Why Biden’s Crackdown on Private Equity, REITs Won’t Deter Investment in Skilled Nursing

While the Biden administration is seemingly trying to push private equity out of the skilled nursing sector, there seems to be growing confusion and frustration on how blaming such a small fraction of the overall sector is going to solve some of the challenges the industry currently faces. 

The skilled nursing market has been one of the more perplexing throughout the pandemic, with increased transaction activity and record-setting deals despite tightening margins and slowed occupancy recovery.

Of the $3.7 billion spent in total skilled nursing transactions in 2021, $3.3 billion, or roughly 89%, were considered private buyers, data released by the data service affiliated with the National Investment Center for Seniors Housing & Care (NIC) showed.

But how much of the SNF sector is owned by what the administration defines as private equity continues to be debated.

Federal agencies will examine the role of private equity, real estate investment trusts (REITs), and other investment ownership in the nursing home sector, as is outlined in the White House’s nursing home reform proposals, and that information will be used to expose corporate entities not serving their residents’ best interest.

Biden specifically called out Wall Street firms during his State of the Union address at the beginning of this month, claiming they were taking over nursing homes, which resulted in lesser care quality and rising costs.

While Biden sees private equity and REIT involvement in the skilled nursing space as “dangerous,” some of the leading health care REITs think his efforts may be misguided and misinformed.

Private equity firms’ investment in health care has ballooned from $5 billion in 2000 to more than $100 billion in 2018, but only about 11 percent of nursing facilities nationwide are owned by private equity firms, according to MedPAC.

Alan Schabes, a partner at Benesch, Friedlander, Coplan & Aronoff LLP, recently told Skilled Nursing News that the private equity funds that he represents don’t have interest in the operating aspect of nursing homes.

With for-profit facilities accounting for 71% of providers, according to MedPAC, some question who the White House is exactly talking about in its fact sheet outlining the nursing home reform proposal.

“Clearly [the administration] doesn’t understand the difference between private equity, private capital and REITs. Years ago it was private equity that did the ManorCare deal and did the Genesis deal, but there’s actually almost no private equity in skilled nursing now,” Sabra Health Care REIT (Nasdaq: SBRA) CEO Rick Matros told SNN. “There is private capital, individual groups that have raised their own money to buy nursing homes.”

Matros argued that since most REITs are public, “there’s an added layer of transparency,” so to put them in the same category with private capital or private equity is “silly.”

He added that most REIT-SNF partnerships are under triple net leases so there’s “little interference” with operators.

“REITs in fact don’t have a lot to say about what happens operationally,” he said. “That’s not the REIT model.”

While Biden’s overall reform may have some of the most active REITs in the skilled nursing space scratching their heads, leaders in the space do not expect it to cause an immediate exit – or even stop investment in the space – at least for the time being.

REITs take on a ‘wait and see’ approach

Summit Healthcare REIT, recently acquired eight SNFs in a $130 million deal in Georgia at the end of 2021 as Elizabeth Pagliarini, Summit Healthcare REIT COO and CFO, remains “excited” about the acquisition and the company’s future growth in skilled nursing.

When Summit got off the ground it was about 50/50 skilled and assisted living. Now that’s shifted to about 80/20 skilled and assisted living with the portfolio stretching across 14 states, she said.

While Pagliarini admitted she was a little taken aback when she first read the White House proposal, she thinks it’s going to take some time for everything to get straightened out.

“We don’t really know what it’s going to mean but we’re going to be having conversations with all of our operators,” she told SNN. “We’re certainly not jumping up and down but I think it’s going to take some time to figure out exactly how it’s going to affect the industry.”

Pagliarini would be lying if she said she didn’t have concerns going forward, but she doesn’t foresee the reforms altering Summit’s long-term plans just yet, she told SNN.

“Are we being reactionary and selling off our portfolio? No, absolutely not, skilled nursing is too important of a service in our country,” she said. “But are we maybe taking a step back and slowing down and waiting, taking kind of a wait and see approach right now? That is our position until there is more clarity about what this is going to mean.”

REITs have been involved in some of the largest deals in the skilled nursing space over the past year – including Strawberry Fields REIT’s $80 million acquisition of six SNFs in Kentucky and Tennessee.

A short time ago, the Ensign Group, one of the most active operators in the SNF sector, announced it would be launching an in-house REIT as it continues to be aggressive on acquisitions.

Matros doesn’t see Sabra moving away from skilled nursing in light of the reform.

“It just seals our support towards the industry and fighting reforms that we think are unwise, unfair and singled us out,” he said.

He added that Sabra will look to have more “balance” in its portfolio.

“Our skilled nursing footprint today is a little bit over 60% of our portfolio, I would expect that to come down some, but that’s simply because we have interest in other asset classes as well,” Matros said.

What the White House defines as private equity remains unclear

While there have been several studies demonstrating substandard care at nursing homes owned by private equity, the White House called on more investigation into REIT and chain ownership as well, and called on Congress to expand the Centers for Medicare & Medicaid Services’s enforcement authority at the ownership level.

Part of this expanded authority will enable CMS to impose enforcement actions on owners and operators of facilities even after they close a facility, as well as on owners or operators that provide “persistent substandard and noncompliant care” in some facilities, while still owning others.

Matros thinks the way REITs have “stepped up” over the course of the pandemic demonstrates their commitment to the sector, and he doesn’t think lumping them with other ownership types is fair.

He pointed to the number of rent deferrals that were handed out in Q4 2021 by health care REITs such as Omega Healthcare Investors (NYSE: OHI), which supported operators like Guardian, Gulf Coast and Agemo after they could not meet their rent obligations to end 2021.

“To make these statements and put forth these initiatives, without a clear understanding of the differences here and who’s really stepped up during the pandemic … it’s frustrating,” Matros said. “In terms of REITs, all anybody in the administration should have to look at is despite the negative impact on them in terms of stock price, cost of capital, every single one of our peers stepped up and provided and is still providing rent relief, so that they have breathing room to recover.

“I think the REITs that are in SNFs – the Omegas, LTC, NHI – we’re committed to this space,” he added.

David Sedgwick, CEO of CareTrust REIT (Nasdaq: CTRE), echoed those sentiments in a conversation with SNN earlier this month, calling the lease structure REITs and nursing homes operate under an “impenetrable wall” between the two.

“The bank’s control over operations is zero, a REITs control is zero – it’s just a way to finance the real estate. So if you have a problem with a REIT then you have a problem with an operator that owns the building themselves with a mortgage,” he said.

Pagliarini agreed and felt that since REITs only own the real estate and aren’t the licensed operator, cracking down on their involvement in the sector feels a little misguided.

“I think it’s possible the people who are working on these reforms are possibly misinformed about the kind of structure that REITs have because with the vast majority of them, the operator is a separate entity, unaffiliated,” she said. “And I think putting so much scrutiny on a landlord is misguided and doesn’t make a lot of sense and makes me think the people responsible are misinformed.”