As major players in the skilled nursing space prune their assets or exit the industry altogether, a new crop of owner-operators is stepping up to fill the void.
They tend to be young and to have a background in nursing homes, whether as a nurse or as administrator. And though their focus is regional, many of them are commuting to spend three or four days a week in the state where they’ve chosen to operate — and then flying back home.
“We have East Coast clients that are buying in the Midwest, or all over the country, really,” Adam Offman, managing director of health care finance at the New York-based commercial real estate lender Dwight Capital, told Skilled Nursing News. “But where they’re based out of is really the East Coast.”
REIT selloffs open the field
The major health care real estate investment trusts (REITs) have been unexpectedly active in the transactions arena during 2018, but their selloff of skilled nursing facilities is not unique to this year.
“I don’t see any kind of slowdown in terms of what’s started maybe 18 months or two years ago, primarily with the REITs … in their severely weaning their portfolios off of SNFs or changing their mixes,” Jeffrey Davis, the president and founder of Cambridge Realty Capital Companies, told SNN in May.
That selloff by both REITs and by major skilled nursing players such as Kindred Healthcare, which exited the space altogether last year, opened the door for a wave of new operators with a regional focus. The significant amount of available product over the past two years presented opportunities, and it marked the beginning of a change in the profile of the SNF buyer, according to Offman.
“We have more buyers in their 30s and 40s, rather than 50s and 60s,” he told SNN. “I also find them to be very focused. They’re focused on a market, whether it’s a state or region … They’re from New York, they’re focused on their market, and they’re focused on their product.”
That region or state, though, could be anywhere in the country: Offman has seen clients from the East Coast focus on states ranging from Wisconsin to Kentucky. These operators will go to the region in which they’re working for a good chunk of the week and keep the staff of the nursing home they buy or take over, though they frequently bring in their own senior staff to oversee things on the ground, he explained.
Marc Zimmet, managing director at Greystone and president of the consulting firm Zimmet Healthcare Services Group, has also seen this phenomenon, though he gave an even younger estimate for the age of such buyers and operators, ballparking it around “late 20s to early 30s.”
“These so-called ‘commuter operators,’ if you will, are young,” he told SNN. “They’re generally not buying the properties; the first foray is into operations. And they’re not being deterred by geography.”
Following the opportunity
Part of the reason for that is the fact that there is a fixed amount of skilled nursing inventory, and in the New York, New Jersey, and Philadelphia area, those nursing home beds are extremely expensive, Zimmet noted. Anyone looking to take the next step in their career in the skilled nursing field will have to go where there are facilities available, and that may not be exactly where they live.
That ended up being the case for Zish Margulies and Nathan Freund of Recover Care, which has eight facilities in Kansas. Freund and Margulies founded the company in 2016, when they were in their late 20s and 30s respectively. Though they are based in New York, they began looking for portfolios elsewhere, specifically because of how expensive deals in the tri-state area and the Northeast region were, Margulies told SNN.
They ended up leasing an eight-property portfolio that was part of a four-state Genesis Healthcare (NYSE: GEN) divestiture in the Midwest, and have an option to purchase the facilities, though Margulies declined to give a specific timeline. The facilities have a total of 653 beds.
“Genesis [itself] was not as successful as they had hoped,” he said. “Probably because it’s a little bit of a different model out in the Midwest. The facilities that we took were mostly more rural, and I don’t think they thrive on a heavy, top-down management style.”
Both Margulies and Freund have a background in nursing homes. Margulies is a registered nurse who ended up in the long-term care sector because of the economy after the Great Recession, while Freund was a nursing home administrator in the New York City area who had had some success in turning around facilities. To purchase the portfolio, they partnered with private investors who “have a large ancillary business in the SNF industry,” and were familiar with Freund’s work, Margulies told SNN.
That work continued in the Kansas portfolio, which Recover Care took over on April 1, 2017. The company has a four-person regional team based in the state that, along with Margulies and Freund, makes high-level decisions — but Margulies emphasized that a good idea is “a phone call and an e-mail away from getting implemented.” And with technology making remote work so easy, the fact they’re based in New York isn’t an obstacle, he added. Margulies estimated that between himself and Freund, they spend three out of four weeks in the state of Kansas.
“Overall, we’ve raised the ratings basically across the board,” Margulies said. “We’ve definitely improved skilled census, we’ve improved clinically, we’ve introduced much more technology and … really if I had to sum up this whole thing, we came in, we loosened the shackles of bureaucracy that stifled these local — and specifically rural — nursing homes in their hiring practices, in the decision-making process.”
Both Zimmet and Margulies stressed the need to make contacts and build relationships with state officials and with the local long-term care associations. Health care is a regional and local business, and remains so even if the owners are from another state.
“We made it our business to reach out to the Kansas Health Care Association,” Margulies told SNN. “We made sure to reach out to them in advance of coming into the state and made ourselves known, and created that relationship to have that ally. And it served us really well … We made an effort to endear ourselves to the local industry — because we are a big part of that.”
Written by Maggie Flynn