Sabra, LTC: Skilled Nursing Market Has Hit ‘Trough,’ Slow Occupancy Growth Ahead
Multiple players across the skilled nursing industry have offered predictions as to when slumping occupancy figures will bottom out, and two prominent voices earlier this month declared that the bottom may be upon us.
“I think we’re probably at around the trough,” Sabra Health Care REIT (Nasdaq: SBRA) chief investment officer Talya Nevo-Hacohen said during the Senior Housing News Summit in Los Angeles.
The Chicago-based Aging Media Network publishes both Senior Housing News and Skilled Nursing News.
Nevo-Hacohen was seconding a prediction from LTC Properties (NYSE: LTC) president and CEO Wendy Simpson, who pointed to favorable demographic trends over the next 10 to 15 years as a source of optimism for investors and providers.
“We hope that occupancy — both on the skilled nursing and the assisted living side — has hit kind of a trough over the last couple of years,” Simpson said.
The reasons for the occupancy declines have varied between the skilled nursing and senior housing markets: The former has dealt with reimbursement pressures and a shifting model that has put a premium on shorter lengths of stay, while the latter has struggled with a glut of assets that don’t match current consumer demand — particularly in the memory care space. Both sectors have repeatedly pointed to the so-called “silver tsunami” as a source of continued optimism in the face of sagging census, but Nevo-Hacohen preached caution when looking toward the future.
“You’ve got to remember that X axis — people only grow older one year at a time,” she said. “There’s never an acceleration of that timeframe, and so you have to be patient. And we have gotten ahead in terms of developing supply in certain markets ahead of where the population is. But it will catch up.”
Public vs. private perceptions
During the course of the wide-ranging talk — which also featured Sarabeth Hanson, president and CEO of senior living company Harbor Retirement Associates — Nevo-Hacohen described a rift between private and public investors in the skilled nursing community. With only a few public companies to use as reference points when analyzing potential deals, investors might be scared off or simply “baffled” by the industry, particularly amid well-publicized issues at players such as Genesis Healthcare (NYSE: GEN) and Kindred Healthcare’s complete exit from the space last year.
“The public market investor, and that’s our shareholders … and others find that with the choices they have to make as to where they place their dollars, the skilled nursing business is a complicated business, and they don’t necessarily have the patience to really figure it out,” she said.
Nevo-Hacohen was echoing comments made by Sabra CEO Rick Matros last year in an interview with Skilled Nursing News, when he pointed out a gulf between operators on the ground who saw potential and concerns among investment analysts.
“You just don’t have the same angst on the street level as you do at the investor level,” Matros said. “This has been a remarkably stable business for 35, 40 years.”
But that dynamic has worked to private equity’s advantage.
“Everything that is actually an idiosyncratic risk in a public company becomes viewed as a systemic risk, and the private-market investors have used that to their advantage, and have been avid buyers of both product, as well as on the operational side,” Nevo-Hacohen said.
This public-versus-private tension could take on greater importance in the coming years as economists predict a recession as soon as 2019 or 2020. In a boom era of cheap money, private investors can enter the market fairly easily, Simpson said — but they won’t stick around when times get tough.
“When or if a recession comes, I think that money is the first to leave, and so we’re going to have some opportunities to buy properties that are in busted deals,” Simpson said.
PDPM optimism, warnings
Nevo-Hacohen and Simpson also offered words of optimism about the new Patient-Driven Payment Model, which will shift nursing incentives away from volume of therapy services and toward the treatment of higher-acuity patients. Simpson in particular noted the potential for accelerated deal volume in the wake of the model’s implementation next fall, as smaller operators decide that adapting to the changes isn’t worth the trouble.
“I think the smaller operators are going to have a difficult time, because they don’t have the intensity of resident that the larger operators have. So again, that might be an opportunity for larger operators to buy some of the smaller operators,” Simpson said.
But Nevo-Hacohen issued a warning: The Centers for Medicare & Medicaid Services (CMS) designed the program to be budget-neutral, meaning it won’t result in an overall increase or decrease in SNF-related Medicare expenditures. That calculation, however, doesn’t take into account provider behavior, and the outlook for success under the model could shift if the government decides that operators are taking advantage of the rules to increase their overall revenue.
“Operators figure out where to go to make it work, and to optimize the situation based on whatever the environment is — the reimbursement regime, the payor regime,” she said. “They figure it out. You change the rules, they figure out a new path, and behavior changes.”
Written by Alex Spanko