In the months leading up to the implementation of a new Medicare payment model for skilled nursing facilities, various voices predicted an exodus of smaller, mom-and-pop operators who’d rather call it a career than adapt to a completely new reimbursement system.
But only a few months after the Patient-Driven Payment Model (PDPM) took effect last fall, the effects of the COVID-19 pandemic could serve as an even greater motivator to push single-site nursing companies out of the business — and accelerate a trend toward regional consolidation that has been brewing for years, according to finance leaders at the National Investment Center for Seniors Housing & Care’s (NIC) virtual fall conference.
“The industry basically just got harder, and being a new operator, like: Hey, I want to open a nursing home today, or I want to take over one when I’ve never done it? It’s not exactly the right time for you,” Vikas Gupta, senior vice president of acquisitions and development at Omega Healthcare Investors (NYSE: OHI), said during a panel discussion this week. “It’s more the time for maybe the mom-and-pops to take a step back, step to the side, and be like: Hey, regionally based operator, maybe nationally based operator — would you want to take over this building?”
The federal government’s extensive support of the industry through CARES Act funding and other levers has largely masked the financial impact on the nursing home industry thus far, with the publicly traded real estate investment trusts (REITs) reporting minimal rent deferrals and billions continuing to flow into the space to offset increased testing, labor, and personal protective equipment (PPE) expenses.
But future stimulus funding remains up in the air, and operators that were already teetering on the brink pre-COVID could soon be forced to make tough decisions.
“The bottom decile or the bottom quartile of facilities and operators are not going to be able to withstand this, should stimulus go away and COVID continue,” Elliott Mandelbaum, managing director of BM Eagle Holdings, LLC, said during the discussion.
BM Eagle is perhaps best known in the space for its $700 million purchase of Kindred Healthcare’s skilled nursing assets back in 2017. The firm — a joint venture led by affiliates of the New York City-based alternative asset management firm BlueMountain Capital — has since sold off some parts of the Kindred portfolio. BlueMountain also picked up Sabra Healthcare REIT’s (Nasdaq: SBRA) portfolio of assets operated by Senior Care Centers, which filed for Chapter 11 bankruptcy protection in December 2018.
Kevin Giusti, managing director of real estate finance at Walker & Dunlop, agreed.
“I think folks that maybe would have sold this year aren’t, because they’re just flush with cash, but the day will come will they’ll need to,” Giusti said.
In Mandelbaum’s view, the departure of those lower-performing operators isn’t a bad thing, though it may create near-term ripples in the market.
“Over the long term, I think it would be good,” he said. “But there definitely will be some some pain and volatility. While we hope there won’t be any pain, I just think that’s the reality — or at least that’s our working base-case assumption here internally.”
The flip side of this dynamic: Opportunities for better-performing companies to expand their portfolios.
“I agree that consolidation makes sense — that that would happen, and you get with regional folks that could have some economies of scale and do, frankly, a better job than the one-off, mom-and-pop-type owner-operators,” Giusti said.
Despite the upheaval of COVID-19, and the logistical challenges of closing transactions during a pandemic where access to facilities is limited and travel has been restricted, the group emphasized that deals are still being closed — albeit with generally more conservative assumptions and some unique hurdles.
The Department of Housing and Urban Development (HUD), which provides vital backing for skilled nursing loans through its 232 program for health care real estate, continues to evaluate deals on a case-by-case basis, Giusti said. For that reason, Walker & Dunlop has been providing clients with a variety of potential scenarios that they may need to accept in order to land the deal, from best- to worst-case.
“HUD’s been open to conversations, but they’re reeling a little bit to try and understand and underwrite it properly,” Giusti said.
That said, the agency’s thinking has evolved since the earliest days of the pandemic.
“In probably the last month or so, I feel like they’re digging in deeper on understanding COVID,” Giusti said. “They’re not taking the most conservative route.”
As other financial players in the space have observed, the government support for the space during its most pressing crisis could actually make investment in post-acute care even more attractive than in the past.
Dependence on government reimbursements, once considered a serious risk given the vagaries of Washington and statehouses, could suddenly become a serious asset in the post-COVID world — especially for real estate-minded investors scared off by upheaval in retail and office space.
“I think people will look back in skilled nursing and senior housing and be like, you know what? That actually did fairly well in this wild environment,” Guisti said. “You know what? Maybe it’s not as risky, and maybe we’re in an era where the government is going to get bigger and bigger and keep funding the operations.”