Mozart Healthcare was going to be a different kind of skilled nursing landlord.
This was in 2018, before the viability of the traditional setup for operators and their real estate investment trust (REIT) landlords started to come into question publicly.
The goal was to work closely with operator tenants, rather than being a distant entity taking checks, Mozart told Skilled Nursing News at the time. It had hoped “to be on the ground with our operators,” as co-founder and CEO Archie Shkop said in 2018.
The company, based in Skokie, Ill., got its start in 2016 and was in the process of expanding amidst some notable bankruptcies and struggles by operators to pay rent that ended with lease restructurings. In 2018, Mozart had seven different nursing home operators in Michigan, Ohio and Texas, where it had planned out a further expansion.
Being on the ground with operators included setting up leases with purchase options for tenants. And for Summit LTC, an operator based in Fort Worth and Mozart’s largest tenant in the Lone Star State, this was a significant draw to work with Mozart as a landlord.
“Mozart has an entirely different model with respect to their lease structure,” Summit President Chris Slimmer told SNN via email in May. “In many cases, operators are able to gain some control over their future by being given purchase options in their leases. This was a major item for our company and very different from the industry norm.”
Need for partnership
Multiple initiatives over the years have targeted the fragmentation among various health care providers across the care continuum, but Archie Shkop and his brother and co-founder emeritus at Mozart wanted to address the disconnect between operators and their landlords. This disconnect would often result in leases where operators could not be profitable, they noted in 2018.
Mozart was not the only one to identify this as a problem; Tom DeRosa, the CEO of the Toledo, Ohio-based REIT Welltower Inc. (NYSE: WELL) at the time it took over the nursing home chain HCR ManorCare with ProMedica Health System, was adamant that bad ownership for the operator was behind its financial and operational challenges.
“These are very good assets — great real estate that’s been run by a very effective management team with one hand tied behind its back because they’ve been capital-starved,” DeRosa said during a 2018 presentation. “This is a very important transaction, because this company, HCR ManorCare, is essentially being rescued by ProMedica and Welltower.”
Shkop argued that landlords working with skilled nursing operators need to understand the challenges of the SNF business – how, for example, a bad survey could lead to a loss in income, he told SNN.
This means that Mozart builds “breathing room” into its leases if operators run into challenges, after conducting stress tests of sorts to see how financials might fare if the tenants run into any issues. That practice paid off for both Mozart and its tenants when COVID-19 struck.
“We don’t have a single tenant who had a lease coverage ratio problem during the pandemic,” Shkop said.
For Summit, working with Mozart during the pandemic also meant getting a range of perspectives, with regular communication, on various trends, challenges and strategies for how the long-term care sector was dealing with COVID-19, Slimmer told SNN in an email.
But beyond the pandemic, working with Mozart is a way to establish Summit on a path to success, he noted. Though Mozart is the operator’s sole landlord at present, the company “over a decade of experience working with other landlords predating the founding of Summit including large REITs and private investors,” Slimmer said in the email.
“Building a mutually beneficial relationship between the landlord and the operator is imperative for success, which is what we have with Mozart,” he told SNN. “Complex and one-sided lease agreements with a massive amount of covenants and large escalators can be overly burdensome to operators. They put undue strain on operators, causing them to defer critical resources away to manage lease agreements and to covering lease escalators than towards the most important item at hand, patient care.”
Nathan Davis, Mozart’s executive vice president of acquisitions, put it even more bluntly in an interview with SNN.
“If you get on the same track as your tenant, and your goals are aligned, then you’re aiming towards the same endgame … ultimately, their success is our success,” he said.
Growing after COVID-19
Mozart decided after its expansion in 2018 to hold off on new deals for the duration of 2019, Shkop told SNN.
“When we grew in 2018, we made a decision that we were not doing a single deal for all of 2019, because the last quarter of 2018, we purchased a little over $50 million in facilities; we grew by 12 buildings in three months,” he said.
Mozart monitored these transactions over the course of 2019, Shkop said, and did not move into acquisition mode until December of that year. But because of COVID-19, it did not stay that way for long.
“We had a bunch of things in the pipeline, and then COVID just stopped everything,” he told SNN. “We did close on some things, and we have done some acquisitions, but it’s been very small.”
The stimulus money from the CARES Act that was distributed over the course of 2020 allowed some operators who had been either breaking even or losing money to remain afloat, Shkop told SNN. That resulted in “almost no inventory on the market.”
But he believes it will be hitting the market soon, pointing to the fact that deal volume was getting a boost even in the early weeks of May, though prices remain surprisingly high.
“We are very bullish that there will be a lot of inventory coming to market in the third quarter or fourth quarter,” Shkop said.
And while some of these assets will be distressed ones from operators who held onto their business too long, he does not believe all the inventory will be distressed facilities. Rather, some of it will consist of solid facilities being sold by smaller owners tired of trying to keep pace with the constant pace of change in the SNF sector, especially after a year of grappling with the pandemic.
Currently the company has five different tenants in Texas, two in Ohio, one in Michigan, one in Arkansas and one in Montana.
There are some states that Mozart will not consider for expansion. Massachusetts is one state it is reluctant to buy in, for instance.
Shkop is targeting Texas, in particular, as a state for growth due in part to the number of people moving to that state, but also because of the regulatory environment, which he described as “tough, but for good reasons.”
The goal is to find operators who invest in their own teams, given the challenges of workforce retention, and who are in the SNF space because they want to have an impact, Shkop said.
But there also needs to be alignment on the key performance indicators an operator must hit to grow, with many of those integrated into the leases in some way, he noted. This might include improving on surveys, rather than financial goals, but both components will come into how Mozart aligns with operators and works with them “to help them grow responsibly,” according to Shkop.
“We are geared for growth, we are hoping to grow, and I wouldn’t be surprised if we doubled the size of our company over the next 24 months,” he said.
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