Skilled Nursing Turnaround Specialist Sees ‘Continued Distress’ in 2019

The skilled nursing industry was roiled on several fronts in 2018. The new Medicare payment model from the Centers for Medicare & Medicaid Services was a major headline, but the year was also marked by several high-profile bankruptcies, receiverships, and general distress among SNFs.

And the leader of a Connecticut-based operator that specializes in managing troubled SNFs expects that unrest to continue in 2019.

David Lawlor serves as president and CEO of the Shelton, Conn.-based Long Hill Company, a management affiliate of United Methodist Homes in Connecticut that was created in 1998 as a for-profit subsidiary to partner with other investors.

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But over time, its focus changed. From 2000 onward, the company has managed distressed SNFs, specializing in situations where lenders and investors see a need to bring in a third party to stabilize a skilled nursing or assisted living property where the license is at risk.

The company has managed more than 55 facilities over the years and has worked in about 13 states overall. Skilled Nursing News caught up with Lawlor to talk about Long Hill’s work, the landscape for skilled nursing over the coming year, and how states are clamping down on their Medicaid exposure.

How did you come to the niche of stabilizing distressed skilled nursing properties?

Our core operations are very stable. [We’re a] nonprofit group. We’ve been in business since the 1800s, so we know how to run a very stable operation. We were originally asked to participate in a project where an asset owner wanted us to stabilize a situation that they needed help with because the regulators had reached a point of frustration with the operator. In that situation, we stepped in and managed a chain of six properties.

We were there for several years — not in the receivership but in a management capacity. Through that transaction, we met several different lenders and investors who subsequently brought us into other deals and it sort of [expanded] from there.

But the way we got into the business was being able to be an operator that could help investors reconcile problems in an investment with the regulators which they were conflicted with. That is something I think we do quite well with — being able to talk with regulators and manage situations that they’re concerned about from a compliance standpoint with the operating team in the facilities.

We’re able to do it in a very efficient and cost-conscious way, so that ultimately the investment is protected — because in many situations, if the license becomes at risk and ultimately is lost, then the investors have a significant write-off they have to contend with. So we’ve been successful in being able to reconcile those interests and conflicts between owners, operators, and regulators.

How many properties is Long Hill managing as of December 2018? What is a normal number of facilities for the company to be in during a given time?

Today we’re in 14 different sites today, and that ranges in three different states. When you include our own sites and managed sites, we’ve ranged anywhere from eight to 30 properties, in that neighborhood.

I would like to talk about one specific facility: Wyndmoor Hills Health Care and Rehabilitation Center, which used to be owned by Skyline Healthcare. Is this the only former Skyline property you’re managing or are there others?

We are only in one Skyline property right now in Pennsylvania, and I can’t really talk too much about it because it’s an active case. But we’ve been working there and it’s a federal court receivership and we’re working through stabilizing the property and having some success. It’s taken a lot of work, but we feel great about where the property is and the opportunity it has for, ultimately, a third-party buyer.

When you go into a distressed property, what are some of the most common issues that you have to deal with? What are some of the hardest ones to deal with, and which are some of the easiest ones to fix?

Typically there’s significant unrest among staff and there’s significant concern among regulators. No. 1 is understanding the regulatory landscape and the compliance landscape that the facilities are in, and making sure the onsite teams understand what needs to be done to remedy the compliance issues. That’s really job No. 1.

And usually there’s a lot of anxiety among staff, because before you ultimately get into a receivership, there’s an awful lot of stress and hardship that the operations are put under — mostly involving stress of limited liquidity.

When we take on these assignments, because of our experience and because of our approach to dealing with people and the real problems of caring for residents, we’re usually able to earn the respect of the onsite teams very quickly, and oftentimes there are situations where the staff hadn’t been given the attention that we’re able to provide in a receivership setting.

That’s probably one of the easiest things, is earning the respect of the onsite teams. What also comes quickly with remedying those anxieties is getting a sense of trust from the regulators as well. Usually early in our engagements, because of the organization that we are, they understand we’re here and have a patient care focus. We’re typically very successful with regulators in being able to talk about a plan that would bring the facilities back into compliance, and that sort of sets our road map.

