Formation Focuses on Strategic Skilled Nursing Sales as Capital Continues to Drive Demand, Prices

Formation Capital remains a heavyweight in the private investment space for senior housing and care, but its CEO says that its skilled nursing tastes have become more opportunistic as capital continues to aggressively chase available properties.

The Atlanta-based Formation this past spring sold off a 12-property skilled nursing portfolio in Virginia and Pennsylvania, and CEO Brian Beckwith told SNN that another multi-building sale is close to wrapping up.

Despite the strategic trims, Beckwith said Formation continues to be on the lookout for new deals, but that competition for attractive properties can be fierce as investors seek out skilled nursing upside — and potentially detect a hint of tailwinds in the air amid payment reform and ongoing demographic trends.

SNN sat down with Beckwith on the eve of the National Investment Center for Seniors Housing & Care’s (NIC) annual conference in Chicago to learn more about Formation’s M&A strategy, as well as the CEO’s ongoing outlook for the post-acute and long-term care businesses.

What’s your current outlook on skilled nursing — I know you recently sold off some buildings in your portfolio.

We did sell 10 or so earlier in the year, and we’ve got one other portfolio that’s close to being sold. We have taken an approach for skilled nursing where we’ve got some assets and some portfolios that have performed well — and I think that’s not necessarily rare, but it’s certainly a distinguishing factor for skilled nursing. And there’s a lot of capital out there looking for deals.

As a private equity firm, we’re not like the REITs where we need to hold it for FFO. If we can sell something that’s performed well, and sell it for a gain, then we will do that. When that does happen, the market’s a little bit challenging, because it’s hard to find good deals right now. You either have some that are challenged — which is okay with us — but you also have some that are, I think, pretty aggressively marketed, which I think has been a change over the past five or six years. There’s still a good bit of capital chasing deals right now.

We’re looking at skilled nursing. We’ve been a little bit more of a seller recently, but that’s just because the capital’s been there for us to make sure we sell into a good market.

That doesn’t mean we wouldn’t look at new deals. It’s just that we’re going to be pretty opportunistic on new deals, buying portfolios in skilled nursing right now.

What’s your balance?

We’re still predominantly skilled nursing. In the U.S., it’s about two-thirds skilled and one-third assisted living. In the U.K., it’s not classified exactly the same, but we own a little more than 300 properties through a company called HC-One, and that’s more social care. It’s very similar.

I know prices have moderated over the last 18 months, but why are they still so high — especially given publicly traded investors’ continued reluctance to go all in on the assets? I always joke that the one way to get analysts to celebrate on earnings calls is to announce that you’ve sold off some skilled nursing buildings.

I understand when they announce that: “Hey, we’re happy that we sold this portfolio,” because a lot of what they’re trying to create is stability of earnings. And the reality is, skilled nursing hasn’t been super stable over the past five years. So when you go through some of the changes that the market has gone through, that’s not creating certainty of cash flow, and that’s what they have to have.

But there’s a segment of the market that, with a focused operator, can really drive cash flow, and it’s probably seeing a little bit of the benefits of a good economy that helps the Medicaid reimbursement on the state level. Medicare’s been pretty stable. The biggest influence has been the length of stay coming down over the past few years, and that seems to have stabilized.

What I think was happening is: You’ve got a lot of folks who have come into the market on a more local and regional basis, versus when you think about the big REITs, they are pretty focused on creating stable cash flow, and the uncertainty that comes with some of the intricacies of skilled nursing can be challenging for that goal.

The folks that are coming in with capital are looking to put good management teams in place, and they’re looking at some things that have — I don’t know if you can say this, with the past several years — maybe even have a tailwind for skilled nursing.

Speaking of tailwinds, what about demand for long-term care? We aren’t seeing a lot of new development targeting the Medicaid side of the business; all the new buildings are high-end, short-term rehab. How does the industry solve the long-term care problem?

There’s not a good solution. … You’re seeing folks who have capital develop those higher-end, Medicare-focused facilities and rehab-focused facilities, because that’s where you can attract the capital. It’s a higher-margin business. It is a little bit more professional, meaning you need more sophisticated management to manage those well — because it’s got a shorter length of stay. But I think with the right manager, there’s a place for both.

I haven’t seen it happening yet, but it would be difficult to put an operator in a spot where they don’t have some Medicare census, because the reality is, the profitability that comes from that resident, that patient — in a lot of states, some states not so much, but in a lot of states — subsidizes that Medicaid patient. I think there’s a balance in a lot of states, and in the more rural areas especially, there’s a big demand for it. It’s not necessarily profitable, but there’s a lot of folks with a proper mix that can do both.

