‘The REIT Model is Dead’: How Skilled Nursing Operators Can Adapt to a New Reality

With all the changes that have swept the skilled nursing industry over the last decade, one of the classic investment models in the space may need to evolve with the times.

“I think that the REIT model is dead,” Robert Hartman, founder of Symphony Post Acute Network, said during a Monday panel discussion at the eCap health care summit in Doral, Fla., just outside of Miami. “We are in a completely different environment than we were in the ’90s and 2000s.”

Hartman in particular took aim at the standard, long-term leases with annual rent escalators that have been a hallmark of relationships between skilled nursing facility operators and their real estate investment trust (REIT) landlords. In his view, the payment shifts that have roiled the industry compel operators to increasingly invest in their physical plants and operational strategies — an imperative that’s difficult to pull off if their rents increase by 2% each year.


“Nobody’s going to put money in their buildings,” Hartman said of the standard SNF-REIT relationship.

Instead, Hartman said he prefers more flexible arrangements such as joint venture, operational/property company (OpCo/PropCo) deals.

And Hartman isn’t alone in his pronouncement: Speaking at the same conference in February 2019, Genesis HealthCare (NYSE: GEN) CEO took similar aim at the way REITs structure their relationships with nursing home operators.


“I would argue that the traditional REIT structure in skilled nursing has been proven to be a failure,” Hager said at last year’s eCap, predicting a sell-off of those assets as struggling operators failed to keep up with the annual escalators.

Hager and Genesis have pulled off several deals that align with the CEO’s worldview, including a joint-venture deal with Next Healthcare Capital to buy back 15 SNFs from REIT landlord Welltower Inc. (NYSE: WELL) for $204 million; the Kennett Square, Pa.-based skilled nursing giant followed that up with a similar deal to take back 18 properties from Welltower and Second Spring Investments.

But that doesn’t necessarily mean that REITs and SNFs can’t get along under different terms. Ronald Wilheim, principal of Communicare Health Services, said REITs often bring deals to the table, with sellers willing to take less money in exchange for the certainty to close.

“REITs are willing to do creative solutions,” Wilheim said.

Communicare itself works with three REITs, while also owning a significant chunk of its properties — with a preference for funding backed by the Department of Housing and Urban Development (HUD).

“I’m a big believer in HUD. It comes in two flavors for us: REIT or HUD,” Wilheim said.

‘Never saw that wave coming’

Of the financial headwinds facing the industry, Medicare Advantage and various state-level managed Medicaid plans have shaken the skilled nursing space the hardest over the last five years, and Hartman claims that the industry was largely unprepared for the consequences.

“We never saw that wave coming until it actually came, and it came too powerfully,” Hartman said.

Part of the surprise may have stemmed from the fact that health care operators and consumers look at Medicare Advantage from fundamentally different perspectives.

“I would never think that somebody would give up the classic, wonderful Medicare program to become part of managed care,” Hartman said.

But the perks that consumers receive when they first sign up for Medicare Advantage plans — typically when they’re relatively younger and likely still working — are often enough for them to sign up, whether it’s cheaper prescriptions or ancillary coverage such as vision and dental.

Simply put, seniors aren’t thinking about ending up in a nursing home when they join a managed Medicare plan, and they’re likely unaware of the potential for shorter lengths of rehab stay that they may experience decades down the road — nor would or should they necessarily care.

While nationwide Medicare Advantage penetration continued to sit at 34% of all Medicare-eligible seniors in 2019, according to data from the Kaiser Family Foundation, that figure represents the totality of all seniors aged 62 and older. Among the large numbers of baby boomers reaching Medicare eligibility each year, demand is much greater.

“If that program had just started, we’d be at 66%,” Marc Zimmet, president of Zimmet Healthcare Services Group, said during a separate panel discussion, specifically referencing uptake rates in New Jersey. “It’s going nowhere but up.”

With a private insurer’s eye on reducing costs, Medicare Advantage plans have vexed skilled nursing operators by enforcing shorter and shorter lengths of stay for post-acute residents. For that reason, even while the number of admissions may be increasing as the population ages, operators can no longer count on the financial stability that longer-stay Medicare patients bring.

The effects, according to Wilheim, don’t just stop at balance sheet issues. The increasingly transient nursing home population makes it difficult for employees to make real, lasting relationships with residents — a factor that in years past convinced many clinicians and caregivers to stay in the space for the long haul, he argued.

“It’s brutal — the churn, the churn,” Wilheim said. “Even in a Medicare building, which is beautiful with all the accoutrements, the churn is killing people.”

Image is everything

Asked to identify the biggest challenges that will roil the skilled nursing space in the coming years, Hartman took the long view, raising a problem that could come to haunt the industry once the baby boom generation finally starts to age into nursing home services in the next two decades.

“They will do everything humanly possible not to come into a nursing home,” Hartman said of baby boomers. “I’m getting to the age where I could be a mystery shopper in one of my own buildings, so I’m thinking about this, too — would I go to one of my buildings? Would I try to do everything possible not to?”

The industry’s reputation problem, Hartman and his fellow panelists argued, should be the concern of every operator; not only should they worry about their own facilities, but they should remain focused on how their individual actions could bring long-term trouble for the industry at large.

“I am very concerned about the fact that there’s an awful lot of young guys getting into the industry that have not seen some of the things that I’ve seen,” Hartman said, referring to abuse and neglect incidents that spurred national headlines in past years.

But it’s not just a reputation problem: It could be as simple as a matter of branding.

“Assisted living — positive image. Nursing home — negative connotation,” Hartman said. “Why? We’re an equal or better provider. We’re a cheaper provider. We’re a more consistent provider. Why can’t we do it?”

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