The more difficult parts of these receiverships are the provisions of the order itself, which typically require us not to pay pre-receivership debts. That involves notifying many vendors. That’s where we have to have hard talks with vendors and having them understand the situation and the process that we need to follow. Those can be very tough conversations to have, but necessary as part of the receivership.

Those groups that do recognize the risk is where we’re seeing more action. I think this will continue as the industry goes through a right-sizing of its bed license number.

One thing we’ve been hearing over the past year is that distress in the SNF industry is going to continue. In terms of distress levels in the SNF world, how does the current environment compare to years past?

I think it’s gotten quite a bit more stressful for operators. It’s become more challenging. We’ve gotten stagnant reimbursement rates, we’ve got increasingly difficult labor markets, and we’ve got heightened scrutiny of regulators and higher civil money penalties for compliance issues. It’s a recipe that really weeds out operators, and those groups that are not prepared and not focused on the changing marketplace and the changing landscape really are running into problems. That’s where the lenders and investors are really needing to roll up their sleeves and recognize the risk that they have, should they risk their license.

So you have many states aggressively looking to reduce the number of nursing home beds they have under licensure. That presents a greater risk for investors, because if they have an investment in a facility that does have its license at risk, they can experience a significant loss if they do lose the license.

The lenders and investors that are proactive about managing their credit risk with regard to regulatory exposures are the ones that see the benefit of our work, and there are some that perhaps aren’t as experienced in long-term care, nursing home lending and investing. They may be more hesitant to roll up their sleeves on operating issues, but those groups that do recognize the risk is where we’re seeing more action. I think this will continue as the industry goes through a right-sizing of its bed license number.

When you mention states looking to reduce the beds under licensure, how does Long Hill’s geographic footprint compare to those states? Do you work in those states, or is your range broader?

We are broader geographically. We’ve been in Wisconsin, Illinois, Missouri, Pennsylvania, West Virginia, Delaware, Connecticut, New York — we’ve been as far south as Florida, South Carolina. We’ve got a pretty wide footprint where the problems lie.

In terms of the bed reductions, Connecticut, for example, has an objective to reduce the number of licensed beds by 30%. They will move to close facilities if they can; that’s just a stated objective of the state itself.

We’re seeing, in dealing with regulators in other states, the same interest in de-licensing facilities, should they find that the facility isn’t living up to its provider agreement. Because even though we have baby boomers coming, the current demographic of 85+ is actually a little soft right now and in the next several years, until the baby boomers hit that age demographic.

So for states to manage their Medicaid exposure, the long-term Medicaid exposure, the key to that is reducing the number of institutions while census is low. So if you have an inventory right now that’s occupied at 85%, it behooves states to reduce the number of Medicaid facilities, so that when the demographic changes, they can facilitate support for those folks in different ways. They can just manage the total expenditures to the Medicaid program over a long-term strategy.

When you allow the state to control the outcome unilaterally of a distressed situation, you have a greater risk of closure.

Heading into 2019, do you expect distress levels among SNFs to increase or decrease? We’ve had some pretty high-profile bankruptcies in 2018 — would you say these are one-offs, or a sign of things to come?

I see continued distress. The demographic is still soft in the 85+ age bracket, and the regulatory landscapes are not getting any easier. I just see states responding with more concern about their broader exposure of operators pulling out of facilities, much like the Skyline organization did on a mass scale. So I think you see regulators looking at their overall operating risk and their responsibility, ultimately, of caring for residents and kind of assessing the providers they have in the state and being concerned about the operators that are caring for Medicaid residents in their respective states.

I see states being more in tune to that and reducing their Medicaid exposure, but I also see a growing concern of lenders and investors understanding they need to recognize risk they have in troubled credits, and be a bit more proactive in solving problems that have historically been operational in nature. I think now if they find they have an operating team that’s not maintaining compliance in a facility, the investors are taking more action now than they once did, so they don’t ultimately their license and investment.

Many states will take properties into receivership and take responsibility of the facility that’s in distress. I think it’s the investors that recognize the benefits of them actively participating in that workout that we’ll see a greater number of in the future years. When you allow the state to control the outcome unilaterally of a distressed situation, you have a greater risk of closure. If banks, lenders and investors recognize the credit risk they have in that situation, which I think is greater, then I think you’ll see more participation from the private side of funding in the future.

This interview has been condensed and edited.

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