Why Even the Best Operator Can’t Fix a Bad Skilled Nursing Market

Skilled nursing operators with a strong regional focus and market presence are attractive to potential investors and capital partners, but ultimately the realities of the market will trump even the best operator.

The operator-driven nature of the SNF field makes the people involved in a given facility paramount, but investors can’t overlook how susceptible nursing homes are to local market forces, according to a panel of experts at the National Investment Center for Seniors Housing and Care (NIC) spring conference in San Diego.

“Operator always first,” Jonathan Slusher, head of senior living and health care at the private equity firm Northwind Group, said in response to questions about the criteria used to determine the right investment opportunities. “Expertise in their markets, but also their character. These are people you deal with on a daily basis, that you want to enjoy working with. But what I will say is that the best operator cannot fix a bad market. So fundamentals do come back to market and real estate, always.”


Northwind has made its investment bets with an eye toward market factors, but specifically with a focus on regional concentration. In fall of 2018, it purchased a portfolio of seven skilled nursing facilities with a total of 1,037 beds in Ohio and northern Kentucky, along with one 110-unit assisted living property, for a total acquisition price of $182.5 million.

Those facilities are operated by Carespring Healthcare, which has made a point of keeping its geographic focus narrow. In fact, Carespring CEO Chris Chirumbolo told SNN last year that the company focuses on keeping all locations within easy driving distance of management.

“You see providers who buy a couple buildings here, a couple buildings there — five states away. We’ll never do that,” Chirumbolo said last year. “It just doesn’t make sense because we want to be able to get to the building right now, with just an easy drive of maybe one to two hours. It’s one hour from our corporate office to every one of our buildings.”


That type of regional concentration is attractive to Northwind, Slusher said, because it tends to tie into one of the other major considerations of SNF financial health and success: workforce tenure.

“We’re more focused on — not necessarily geography, but operators and portfolios that have some level of concentration to both ensure that they know that market extremely well and can staff their buildings extremely well,” he said. “Usually when there’s concentration, that team has been there for quite some time.”

He also added that “concentration” does not mean a mass of properties in a broad region, but something like the ability of the CEO in Northwind’s Cincinnati and Northern Kentucky portfolio to drive to all eight buildings in a day.

KeyBank Real Estate Capital has no particular geographic restrictions in its financing work with skilled nursing facilities, though it does make sure it doesn’t get “too long on one spot or the other,” Brandon Taseff, senior vice president at KeyBank’s health care group, said. The focus is more on aligning with the best owners and operators in the space.

That said, KeyBank does tend to do larger deals, such as portfolios, with some “built-in diversification from a market perspective,” and not many single-asset transactions. But from his perspective, the operator is indeed the paramount consideration.

“Generally speaking, going back to criteria, it’s who’s the sponsor, who’s the operator?” Taseff said. “The market, although important from a real estate 101 perspective — the owner-operators tend to outweigh that.”

Star concerns

In terms of how the financing environment has changed over the past few years, there’s one key element for SNFs that has become more prominent: the importance of the Centers for Medicare & Medicaid Systems’ (CMS) star ratings system on its Nursing Home Compare tool.

“The client conversations we had five years ago was: ‘Ah, they’re nothing, they don’t mean anything, don’t worry about it.’ And slowly but surely they’ve become a very important measuring device, not just for potential residents but now for insurance carriers, and now we’re hearing that managed Medicare, some of their contracts use star ratings … it impacts your ability to get HUD financing,” Taseff said.

In fact, the Department of Housing and Urban Development (HUD) has become even more stringent on its underwriting and approval process ever since the $146 million default by the owners of Rosewood Care Centers set a record at the agency. And lenders have emphasized that star ratings are a crucial tool for measuring the financial and clinical health of a nursing home company.

Given how much of the star ratings depend on factors like staffing, health outcomes, and surveys, operations still remain paramount.

“You need a very good operator to make the business work,” Slusher said.

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