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Welltower to Overhaul Portfolio With $4.1 Billion In Sales By 2017

Welltower Inc. (NYSE: HCN) is undertaking a major repositioning of its portfolio, increasing its disposition target for the full year to $4.1 billion. As part of this effort, the Toledo, Ohio-based real estate investment trust (REIT) already has agreed to sell a 75% ownership stake in a portfolio of long-term/post-acute properties to an investment management platform and life insurance company, both based in China, for $930 million.

The transaction includes 11 senior housing properties leased to Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) and 28 long-term/post-acute care facilities leased to Kennett Square, Pennsylvania-based Genesis Healthcare (NYSE: GEN), Welltower announced Wednesday.

Welltower will retain a 25% interest in the portfolio, with the remaining interest going to Cindat Capital Management Limited and Union Life Insurance Co. Ltd.

Backed by China Cinda Asset Management Co., Cindat has invested in more than $6 billion of real estate globally since its inception in 2013. This is the company’s first U.S. health care real estate investment. Union Life Insurance, one of China’s largest life insurance companies, develops and owns skilled nursing facilities in China and previously has invested $100 million in U.S. senior housing.

The transaction is expected to close by the end of 2016.

In total, Welltower is increasing its disposition guidance for the year from $1.3 billion to $4.1 billion. As of Sept. 30, 2016, the company had closed on $832 million in total dispositions.

Welltower’s other planned dispositions also revolve largely around decreasing its concentration of Genesis properties. The operator has seen its share price erode significantly since 2015, and this summer announced a $52.7 million settlement with the Department of Justice related to four ongoing investigations.

By the end of 2016, Welltower anticipates having disposed of approximately $1.7 billion of Genesis properties, through three separate transactions. One is the Cindat deal. The other two, representing $1.2 billion, are sales to third parties. The REIT has either closed or entered into definitive agreements for all three transactions, and together they have an effective cap rate of 9.0%.

In addition to the Genesis sales, Welltower plans to execute the following dispositions in the fourth quarter: $1.2 billion of senior housing triple-net leased properties; $51 million of senior housing operating interests; and $150 million in loan payoffs.

Through this effort, Welltower’s portfolio will see its private-pay revenue mix increase from 89.4% to 92.4%, and it will reduce its long-term/post-acute care concentration from 19.9% to 13.5%. Its Genesis concentration specifically will decrease from 13.8% to 7.1%.

Genesis is not the only long-term and post-acute care company to be in rough waters. Government reimbursement and regulatory pressures, the need to adapt to the evolving U.S. health care system, and ongoing federal investigations have hampered many operators in this space.

Welltower’s peers Ventas (NYSE: VTR) and HCP (NYSE: HCP) both have spun out a significant proportion of their skilled nursing assets into separate REITs, but Welltower CEO Tom DeRosa in the past has blasted this strategy and said that he remains bullish on the prospects for skilled nursing in the long-term. Now, it appears Welltower—like other REITs with significant Genesis ownership—is looking to limit its exposure by selling off properties.

This effort will continue even into 2017. Welltower has agreed to give Genesis an option to buy back $500 million of real estate through the first half of the year, the REIT also announced Wednesday. And it has entered into a memorandum of understanding with Genesis to exit certain states Genesis has deemed non-core; Welltower expects to receive about $120 million in proceeds from the sale of 14 properties in those states.

News of the portfolio overhaul came as Welltower announced its results for the third quarter of 2016. It reported normalized funds from operations of $1.16 per diluted share, beating analyst expectations by $0.01. It decreased its FFO guidance for 2016 from $4.50-$4.60 per diluted share to $4.50-$4.56 per diluted share, mainly due to the disposition activity.