LTC’s Simpson: COVID-19 Could Drive Private Equity Investors Away from Skilled Nursing

Private equity dollars have driven the conversation in skilled nursing over the last few years, as the publicly traded real estate investment trusts (REITs) looked to cut their dependence on government-reimbursed tenants.

But the COVID-19 pandemic could shake that up, at least according to LTC Properties (NYSE: LTC) CEO Wendy Simpson.

“We are thinking that maybe private equity is not going to think that this is a great industry in which to invest in the future, and so maybe we will have less competition when this finishes, this crisis is over,” Simpson said on a Thursday webinar hosted by the National Investment Center for Seniors Housing & Care.

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Private investment in skilled nursing facilities has been on the rise in recent years, with 63% of respondents to Skilled Nursing News’s 2020 outlook survey predicting that either private equity firms or private REITs would be the biggest buyer of nursing homes this year.

Across all investors, non-public firms kicked off 2020 with $1.5 trillion in cash just waiting to be deployed, according to data firm Preqin, and PwC predicted that these companies would be a major factor in the health care mergers-and-acquisitions landscape for the year.

“On the sector trend front, capital availability persists and will continue driving deals activity,” the advisory firm observed. “Private equity firms, for example, are likely to continue seeking value-driven models, especially in growing sub-specialties. Private equity firms also remain potential deals partners for payers and providers.”

But of course, none of those prognostications took into consideration a global pandemic that would upend the U.S. economy — and target, with deadly precision, the exact group of people that skilled nursing and senior housing operators serve.

Kathryn Sweeney, co-founder and managing partner of the senior living-focused private investment firm Blue Moon Capital Partners, drew a distinction between the kinds of private equity firms that are likely to cut and run, and those that will remain after the COVID-19 crisis subsides.

“I think committed private equity will not — knowledgeable, experienced private equity will not,” Sweeney said during the webinar, referring to departures from health care. “But what I absolutely agree with Wendy on is that those private equity ‘tourists,’ who were really looking more opportunistically at the sector, that they will. They did not anticipate how hard something like this could be, and just are not prepared. I think we are going to see an evaporation of that cohort of private equity suppliers.”

Simpson also used the Westlake Village, Calif.-based LTC as an example of a company interested in health care for the long haul.

“We are long-term investors in this industry, and as long as LTC survives, we will probably be long-term investors in the health care industry,” Simpson said. “So we’re looking for possibly little less competition.”

LTC maintains a mix of skilled nursing and senior housing assets, and despite the widespread reports of outbreaks and deaths in nursing homes across the country, Simpson asserted that SNFs have an advantage over senior living operators during the crisis.

“They are prepared for infections. They always have a flu season. They have very stringent protocols in place,” she said. “So I think they were able to respond a little faster than the private-pay, the assisted living, the memory care. Our SNF operators are feeling more comfortable in the fact that they know how to respond, that more of their employees are trained to do this type of thing.”

As for questions of rent deferrals and defaults — which have contributed to significant drops in health care REIT stock prices since the crisis began — Simpson said LTC and the industry will likely have a better grasp on the full potential impact next month.

She also indicated that unlike fellow REIT Ventas Inc. (NYSE: VTR), LTC does not expect to offer an across-the-board rent cut for large chunks of its portfolio.

“We believe May is going to be a much better insight into the impact on our operators, and I am not Pollyanna enough to think that LTC will not be impacted by this,” she said. “It will not be a long-term impact, as I think we all believe that this is not going to be a long-term impact, financially, as much as it is right now. It will be a long-term change in our country, in the health care providing, but it’s very preliminary right now.”

In the meantime, Simpson suggested that operators should prepare for detailed conversations with their REIT partners about the full state of their business — and not just the parts in which the particular REIT happens to have a stake.

“We find out what our operations are doing, but we don’t know what their other operations are doing,” she said. “In terms of providing concessions and support, we would like an understanding of where they are totally impacted by this crisis.”

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