As multiple skilled nursing tenants struggle to pay their real estate investment trust (REIT) landlords, a Chicago-based real estate management company is looking to change the model of skilled nursing leases by getting its operators to see it as a partner.
For Mozart Healthcare, the goal is to be “on the ground with our operators,” CEO and co-founder Archie Shkop told Skilled Nursing News.
His brother and co-founder Ben Shkop, who serves as chief operating officer, agreed.
“We want to be viewed as a business partner who happens to get their distributions in the form of a rent check,” he said.
Away from REIT model
Over the last few years, multiple skilled nursing tenants have struggled to pay the REITs that own their buildings.
HCR ManorCare notably declared bankruptcy and had to be taken over by its landlord, Quality Care Properties (NYSE: QCP), before finding a buyer in hospital chain ProMedica. Signature Healthcare has struggled to pay its landlords Omega Healthcare Investors, Inc. (NYSE: OHI) and Sabra Health Care REIT (Nasdaq: SBRA), while Omega’s tenant Orianna is in the middle of bankruptcy proceedings.
In Ben Shkop’s view, the REIT model of leasing has forced SNF operators into rents and structures that are never allowed to be profitable, which keeps them from running the operating business the way it should be run.
“There’s a disconnect between the people that are buying the real estate and the people that are operating the actual nursing home,” he said. “If you have a disconnect with those two, you are setting yourself up for failure.”
Mozart currently leases to seven different nursing home operators, and the company is hoping to double that number by the end of this year. It has locations in Ohio, Texas, and Michigan, and aims to expand to the West Coast shortly.
When they assess operators, the Shkops try to go beyond pro formas to stress-test for every adverse event, Archie Shkop said.
“We’re buying facilities and business valuations with the understanding that things are going to go wrong,” he said. “We need to make sure that operators have significant coverage ratio and the capital to sustain tough times.”
Though capitalization rate has historically been considered the basis for lease structures, lease coverage is the primary focus for Mozart, Ben Shkop said.
“We want to understand what it’s going to take to make the nursing home successful, and that is the basis for our rent discussion,” he said.
Having that understanding — and maintaining a sense of partnership — requires operators to provide “a tremendous amount of information,” Archie said. This could include daily census, their case mix index roster, and survey information, among other updates.
Mozart’s purchase options for tenants are usually eight to 10 years out, with leases about 10 to 15 years, Archie said. Building improvements are a key part of this strategy, as Mozart tries to incentivize operators to make improvements by framing the decision as a way of bolstering their potential asset — and not merely sprucing up their landlord’s property.
“The operators of the future understand that less is more,” Ben Shkop said in an email to SNN. “Mozart is looking to align themselves with operators who want to focus on targeted regional growth, as opposed to the national operator model which has proven disastrous for our industry.”
With the timeline of their leases and the fact that the company was founded in 2016, it remains to be seen how the deals will play out. Still, the firm has seen targeted lease coverage ratios, Ben noted, and the Shkops are bullish on the industry as a whole, he added. He predicted a rebound for the industry starting in about 2024, which will benefit experienced operators.
“As the baby boomers age and the clinical complexities of SNF patients continue to rise, many of the large corporations that are not involved in day-to-day patient care are going to have to hand over those operations to the actual caregivers who’ve been waiting decades for the opportunity to care for their own patients,” he said.
Written by Maggie Flynn