rent obligations through January 2032 by $297 million.

Cindat Capital, Union Life Strike Similar Deal

Similar concessions are expected in another sale of Welltower's skilled nursing assets, announced as the same time as the Second Spring Healthcare deal.

Welltower and Beijing-based Cindat Capital Management and Union Life Insurance agreed to form a joint venture in which the two Chinese firms will invest $930 million into a Welltower portfolio of consisting of seniors housing, as well as skilled nursing, or post-acute assets, with Welltower retaining a 25% interest. The JV covers 28 properties leased to Genesis and 11 leased to Brookdale Senior Living.

Genesis expects to enter into a new lease at this sale's closing in the fourth quarter of 2016. Genesis' 28 facilities have been subject to 3.4% annual escalators, which are scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease, the 28 properties' initial annual rent is expected to be reduced by approximately 5% to $54.5 million and the annual escalators are expected to decrease to 2%. The more favorable lease terms are expected to reduce Genesis' cumulative rent obligations by $143 million through January 2032.

“This is a great example of the creative things we can accomplish with our partners to further strengthen our capital structure,” Genesis CEO George V. Hager, Jr. said. “For Genesis, the new leases lower year-one rent payments and fixed charges by $10.5 million and $8.1 million, respectively, reduce the burden of rent escalators and are significantly accretive in both the near and long term.”

HUNT VALLEY, MD–Locally-based REIT Omega Healthcare Investors is playing a bit role in the Toledo, OH-based Welltower's push to triple its dispositions this year to $4.1 billion.

Its influence is more outsized, however, when it comes to the trajectory of these skilled-nursing assets which are undergoing a period of transition.

Omega was a participant in one of the two deals WellTower announced this week: the $1.1 billion sale of 64 skilled nursing facilities to a joint venture in which Omega has a 15% stake and the New York City-based private investment firm Lindsay Goldberg LLC has an 85% interest. Omega invested $50 million in the transaction.

The JV, Second Spring Healthcare Investments, entered into a new 15-year master lease with Genesis Healthcare simultaneously with the sale. The initial annual rent is $103.9 million with annual escalators of 1% after the first year, 1.5% after the second year and 2% thereafter.

The transaction answers a question that the industry had been wondering about — would there be private investors willing to make large-scale deals in the increasingly cost-pressured skilled nursing space, especially after Welltower CEO Tom DeRosa colorfully knocked down the possibility of spinning off these assets into another publicly-traded REIT (more on that in a minute).

So yes, Second Spring Healthcare and its equity backer, has stepped up the plate. As Omega's CEO Taylor Pickett said in a prepared statement about the deal, “the joint venture structure allows Lindsay Goldberg to deploy substantial capital into the skilled nursing industry alongside an experienced REIT management team.”

They did so with their eyes wide open, willing to make necessary concessions in the lease with Genesis to keep the portfolio operating.

The Problem With Skilled Nursing

The skilled nursing asset subsector has been struggling since the implementation of the Affordable Care Act, which by focusing on preventative care led to a decline in medicare reimbursements.

Recently, a Fitch Ratings note focused on federal programs' push to contain costs through such measures as bundled payments — specifically, the Center for Medicare and Medicaid Services' announcement that various cardiac procedures would be added to the existing bundled payments for care improvements program. But the industry is clearly going through a wider, broader period of transition that goes beyond just one program.

Healthcare REITs Ventas and HCP have spun off their skilled nursing portfolios as skilled nursing began to decline, ostensibly to focus on their core product of senior housing. But skilled nursing's uncertain future was suspected to have played a role in these spinoffs as well.

A 'Leaking, Steaming Bag of Real Estate'

In what turned out to be a preview to this week's massive sell off of properties, Welltower CEO DeRosa discussed some of these issues in a presentation at NAREIT's REITWeek 2016 event.

He promised he would never spin off the REIT's skilled nursing portfolio, disparaging the very concept, according to a SNL blog post [PDF] on his presentation.

We will not hand you a leaking, steaming bag of real estate and say, 'Here, you go, do what you want to do with it, but I'm washing my hands of it.' That's not what you pay us for. You pay us to find you good opportunities to deploy capital into, and you also pay us to recycle that capital for you, as we have done for over 40 years.

I will say here, you will not see us spin out our real estate to you. We will not do that as long as I'm sitting in this seat.

The author of the blog post, Jake Mooney, also wrote that:

Welltower executives argued that private markets are valuing skilled nursing properties much more highly than public markets at the moment, and said the company can move to take advantage of that imbalance. “We always sell real estate,” DeRosa said in an interview after his presentation. “That is not classically done by REITs. REITs get penalized for selling real estate, but we've always sold real estate, and we've managed it in a way that we've still been able to deliver growth for the shareholder, and still been able to delever the balance sheet.

Amending Lease Terms

That said — and said in quite vivid terms — it is clear that any buyers will have to take into account the transition period skill nursing is undergoing.

In its report, Fitch said that some healthcare REITS have had to amend lease terms on their SNF properties and provide debt to a key common tenant. “These actions likely reflect REITs' expectation that a short- or medium-term reversal in operators' prospects is not forthcoming and tenants may need additional financial flexibility as they manage through the transition,” Fitch wrote.

Indeed, Second Spring Healthcare's renegotiated lease terms with Genesis reflects these dynamics.

Under the new lease the initial annual rent for the 64 facilities has been reduced approximately 5% and annual escalators trimmed as well from their previous 3.4% annual escalators, which were scheduled to decrease to 2.9% effective April 1, 2017.

The more favorable lease terms will reduce Genesis' cumulative rent obligations through January 2032 by $297 million.

Cindat Capital, Union Life Strike Similar Deal

Similar concessions are expected in another sale of Welltower's skilled nursing assets, announced as the same time as the Second Spring Healthcare deal.

Welltower and Beijing-based Cindat Capital Management and Union Life Insurance agreed to form a joint venture in which the two Chinese firms will invest $930 million into a Welltower portfolio of consisting of seniors housing, as well as skilled nursing, or post-acute assets, with Welltower retaining a 25% interest. The JV covers 28 properties leased to Genesis and 11 leased to Brookdale Senior Living.

Genesis expects to enter into a new lease at this sale's closing in the fourth quarter of 2016. Genesis' 28 facilities have been subject to 3.4% annual escalators, which are scheduled to decrease to 2.9% annual escalators effective April 1, 2017. Under the new lease, the 28 properties' initial annual rent is expected to be reduced by approximately 5% to $54.5 million and the annual escalators are expected to decrease to 2%. The more favorable lease terms are expected to reduce Genesis' cumulative rent obligations by $143 million through January 2032.

“This is a great example of the creative things we can accomplish with our partners to further strengthen our capital structure,” Genesis CEO George V. Hager, Jr. said. “For Genesis, the new leases lower year-one rent payments and fixed charges by $10.5 million and $8.1 million, respectively, reduce the burden of rent escalators and are significantly accretive in both the near and long term.”