Advocate to Congress: REIT, Private Equity Investment in SNF Sector ‘Has Savaged The Industry’

The influx of cash into the nursing home world from outside investors such as private equity firms came under fire during testimony in a hearing of the House Ways and Means Committee on Thursday.

The hearing focused on the costs — both financial and social — of caring for elderly Americans, with testimony from caregivers, advocates and senior care associations.

Rep. Lloyd Doggett, a Democrat from Texas, noted that in the field of emergency care, private equity is becoming increasingly involved, which can raise costs while hindering Congressional action on surprise medical bills. He asked Robert Blancato, national coordinator of the Elder Justice Coalition, about the impact of such firms on nursing homes.

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Blancato said he was not certain on the answer, but called for a greater examination of nursing home ownership as related to that problem.

“There seems to be a growing issue about chains opening and there being a lot of accountability issues that we need to address,” he said.

Richard Mollot, the executive director of the Long-Term Care Community Coalition, a New York-based non-profit that advocates for seniors and people with disabilities, had stronger words.

“The investment by real estate investment trusts (REITs) and other entities that have nothing to do with health care into the nursing home world has essentially savaged the industry and, I think, care across the country,” Mollot said during the hearing. “We’re seeing more and more entities that buy up nursing homes. They have no experience in the business. They sell out the underlying property.”

He cited a case of “one of the largest chains in the country” that sold to a REIT a few years ago and then turned around to sell the underlying properties, “leaving about 99% of the assets gone.” That led to some of the homes going to providers that could not handle them, Mollot testified.

Mollot noted in his testimony that he was not positive on the numbers, but clarified to SNN via e-mail that his testimony referred to HCR ManorCare, which private equity firm Carlyle Group purchased in a leveraged buyout for $6.3 billion in 2007. The underlying property was then sold for $6.1 billion to the REIT HCP Inc. (NYSE: HCP), he said, citing the blog PEU Report.

HCP, which recently changed its name to Healthpeak (NYSE: PEAK), in 2016 spun out the ManorCare assets into a separate REIT, Quality Care Properties (QCP). QCP eventually had to take over the assets of ManorCare amid a bankruptcy action, and then was eventually acquired by Welltower (NYSE: WELL) in a major deal with the health system ProMedica to acquire the operations and the real estate of the SNF chain. The deal was finalized in July of 2018.

An investigation by The Washington Post blamed problems at ManorCare directly on Carlyle’s ownership — an argument also made by Welltower CEO Tom DeRosa, who said the assets were hamstrung by being “capital-starved.”

Mollot argued during the Thursday hearing that this was not an isolated case.

“We’re seeing it over and over again, that moneys are being siphoned away from nursing homes and from care,” he said. “They’re just being devalued and sometimes even closing.”

The influence of private equity in the nursing home world has been growing, as private buyers snap up SNFs divested by the major REITs. One possible reason is that private equity is drawn to the post-acute sector’s price per bed, Eric Smith, founding partner of the Red Bank, N.J.-based Locust Point Capital, told Skilled Nursing News last year.

“They believe that if they have the right operator in there running that facility, they can make a very attractive return acquiring that asset at these levels,” he said at the time.

At the beginning of the year, SNF owners and operators predicted in the SNN’s 2019 Skilled Nursing Outlook Report that private equity firms would be the most likely buyers of SNF assets over the coming year. Private equity also came in as one of the top sources of financing in that report, chosen by 36% of respondents.

And in a guest spot on SNN’s Rethink podcast, LTC Properties (NYSE: LTC) CEO Wendy Simpson said private equity is most interested in buying.

“Within any portfolio, you’ll have a couple of very nice assets, and they will draw the attention — and I’m not saying it’s Ensign — of somebody like an Ensign who might be looking to add to a footprint that they have in a particular state,” she said on the podcast. “But predominately we are seeing private equity interested in these assets — and a significant number of private equity.”

She sounded a similar warning to Mollot’s, at least when it comes to operator experience.

“The challenges are new owners who don’t really understand the business,” she noted. “It’s a very specific business … Now, some of the private equity people may actually have owned nursing homes before and actually understand the operations of a nursing home and the challenges of the regulations and the reimbursement — and others may just see it as real estate that can be levered.”

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