Has the Skilled Nursing Industry Finally Hit Bottom?

As summer ends, it’s tempting to start looking ahead to what 2019 will hold for the skilled nursing industry. While the widely praised new payment model will likely grab the most attention, next year could also signal an upward climb out of an industry valley, or more troubled times ahead — depending on who you ask.

A quick survey of the most recent set of earnings calls reveals a slow middle of 2018 on the mergers-and-acquisitions front, with major real estate investment trusts (REITs) having completed the SNF sell-offs that had come to define the industry over the last few quarters.

Sabra Health Care REIT (Nasdaq: SBRA), for instance, observed a lull in inventory after largely completing its so-called “Genesis Exodus,” which saw the REIT offload the vast majority of assets operated by Genesis Healthcare (NYSE: GEN).


“While operators are obviously buying all the assets that Sabra and some of our peers are selling, they seem to be holding onto the good assets that they currently operate in,” CEO Rick Matros said on his company’s earnings call. “I think everybody in this space is seeing the light at the end of the tunnel, and we’re going to hold onto these assets to get some upside.”

Speaking of the seniors housing and care industry as a whole, executives on Welltower Inc. (NYSE: WELL) made repeated references to the “bottom” of a recent down cycle.

“We will not venture to guess how 2019 might look at this point in the year, but our sense is we’re bouncing along the bottom right now,” chief investment officer Shankh Mitra said. “We’re really excited about the growth trajectory of our cash flow when we come out of this bottom.”


The PDPM effect

Over at CareTrust REIT (Nasdaq: CTRE), chief investment officer Mark Lamb observed a similar ebb in deal volume at the midpoint of 2018, while also floating an idea that’s gained traction as the industry continues to digest the potential long-term effects of the Patient-Driven Payment Model (PDPM): Operators used to working in the Resource Utilization Group, Version IV (RUG-IV) world will find the transition too difficult.

“I think the shift from RUG-IV to PDPM is a little bit of a game changer for mom-and-pops, and not knowing how to navigate that,” Lamb said. “A lot of the feedback that we’re getting from the brokerage community is that a lot of them don’t want to go through another transition, and so they’re choosing to sell at this point.”

Omega Healthcare Investors (NYSE: OHI) CEO Taylor Pickett echoed that sentiment.

“Each iteration of more sophistication in this business has driven the consolidation. It’s been the model that we’ve run forever,” Pickett said on Omega’s second-quarter earnings call. “It’s just another iteration of what has caused the consolidation of this industry over the last decade. If history holds true, we’ll see some of these local operators just say: ‘Okay, I’ve had enough. I’m not going to go through this next change.’”

These predictions of PDPM-related consolidation have largely come with a positive undercurrent: Smaller operators who don’t want to get on board with the changes will voluntarily give way to providers that take proactive steps to align their business models with the new incentives. Gone are the days of patients receiving as many therapy hours as possible, replaced with a system that encourages providers to take on higher-acuity patients — and also receive reimbursements for the services they’ve been providing for years without a direct incentive from Medicare.

“That’s what was broken with the old system,” Michael Sciacca, chief operating officer of consulting firm Zimmet Healthcare Services Group, said at a recent industry event. “It incentivized the volume, and it didn’t adequately pay you guys for taking care of people.”

That matches the vision for the future of the skilled nursing industry that Matros laid out earlier this year at an event hosted by the National Investment Center for Seniors Housing & Care (NIC).

“The skilled nursing facility isn’t a nursing home,” he said. “It’s more of a step-down unit from an acute care hospital.”

Occupancy troubles

National-level occupancy numbers remain the bucket of cold water that gets thrown every time the outlook starts to look too positive. Skilled nursing facilities were just 81.6% full in the first quarter of 2018, according to the most recent set of data from NIC — representing the first time in six years that American nursing homes failed to receive a census bump between the fourth and first quarters due to seasonal illnesses such as the flu. That represented an occupancy dip of 30 basis points from the fourth quarter of 2017, and a 210 fall from the same period last year.

But as the skilled nursing industry moves from a national model to a more regional network of operators attuned to local pressures and opportunities, some players have argued that the overall census data isn’t an accurate measure of industry health — as one market’s census problem is another’s triumph.

Those numbers also haven’t stopped some major entrants into the skilled nursing space this year: Welltower and non-profit hospital provider ProMedica joined forces to take on the slumping HCR ManorCare portfolio out of bankruptcy, and non-profit health network Sanford merged with senior housing and care provider Evangelical Lutheran Good Samaritan Society.

Back in June, Welltower CFO John Goodey bluntly declared that 2018 “will likely mark the bottom of the U.S. senior housing market cycle.”

And part of that surge, Welltower CEO Tom DeRosa predicted, will come from skilled nursing’s increasing integration into the overall health care marketplace.

“When you sit down with the CEO of a major health system … they will tell you: ‘Where you can help us is we need a valuable post-acute care option. And we have been trying to figure that out for a number of years,’” DeRosa said. “And this is that opportunity, so we could not be more excited about it.”

Written by Alex Spanko

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