Why Private Owner/Operators May Be Riskier for Nursing Homes than REITs, Private Equity

As the White House blasts the role private equity and real estate investment trusts (REITs) play in the nursing home space, some industry insiders believe that the administration is confused about how ownership actually works and where problems truly lie.

David Reis, CEO of Senior Care Development, described “three players at the table,” and said that REITs and PE firms have more incentives to ensure strong operations than private owner/operators. Senior Care Development is a nationwide developer and operator with a focus on continuing care retirement communities.

“The REITs and the private equity guys, they want to improve the asset because they want to sell the real estate and get out of it,” Reis told Skilled Nursing News. “If the operator is doing a good job, that equates to value to the lease. Where that doesn’t seem to be the same is for owner/operators.”


As the White House plans to increase accountability for chain owners of substandard facilities, Reis thinks it’s the private owner/operators that have the least transparency.

“There used to just be pure operators, now there’s a big mix of what I’ll call owner/operators and that’s where I think there’s a lack of transparency,” he said. “When those owner/operators can access under 3% HUD debt and take out as much money as they can non-recourse, that leads to a lot of dollars that I think should be spent in the community leaving the community.”

Furthermore, REITs and private equity — while they remain active — have been backing off skilled nursing investment in recent years.


Welltower (NYSE: WELL) and Ventas (NYSE: VTR) have been steering clear of skilled nursing. Ventas divested of SNFs as its operating partner Kindred Healthcare exited the space in 2017. Welltower now has just 3.6% of its overall portfolio in the SNF and post-acute space, according to Stifel.

And large private equity firms also have not been executing blockbuster SNF investments “for quite some time,” Stifel Analyst Qiu Tao told SNN.

Similarly, private equity buyers accounted for just 4% of the quarter’s skilled nursing deal activity in the first quarter of 2022, according to acquisition data released by LevinPro LTC earlier this month.

Both Reis and Josh Sturm, managing director of healthcare finance at Dwight Mortgage Trust, indicated they had seen REITs own fewer nursing homes than they did five years ago. 

Private owner/operators are filling the gap.

“I think we’ve seen a decrease in REIT ownership. I think it’s starting to move towards private ownership where you have small networks of operators and owners that are really focused in their markets,” Sturm told SNN.

However, despite some of the current operational challenges, skilled nursing assets remain a valuable proposition for many buyers.

“The opportunity that investors are seeing is that it is a needed care, it’s not something that you can subsidize with home care, definitely not from an affordability standpoint, so we’ve seen the demand continue,” James Graber, national practice leader of Seniors Housing & Healthcare for CBRE’s Valuation & Advisory Services, told SNN. “

Private owner/operators driving transactions

While the skilled nursing and seniors housing transactions volume has come down a bit after a busy end of 2021, it remains an active market.

Transaction volume reached $4.7 billion in the entire nursing care segment in 2021, with $4.2 billion attributed to private buyers, which include private REITs, single owners and partnership – data released by the data service affiliated with the National Investment Center for Seniors Housing & Care (NIC) showed.

The volume of deals executed by public buyers, defined as any publicly traded company, has fallen significantly in the last 10 years, from 2011 to 2021.

With occupancy still at 76% for the industry overall and SNF operating margin predicted to be -4.8% for 2022, some have questioned why SNF prices rose the way they did in 2021. Reis thinks the private owner/operators are responsible, fueled by Department of Housing and Urban Development (HUD) funding.

And HUD activity has indeed been robust.

Lenders in the skilled nursing space utilized HUD funding throughout 2021, with Jason Smeck, seniors housing and health care production director at Lument, telling SNN that some owners refinanced a few times over the course of Covid due to plunging rates.

Capital Funding Group closed a record-setting number of deals throughout the year, including a $660 million bridge-to-HUD loan, representing the single largest financing deal CFG has executed in 10 years.

“What I think the government should focus on is why they’re letting people borrow HUD debt at under 3% for 30 years non-recourse. Those low interest rates are fueling very large purchase prices,” Reis said.

Reis thinks that letting owner/operators borrow a lot of debt with low cost capital could be the “road to disaster.”

“I think if HUD loans for nursing homes were curtailed, you’d see per bed drop and that’s probably not a bad thing because people do tend to over leverage building when they’re borrowing money on a non-recourse basis,” he added.

Pros and cons to real estate ownership over lease structure

While the Biden administration has criticized private equity and REITs, some within the industry have pointed out that lumping together these two very distinct types of companies is creating confusion — and is a sign that federal policymakers themselves might be confused.

Illinois Rep. Bobby Rush recently penned a letter to the chair of the House Oversight and Investigations Committee, calling on Congress to “prohibit REITs from operating nursing homes.”

In fact, REITs typically own nursing homes in triple-net lease structures in which a separate operating company manages the facilities.

“REITs in fact don’t have a lot to say about what happens operationally,” Sabra Health Care REIT (Nasdaq: SBRA) CEO Rick Matros recently told SNN. “That’s not the REIT model.”

This structure is not flawless, with one concern being steep rent escalators that limit operators’ ability to invest in other areas; but the federal government so far has not approached the issue with this level of nuance.

Furthermore, the White House has called for increased transparency about ownership structures. Publicly traded REITs are arguably among the most transparent owners, governed by rules regarding routine public disclosures such as quarterly earnings.

Ephraim Lahasky might be one example of a private owner/operator that has been highly acquisitive but opaque. When MarketWatch recently profiled Lahasky — including concerns over quality at facilities in his portfolio — the publication noted that he has “largely avoided reporters for years.”

Reis thinks that when the private owner is also the operator is where things have a chance to get a lot “murkier”, as some appear to be more determined to expand their third-party ancillary businesses than provide quality care.

“I would say that the hardest balance sheets and the hardest financials to read are those owned by owner/operators who also control ancillary businesses to their own [nursing] homes,” he said.

While Reis sees REITs and private equity ownership as a path to better care, not everyone agrees.

“There’s pros and cons to both structures but I think … there’s more incentive and upside for a private homeowner under that structure than for a REIT long term,” Sturm said.

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