REITs Owned 12% of US Skilled Nursing Assets in 2021, Ownership Trends Changing

Real estate investment trusts (REITs) owned about 12% of all skilled nursing assets as of 2021, equating to about 1,870 facilities.

That’s according to a research letter published in JAMA Health. Researchers also examined REIT ownership trends of hospitals and other health care properties.

The data comes at a time when the Biden administration and Centers for Medicare & Medicaid Services (CMS) are pushing for greater transparency around nursing home ownership, and increased scrutiny around REIT and private equity ownership in particular.

CMS mid-April released groundbreaking data on nursing home ownership in an effort to bring more transparency to health care and inform future policy decisions, according to Administrator Chiquita Brooks-LaSure.

Mergers, acquisitions, consolidations and changes of ownership for nursing homes enrolled in Medicare are listed on the CMS website; data goes back to 2016.

REIT ownership of skilled nursing is important to study given the lack of research in this area, and the landscape is shifting, Tamar Katz, co-author of the research letter, told Skilled Nursing News.

“For a while there has been this general trend toward national consolidation. You saw that with HCR Manorcare, with Genesis, really these national conglomerates have nursing home facilities – they were perfectly aligned to be financed by REITs,” said Katz. “But it’s a really complicated business to run nationally. Today, the industry trend seems to be more toward regional ownership, which is much less consistent with or conducive to refinancing.”

Katz, one of six authors listed on the research letter, was a research affiliate at the Center for Economic and Policy Research in Washington, D.C. and former investment banking analyst for Citi.

REITs and regional portfolios

Pure play REITs like Omega Healthcare (NYSE: OHI) will “adapt with the times,” Katz said, as the sector continues to see smaller, more regional portfolios acquired and sold.

More diversified REITs – Katz uses Welltower (NYSE: WELL) as a prime example – won’t be investing as consistently in SNFs because prospective portfolios are minor compared to their overall balance sheet.

In Q1 alone, Welltower divested seven more SNF assets, bringing its sector exit to $525 million in the past year.

Sabra Health Care REIT (Nasdaq: SBRA) announced earlier this month the company would be diversifying its portfolio by paring down SNF exposure. The REIT’s growth strategy would leave its SNF assets at an “all-time low.”

SNF financing structures will play a role in future REIT involvement too, Katz said. Traditionally, facilities are tied to 15-year triple net leases; Katz wonders if the returns REITs would get from those leases would be sufficient to keep up with rising interest rates.

“Are people going to be interested in those investments? It does pose a real challenge to the triple net business model that skilled nursing operators tend to run on, in a way that we haven’t really seen since before the Great Recession,” she added.

Given these changes, the federal government’s scrutiny of REITs might be belated, Katz said.

The “financialization” of the SNF industry has been happening since the mid-1990s while REITs have only very recently started pouring capital into acute care, she added, mainly because it’s an even more complicated regulatory environment than the SNF sector.

“There’s finally people up to [President Biden’s] level speaking about these conditions and really making sure that federal policy is oriented at preventing them,” added Katz, speaking of concerns over quality at some REIT- or PE-owned facilities. “I could see that happening with acute care hospitals in another five to 10 years.”

Analysts have said much the same thing about the lag between government action and investment among large private equity firms.

Stifel analyst Tao Qiu told Skilled Nursing News in a previous interview he hasn’t seen any major deals involving such players “for quite some time.”

While the private equity market got involved in skilled nursing between 2005 and 2015 – and those efforts largely didn’t work out – the very large firms have, for the most part, exited the space. One notable example is Carlyle Group’s sale of the HCR ManorCare portfolio to a joint venture of nonprofit health system ProMedica and Welltower.

‘Understudied’ REITs and government scrutiny

The authors consider REITs an “understudied force” in the health care continuum; REITs owned more than $3.5 trillion in U.S. assets last year, including the health sector.

Coinciding with the Biden administration’s efforts to increase scrutiny of private equity and REIT involvement in the space, the JAMA authors said there is “concern” that REIT ownership of SNFs may divert funds away from clinical and operational investments in order to generate high returns for investors instead.

Capital from a sale-leaseback could be used for facility investments, but such funds are often diverted to a holding company and distributed to investors, according to the research letter.

To the extent that REITs and private equity have used SNFs as a source of profit for 25-plus years, Katz said the Biden administration’s focus on REIT scrutiny is “long overdue and a completely appropriate measure.”

Yet, there is no research quantifying the association of REITs with quality of care, cost to patients or the financial security of health care operators, according to the research letter.

JAMA authors urged policy makers and facility operators to make sure the REIT business model lines up with long-term priorities in health care delivery.