Why Institutional Capital is Critical for Skilled Nursing, Despite White House Rhetoric

Capital providers dealing in the skilled nursing space are pushing back on the White House’s position on institutional capital, stressing the need for it in the sector.

While institutional capital is critical to many of the key players in the space, some capital providers say newer owner-operators will have a hard time getting the necessary funding for entry into the SNF space.

That’s despite pressure from the Biden administration and closer scrutiny from federal agencies around private equity and institutional investors like real estate investment trusts (REITs).

“A good friend of mine I used to work with … he left the industry for about five years, came back and he said, ‘Well, none of the names have changed.’ They’re all the same people running these facilities,” Greystone Managing Director Donika Schnell told Skilled Nursing News.

Schnell, along with Jonathan Slusher, partner and head of senior living and health care at real estate private equity firm the Northwind Group, participated in a virtual panel on Thursday hosted by Skilled Nursing News. Panelists discussed investor outlook in the face of industry reform initiatives and ownership structure changes.

Slusher said he expects the future ownership environment to look “very similar” to what it looks like now, but with more efficiency and technology in the space.

“Everyone’s going to grow up a bit, get really good and more efficient, and technology is going to be much more of a meaningful player in managing operating expenses going forward,” he added.

New York-based Greystone originates more than $16.6 billion in loans annually, with a loan servicing portfolio of more than $70.2 billion across multiple property types. The private commercial real estate finance and investment company provides debt solutions to the skilled nursing industry along with seniors housing.

Northwind, also in New York, has more than $2.5 billion in assets under management, encompassing equity and debt investments in health care properties, senior living, residential and commercial buildings.

Of the $3.7 billion spent in total skilled nursing transactions in 2021, $3.3 billion, or roughly 89%, were considered private buyers, according to the NIC MAP Data released by NIC MAP Vision.

The share of skilled nursing transaction property closed by private buyers started to increase in 2016, NIC senior principal Bill Kauffman told SNN. Private buyers went from 33% to 36% of the transaction market between 2015 and 2016 – that number jumped to 82% in 2020.

The NIC transaction data is broken down into five categories: private, public, institutional, user/other and cross-border. The private buyer category encompasses private REITs, smaller family partnerships and owner operators, whereas the public category includes publicly traded companies or public REITs.

Biden initiative in ‘poor taste’

The Biden administration’s targeting of private equity was in “poor taste,” Slusher said. The panelists were quick to point out that institutional investors – public REITs and private equity – don’t really have control of the operating side of the business.

President Joe Biden specifically called out private equity-owned facilities during his State of the Union address last month.

“As Wall Street firms take over more nursing homes, quality in those homes has gone down and costs have gone up. That ends on my watch,” Biden said during his speech.

The White House also used numerous studies in its reform fact sheet to connect private equity to facility performance, warning private equity is a “dangerous model” that puts profits before people.

Among them was a National Bureau of Economic Research working paper published in February, which found that over 12 years, private equity ownership increased excess resident mortality by 10%.

A November JAMA study found that residents in private equity-acquired nursing homes were 11.1% more likely to experience a preventable emergency visit to the hospital compared to for-profit nursing homes not associated with private equity.

Among the White House’s referenced studies tying private equity to poor care quality, the federal government did not mention one published in October 2020 that found SNFS owned by PE firms had COVID-19 outcomes comparable to facilities with other ownership structures, including similar staffing levels, case counts, and COVID-19 deaths — as well as deaths from any cause.

The study examined 11,470 nursing homes in the U.S. to determine whether nursing homes with PE ownership performed better or worse during the pandemic, compared with other facilities.

An institutional investor’s role in the industry is to provide capital to individuals and companies in skilled nursing, not get involved in operations, Slusher countered. Many funding recipients often start out as administrators or trained clinicians themselves.

“The White House’s claims regarding private equity and Biden’s comments really just unfortunately show that some of the leaders in the country don’t really understand the dynamics of the industry,” Slusher said.

In an earlier webinar hosted by SNN, American Health Care Association (AHCA) President and CEO Mark Parkinson said much of the same. He pointed to a flurry of private equity activity in the space between 2000 to 2015 where a series of large transactions took place that ultimately didn’t pan out, leaving a few “pretty important legacy” operators in “tough and challenging business situations.”

