The skilled nursing sector has endured whiplash since the early days of the pandemic, with federal agencies at first supporting the sector only to call for vast reform several years later.
Such a cycle is one owners and investors have seen before, and one not likely to break any time soon – but that doesn’t make the Biden administration’s current stance less concerning.
Specifically, the administration’s seeming animosity toward for-profit health care entities is troubling, according to Wendy Simpson, CEO of Westlake Village, Calif.-based LTC Properties REIT (NYSE: LTC).
In his State of the Union address in January 2022, President Biden singled out “Wall Street firms” that “take over” nursing homes, at which point quality declines as costs rise; he pledged this would “end on my watch.” But at the same time that this rhetoric is ramping up, along with pledges to increase transparency about ownership and crack down on bad actors, Medicare reimbursement rates remain under pressure. Owners and operators are expected to do more with less reimbursement, even while being villainized as being too profit-minded.
“Every time they cut costs or add more regulation, they expect that to be absorbed within reimbursement,” Simpson said. “Where does it come out? It comes out of the margin.”
Simpson spoke about the future of investment in the skilled nursing sector at Skilled Nursing News’ RETHINK event, alongside Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA) and Jonathan Slusher, partner and head of senior living and healthcare for the Northwind Group.
Matros sees the cycle too, with the CARES Act treating the SNF sector like a protected asset class for a while – but, the sector will always have that scrutiny, he said. And he struck an optimistic tone.
“We’re really good as an industry at looking for silver linings, because we get banged around so much, right? There are those silver linings that are there now that we haven’t seen in the past. That gives me some level of optimism,” noted Matros.
Silver linings and shifting public perspective
An increase in the older adult demographic combined with a decline in available beds, Matros added, is creating access problems which will ultimately prove to be a positive in terms of policy and dialogue moving forward.
The sector is already seeing policy changes in response to access issues in the form of Medicaid increases across multiple states.
“Those silver linings … they’re not at the federal level and they’re not in the press. Every time there’s a silver lining, we should all embrace it and say thank you, but the headlines are always negative. I don’t think that part’s ever going to change,” added Simpson.
What has to happen first is ensuring the general consumer knows more about the skilled nursing industry, Slusher said, especially as technology starts to become more prevalent in buildings.
“People need to understand where they’re sending their loved ones much better than they did in the past. Each building has a very unique purpose and that’s just really not known by the general public today,” added Slusher.
Simpson echoed Slusher’s thoughts on making long-term care education more widely available – too many people are making decisions and don’t know the SNF product and haven’t seen what a skilled nursing facility is, she said.
Private capital, REITs and the value-add stage
Despite continuing animosity from regulatory bodies, Slusher believes private capital and REITs are needed to help operators – sometimes indirectly – solve staffing and infrastructure problems.
Much like skilled nursing is a crucial part of the care continuum, private equity and REITs will always be needed by operators in the sector.
The nursing home market overall is currently in a “value-add stage,” he said, which is where private capital usually comes in while assets stabilize, in the form of mezzanine loans.
“In a value-added stage of an asset, an operator needs to get control of the real estate and the operations,” said Slusher. “The value of the real estate in skilled nursing is obviously driven by the operating cash flow of the facility. For an operator to really take a situation where an asset is lower occupancy, difficult environment and then drive to the stabilization point, they need access to the value creation of the real estate … private capital helps them achieve that.”
Once assets stabilize, public REITs will be increasingly active, he said – it’s important for both to exist to help operators during different market stages.
REITs have overall become more active as a capital partner than they were a decade ago, Matros added. Instead of just putting a lease in place, REITs are helpful on the debt side as well, and investing in technology to modernize the skilled nursing sector.
“We’ll invest in those products and help the operators out financially with installation, startup costs … that’s part of how I see REITs [changing],” said Matros.
Ancillaries and added scrutiny
Matros believes ancillary businesses are the “right approach” to diversifying the SNF business model, despite further financial and ownership scrutiny piled on by policymakers and watchdogs.
For instance, the HHS Office of Inspector General recently announced that it will more closely examine “related party” structures and costs.
Having pharmacy, radiology, hospice and in-house staffing agencies make “economic sense” as an operator, Matros argued. While he’s in favor of more transparency in ownership and finances, he said it shouldn’t be at the expense of how businesses should grow.
The market already self-regulates any means of hiding true profits in ancillary businesses, added Slusher.
When landlords structure leases, select joint venture partners, or perform due diligence for any type of lending, they focus on ancillary businesses to make sure there are no odd transactions going on, he said.
“Maybe there’s a few bad actors, but most operators understand the value of controlling each of those ancillaries and us as investors, we like it,” noted Slusher.
Thinking differently
Other than a need for more public education on the skilled nursing industry, Simpson said she’d like to see more of a separation between long-term care facilities and short-term rehabilitation centers.
That could look like a repurposing of older buildings for long-term residents with less acute needs, she said.
“There should be a split between the people who are going to be there permanently, as opposed to the people who are going to be moved back to their general life,” said Simpson.
Operators and capital providers like LTC need to rethink collaboration with agencies like CMS as well, engage with state and federal entities in any way they can to get policy makers to better understand the industry.
Matros said facilities need to reevaluate infrastructure as well, with the push for private rooms and the small home model.
“We all have a lot of old facilities with a lot of three bedrooms; it’s just not going to fly with the generation that’s coming in. Our operators that have semi-private and private rooms, environments that are less traditional, we think that’s really where the future is,” added Matros.
Ignite Medical Resorts, a tenant both for Sabra and LTC, has been known for taking traditional nursing homes and gutting them to allow more common space, dining areas and therapy rooms – in addition to private and semi-private rooms.
Good capital providers, he said, will be crucial in future to helping operators achieve such transitions and modernize facilities.
Companies featured in this article:
Ignite Medical Resorts, LTC Properties, Northwind Group, Sabra Health Care REIT
