Genesis’s Hager: Traditional Skilled Nursing-REIT Structure a ‘Failure’

The traditional relationships between skilled nursing facilities and their real estate investment trust (REIT) partners have come under increasing scrutiny amid high-profile restructuring efforts and bankruptcies — and the leader of one of the nation’s largest care providers said Monday that the existing models just don’t work.

“I would argue that the traditional REIT structure in skilled nursing has been proven to be a failure,” George Hager, CEO of Genesis HealthCare (NYSE: GEN), said during a panel discussion at the eCap Healthcare Summit in Doral, Fla., just outside of Miami.

Hager in particular pointed to deals with lease coverage in the 1.2 to 1.3 times range, coupled with annual rent escalators of 2% or more. Given the unpredictable reimbursement and regulatory landscape in skilled nursing, along with persistently low census, it doesn’t take long for those coverages and rent hikes to spell trouble for even solid operators.

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“You’ll continue to see some portfolios in traditional structures be sellers,” Hager said of the year ahead — a prediction that could include the Kennett Square, Pa.-based Genesis.

Local motion

The nationwide provider has already undergone significant transition in recent years, with key landlord Sabra Health Care REIT (Nasdaq: SBRA) divesting most of its Genesis-operated assets and the operator itself shedding 26 buildings through the third quarter of 2018. Genesis also earlier this month engineered a deal to buy the real estate associated with 15 of its skilled nursing facilities from landlord Welltower Inc. (NYSE: WELL), forming a joint venture with Next Healthcare Capital to land a 46% ownership stake.

In a separate transaction, Welltower offloaded seven Genesis-operated buildings to a third party, with the operator poised to relinquish control to a new provider. Speaking Monday, Hager hinted that his company wasn’t done pruning assets in 2019, saying that Genesis was exploring exits in certain markets where the provider doesn’t have the scale to compete effectively.

“There’s no question that this is a local business,” Hager said.

The discussion featured a healthy dose of cautious optimism from both Hager and his fellow panelists, with a continued focus on the potential of regional and local operators that can most effectively navigate the reimbursement and staffing landscapes.

“What I would say is that there’s great opportunity right now for the better operators to distinguish themselves and capture share, in spite of the difficult demographics that last year [saw], and I was really happy to hear that census is stabilizing,” Dave Sedgwick, chief operating officer of CareTrust REIT (Nasdaq: CTRE), said.

CareTrust evaluated fewer deals in 2018 than the REIT had in the past, Sedgwick noted, as speculation about future demographic boosts pushed prices on certain deals ever higher. And while Sedgwick was upbeat about the potential for providers that can prove their value to referral partners with solid data — a common refrain on the conference circuit — he acknowledged that not every operator in the space is in the position to invest in innovation.

“On the other hand, in some markets, it’s still 2005, where the hospitals have no clue about length of stay and readmission rates — and it’s still bagels and bags that’s driving census,” Sedgwick said.

Partner up

That’s why his firm places such an intense focus on picking solid operational partners. CareTrust itself was spun off from The Ensign Group (Nasdaq: ENSG), one of the more consistently successful providers in the space back in 2014; just last week, the Mission Viejo, Calif.-based operator reported several record-high financial metrics for the fourth quarter of 2018. With the right leadership and dedication, Sedgwick noted that a particular property doesn’t need to be the most advanced in a given market to attract attention.

“Maybe you don’t need the full sophistication of a Genesis for an asset that’s in a market that’s still operating like 2005, and as long as they’re adaptable and can grow, that’s what we look for,” Sedgwick said.

Hager agreed, emphasizing in his closing remarks to the crowd that success won’t necessarily come through treating skilled nursing facilities as just another real estate investment.

“The real estate is only as valuable as the operator makes it, and if the operator is not incentivized to operate and grow the asset … it will ultimately fail,” Hager said. “You might have gotten a good deal on the front end. But it will ultimately be challenged in most cases if there isn’t a stronger and better alignment of interests.”

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