“So what’s happened now is that people that don’t understand that and don’t understand what private equity really is, then conflate private equity with private capital or private investment,” Parkinson said. “If we didn’t have private investment, there’s no sector in the economy that could succeed. That’s where the money comes from.”

Schnell agreed there’s a “disconnect” on the definition of private equity in the space.

“Private equity that you see in health care is very, very small. I think it’s down to 5% ownership. It’s not that influential,” Schnell said. “I think one of their institutions, or type [of lender] that they’re talking about is probably the REITs. The REITs have been very active, but they’ve also been super supportive of their operators and they also do not operate these facilities.”

Schnell’s reference to 5% ownership comes from a March 2020 working paper published by the Center for Economic and Policy Research.

Operators should be thinking about the people, process, product and technology, Slusher added, while investors focus on providing efficient capital capable of helping operators expand their network of facilities.

“Continued attention of institutional capital and skilled nursing will do nothing but benefit the industry, as the best operators have access to the best sources of capital, and they can grow their mission,” Slusher said.

Such funding, with federal dollars from the Provider Relief Fund (PRF) expected to sunset once pandemic becomes endemic, is “fundamentally important” as this part of the post-acute care continuum continues to evolve.

Investor enthusiasm unaffected by PE target

Panelists don’t believe increased scrutiny of private equity in the industry will affect investor enthusiasm. People who are in the SNF market remain committed to that market, Schnell said.

Lenders that have committed to and understand this aspect of health care aren’t going away, she added.

“We’ve gone through cycles before. This is probably major with a pandemic, but we’ve gone through reimbursement changes, significant platform changes for reimbursement … we weathered the storm, but I think that our community really needs to speak up,” Schnell said.

If anything, the wider populace now has a better understanding of the industry as a result of the pandemic, Slusher said, a positive development to come out of a difficult situation.

Medicaid rates have finally seen a bump in some states like Florida and Kansas, with state officials recognizing that nursing homes are a fundamental setting for care delivery, he said.

State and federal funding is a “net positive,” he added, in correlation to the “stroke-of-the-pen” risk often associated with nursing homes.

The Medicare Payment Advisory Commission (MedPAC), however, suggested a 5% cut to Medicare, a worrying prospect given the industry’s workforce crisis, Schnell said.

Parkinson told SNN this week that he had concerns the proposed payment rule released by the Centers for Medicare & Medicaid Services in the coming weeks would come with cuts to Medicare funding.

“The tea leaves are indicating that we’ve got a real problem here. So we’re working as hard as we can to make the best possible case that nursing homes have never been in a worse position and this would not be a good time for a cut,” he said.

Schnell hopes “cooler heads prevail,” as operators need funding to hire and train workers.

Ownership structured by the pandemic

The new crop of owner-operators are having a harder time right now, Schnell said, because investors are very cautious coming out of the pandemic.

“I feel bad for the new operators, the guys who were in nursing, who are administrators, and then want to go out on their own and buy a handful of homes,” she added. “I’ve always been a big advocate of those guys, because they were the next generation of owner-operators.”

Slusher expects hospital systems to continue to sell their long-term care assets, further shifting facility ownership to for-profit entities.

“They’re good at surgery, but they’re not good at running a long-term care building, and they know it,” added Slusher. “They’re willing to sell their portfolios and also partner with the for-profit operators that they’re selling it to, and they think that’s a very good coordination for them.”

Earlier this month New Jersey-based hospital system Hackensack Meridian Health agreed to sell off a majority of its long-term care facilities to Complete Care Management, a family-owned and operated New Jersey-based provider.

The two entities are expected to maintain a care collaboration agreement to ensure quality care for hospital patients and residents in a clinically integrated care continuum, according to a news release announcing the deal.

Owner-operators have also been “very active” in breaking down former portfolio behemoths like Genesis HealthCare and Consulate Health Care, Slusher said, referring to a shift toward market-focused business models in the industry.

Such operators are “building an enterprise around that strategy and that capital structure … it’s a very healthy way for a building to be owned and operated,” Slusher added.

Kennett Square, Pa.-based Genesis in November announced a shift in its business model to grow vertically integrated community-based health care systems in every market, supported by centralized resources.

Consulate is also undergoing rebranding and restructuring efforts. The operator split into three individual companies in the state, Independence Living Centers, Raydiant Health Care Services and NSPIRE Healthcare, at the beginning of the year.