I think we pay maybe an outsized level of attention to the brand-new, fancy rehab facility, because it’s the one that’s on the front cover of somebody’s annual report. Look, it’s more fun to go walk through; you go walk through one of those, you feel like you’re in a hospital. You walk through a long-term care facility, it’s not as enjoyable of an experience.

You talk about tailwinds: We as a country are going to need more long-term care beds, so how do we make it attractive to investors? What would make it exciting to you?

There’s a lot of people who do it well. What makes it exciting is finding the right operator in a regional or a local area that can manage it well. You can never really manage 100% Medicaid facility and be profitable for very long. There’s always got to be a little bit of a mix.

Making it exciting — it’s not a very exciting part of the market, so it’s hard to make it exciting. But I think with the proper mix of a Medicare patient to help make sure that you can provide that care to the other need that we have in the U.S., then it’s something that people can do and do well — and make reasonable profits if they’ve got a proper mix.

I don’t think you’re ever going to see somebody who’s going to announce: We’re going to go 100% down this path. It is a tough market, and it’s something that in a lot of cases, you want to make sure that as you’ve seen the supply of beds come down over the past 10 years, you want to make sure that at some point, the supply of those beds will make that a profitable business.

You’re already approaching bed shortages in certain states, which is exactly the opposite of what we might want to see as the baby boom population ages.

I do think that home health will fill some of that void. The reality is, nobody really wants to go to that [nursing home] environment. So home health will fill some of that void. But the thought that it’s not going to be needed, I think, is a mistake.

Genesis CEO George Hager has declared the end of home health runoff from skilled nursing, challenging people to identify residents at his company’s SNFs that could receive the same level of care at home — of course, with the implication that they can’t.

I think he’s right. I think he’s 100% right.

And that was healthy. I don’t think it’s an unhealthy thing. We tend to be agnostic when we think about how we care for seniors, where we invest — there’s room for skilled nursing, long-term care, home health, and we look across that spectrum.

But I think George is right: We’ve seen some of that home health service provider take some of those that may not have needed to be in that spot, and taken them out. They’d rather be at home. The reality is, they’d rather be at home — whether it’s home health, hospice, whatever it might be.

There’s an ability to do some of that at home. It’s not total and complete, because you do go through some these facilities, and you’d be hard-pressed to find somebody where you’d say: Okay, this could be done at home.

What does the nursing home look like in 10 years then? Is it still two separate businesses under one roof, is there bifurcation, does it look totally different?

I don’t think it’ll look completely different, so I’ll start there. I do think that you’ll continue to see both rehab and long-term care provided in the same facility.

I think you’ll see more insourcing of the services that you need to care for that population, and I think ultimately you’ll see in 10 years — whether it’s risk-sharing with hospitals or whether it’s risk-sharing on just the part of the long-term care industry — that managed care concept come in a little bit more. And with that comes a broader view of: How do we care for a senior that needs housing, that needs rehab, that needs maybe some home health, that may need hospice? And how do you figure out how to take total control of a patient and their needs?

I think that’s what you’ll see long-term. I hope so, anyway, because that’s probably the most efficient way to do it.

Will that be plan-driven or provider-driven?

Or government-driven. I don’t know which of those is the one that will happen. I hope that it’s provider-driven, because even though I think this industry and specifically skilled nursing has shown a fairly strong skill set in moving toward the more profitable pieces of the business, I think if it was a more comprehensive view, that it’d be better for the resident, better for the patient. So I hope that it’s provider-driven.

The reality is, every provider in the industry, as good as they are on a clinical basis, reacts to how they get paid. Whether it’s rehab, whether it’s pharmacy, whatever it is — this industry’s pretty good at morphing to make sure that they’re optimizing the way they get paid.

I think, ultimately, that’s what will drive it, is how you get paid. Somebody will figure out how to optimize that.

That kind of tracks with the goal of a unified post-acute payment system, though I’ve seen that the long-term care space can be very adversarial — SNFs thinking of home health or accountable care organizations as the enemy, for instance.

And I think that’s a mistake. The people who are going to do well will figure out how to embrace that stuff, and embrace the relationships with the hospitals. To give George [Hager] a compliment, I think they’ve done a good job with rehospitalization, and making sure that you’re providing the right data. Data’s going to be critical to show: Here’s what we’re doing in these facilities. Here’s why it’s better for us to take care of your resident or your patient. The people that embrace that will do much, much better.

This interview has been lightly condensed and edited for clarity.