While many nursing home operators saw a reduction in skilled nursing beds this year – especially not-for-profit organizations in rural areas – some operators were able to buck the trend and continue to grow in the space.
Specifically, larger operators with resources to respond to market trends continued to see growth despite staffing challenges and reimbursement challenges. Ensign Group (Nasdaq: ENSG) and Eduro are two examples.
There are also nonprofits — such as Bishop Gadsen — that have bucked the trend of reducing skilled beds, investing in this area to meet market needs and modernize rehabilitation offerings.
The ability of certain operators to expand amid tough market conditions points to some successful operating approaches, and highlights which organizations have gained strength during the pandemic era. But current market conditions also suggest that some companies that rapidly expanded this year might be pressing the brakes heading into 2023.
Robust growth in 2022
Utah-based Eduro Healthcare added 20 new buildings in Texas in Q2 and Q3 of this year, although there has been a slower deal flow than last year, according to Sam Bechthold, Vice President of Investments. Eduro operates 40 buildings total across the West and the Midwest.
Early in 2022, Eduro already was emerging as a growing organization, leveraging a close relationship with capital partner CareTrust REIT (Nasdaq: CTRE) while implementing an operating approach that prioritizes local control.
In fact, Eduro’s model is similar to Ensign’s, in terms of the emphasis on local leadership, while overlaying corporate support.
Bechthold said Eduro’s strategy may be to wait to make any new transactions until Q2 of next year while Eduro stabilizes the new facilities.
“We had a pretty robust kind of third and fourth quarter with growth,” he said. “We feel like there’s a little bit of a disconnect right now between what current owners and operators think their buildings are worth, and what buildings can be financed for. Unless that changes, I think we’re happily sitting on the sidelines for now and just trying to see what the market does.”
In Texas, where Eduro operates 22 buildings, Bechthold said the company is waiting to see what happens to pandemic reimbursement inducements, which are subject to CMS revision.
“They have a $20 a day add-on from the state of Texas to their Medicaid rate that is not permanent at this point,” he said. “We’ve heard, at least from other sellers, that they’re trying to see [about] the federal rumors that the state of Texas is going to see a big jump in Medicaid rates.”
Rising interest rates will also have an impact on Eduro’s acquisition strategy.
“With increased rates, it just diminishes your ability to ‘overpay’ for buildings, so I think where the market was pretty red hot for the last couple of years, I think that seems to have cooled off,” he said.
As for Ensign, the company just this week announced the acquisition of two skilled nursing facilities in Colorado. And this follows a busy Q3, in which Ensign acquired 17 new SNFs with 12 in Texas, two in South Carolina, two in Arizona and one in Nevada, adding to the company’s growing portfolio of 269 health care operations, 26 of which also include senior living operations, across 13 states.
Indeed, all signs point to Ensign now being the single largest SNF operator in the United States, lending even more prominence to its approach of empowering and compensating local leaders.
With this model, Ensign has been able to gain tremendous scale while also driving consistently strong financial results. As other large companies have divested of communities in recent years, several have pursued a more regionally focused strategy, including Consulate and Brickyard.
As for Ensign’s growth in 2023, pricing is one factor, but the availability of strong leaders is another.
The company’s acquisition strategy is “opportunistic,” Ensign’s Chief Investment Officer Chad Keetch said in a recent earnings call, as the company keeps an eye out for the right price while ensuring the right people are available to staff turnaround properties.
Reinvesting in older properties
The reduction in SNF beds nationwide has not only been driven by operators shrinking their footprints through closing or repurposing facilities, but due to more units being converted to private rooms.
But for both large and smaller operators the need for reinvestment and modernization of older properties has in some cases led to growth in skilled nursing, according to Lisa McCracken, director of senior living research and development at Ziegler.
“You would walk in and you would not know you’re in a nursing home,” she said of not-for-profit Bishop Gadsen, which opened a health and rehabilitation center in spring and is designed to feel like a modern home.
Located on James Island in South Carolina, the community has more than 500 residents and 96 skilled nursing beds. The new building will support 64 skilled nursing, 32 memory support and 32 short-term rehabilitation residences.
“With the short-term rehab center being Medicare-certified, we want to become the area’s top choice for rehab support,” Ashley Proctor, Bishop Gadsden’s health care marketing manager, said in a press release.
McCracken said with the growing focus on worker satisfaction and retention, the operators’ focus on staff experiences helps them stay competitive in the labor market.
“Bishop Gadsen is very intentional about designing space for the staff,” she said.
Another big-picture factor that has been constraining SNF growth is the expansion of home health, with more care being delivered in this setting particularly during the pandemic.
But with the aging demographics of the United States, McCracken still sees room for skilled nursing expansion.
“I think there’s going to be a need for both,” she said.
So, providers need to consider the specific demand dynamics of their populations as they make decisions about whether to join the long list of organizations shrinking their skilled nursing offering, or buck that trend and expand.
