Operators Face Tough Decision With Nursing Home Assets That Won’t Bounce Back After Pandemic

The pandemic recovery continues to present unsettling conditions for the economic wellbeing of older and somewhat struggling skilled nursing facilities.

Steady stimulus funding provided by the federal government and other sources such as the CARES Act has helped sustain some communities that have been met with rising expenses and falling census.

December 2020 occupancy rates for nursing homes fell to 71.7%, the lowest level since data have been collected, according to data provided by NIC MAP Vision.

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Occupancy declined 13.3 percentage points since February 2020, before the COVID-19 pandemic took hold.

Mark Myers, Managing Director, Investment Sales, Walker & Dunlop, said he hasn’t seen any communities that are “not coming back” as of yet. But the industry, he says, “is waiting for the other shoe to drop. We track this nationally, and we haven’t seen nursing homes being vacated yet.”

With PPP (Payment Protection Program), other provider relief funds, and advances from the U.S. Department of Health and Human Services winding down, Myers said he gives it six to 12 months before he sees some operators having to make a determination about whether it’s worth it to sell, close or convert their buildings to alternative uses.

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Right now, these owner-operators could be working with lenders on some kind of reprieve or forbearance to stay solvent.

“But eventually, it will be time to pay the piper,” he said.

Adding to their cash flow challenges is that operators face pen-stroke risk, the risk that legislators or regulators implement onerous changes to the reimbursement system, requirements for staffing, or other criteria. For example, the Governor of New York is pressing to implement legislation that caps the profit margin SNFs can earn at 5% when serving Medicaid patients.

“This will make it difficult for operators in New York who primarily earn their revenue through Medicaid to maintain business,” Myers said.

What’s It Worth?

In most markets, struggling communities will sell for much lower prices than profitable communities, Myers said.

“There are exceptions, such as one in a NYC borough that sold for a $65 million profit when it was sold to a condominium developer,” he said. “However, this was a unique situation that will not likely be repeated.”

Myers said a vacant, 30-year-old, 100-bed SNF located in a city with a population of 20,000 does not have a lot of worth. “And these are not in a condition to be easily converted to a school or a strip center. Its value is really in the land and that’s only if it’s on a busy street. He said they could be converted to an assisted living community, if they obtain a reimbursement from Medicaid or waiver programs, which are available in certain states including Illinois, New York, Ohio, Indiana, Florida, Oregon, North Carolina and several others.

“If only 60 out of 100 beds are filled, for example, the owners could remove the empty ones and convert them to skilled memory care. Or they can obtain a Medicaid waiver and use them for Waiver ALF or Waiver Memory Care patients.”

The pandemic severely impacted the seniors housing and care industry in 2020, causing average values to drop across each sector, year over year. The average price per unit for seniors housing communities, which comprise both assisted living and independent living, fell to $196,200 per unit in 2020, a 20 percent decrease over 2019’s average, according to data from Irving Levin Associates.

Myers said it wouldn’t be cost-efficient to convert a vacant SNF to a multifamily community, because it would require adding a kitchen, conventional shower and bathroom to each residence – in addition to necessitating a combination of rooms, since many SNF rooms are a fraction of the size needed for a multifamily rental.

“When you consider that renovation costs are typically about 80% higher than costs for new construction, it’s not worth it,” he said. “It makes more financial sense to scrap the SNF entirely and simply build multifamily from the ground up (greenfield construction). Renovating old SNFs will not result in the most beautiful building on the block, so it’s hard to think people would be attracted to them as multifamily assets.”

David Dillard, FAIA, Senior Living Practice Leader, Principal, DKS, Dallas, said, architecturally, SNFs are interchangeable with memory care communities because their dimensions are similar.

“If there’s enough area ‘outside of the rooms,’ SNFs can be converted to memory care to satisfy the extra space needs to serve those residents, who have more mobile lifestyles than those in SNFs,” Dillard said.

Given some of the bad publicity from the pandemic about living in SNFs, Dillard said, “adult children are going to be more inclined to want their loved ones living in memory care settings rather than SNFs, which will be depressed for a while.”

Two years ago, compartmentalization of community layout was a dirty word, he said. “But now, given Covid-19, it’s becoming preferred,” Dillard said. “Whether in SNF or memory care settings, ‘neighborhoods’ of 12 to 16 residents was a care model that had been gaining favor for years. In addition to its other social and care-taking benefits, Covid-19 illuminated an additional vital advantage – immunological containment.”

“Now, they should be separated for health safety and hygiene concerns,” Dillard said. “Data shows that senior living communities that were more compartmentalized had less Covid-19 infection because the residents were naturally more separated.”

With dining rooms, it’s not a bad idea to get away from the “big clunky ones” where everyone dined together, he said.

“If you have 100 residents, it’s better to have separate lounge-like areas such as an area to seat 20 or 30 in what could be a darker, ‘cooler’ (and we don’t mean temperature cool) area,” Dillard said. “And have seating for another group out in an open, bright area with a farm-to-table concept.”

Dillard described another reverse trend: Suburban and exurb communities have become more desirable because they quieter, low-rise buildings that have bucolic settings. “They are essentially, ‘behind the wall,’ which is a good thing,” he said. “It’s no longer considered dull to live away from the city.”

Dillard said that when architects and developers see building design transformation taking place for unforeseen reasons, his advice is to not overreact.

“Don’t leave behind architectural monuments to the pandemic that are clinical or institutional, bu unnecessary in the near future,” he said.

Looking Ahead — The Path Forward

What has helped the industry, especially in recent months, is the Covid-19 vaccine.

“Things had been pretty grim for about a year with no family visitations,” Myers said. “Still, the percentage of residents who have been vaccinated is encouraging and will result in a safe and secure environment and a renewal of family and community connections. It will increase census and profitability as well.”

Myers said it’s crucial for nursing homes to offer specialized services if they hope to thrive.

“Just providing ordinary, plain vanilla services will not attract new residents as they try to recover,” he said. “Including amenities such as telehealth and care-tracking functions have become a must-have.”

For some operators, dialysis services present an opportunity for SNFs to expand their ability to treat patients in place — and find their footing in a post-COVID world.

By offering this service, SNFs can attract new patients who might need it, in turn, improving their census; the operator SavaSeniorCare, for instance, sees adding dialysis services to its SNFs as a way to strengthen census even amid the changes wrought by the pandemic.

By Paul Bergeron

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