In the wake of the pandemic, nursing home operators have needed to continually assess and shift their strategies as the industry contends with workforce shortages and regulatory headwinds.
North American Health Services is one such provider, and is now moving forward with a smaller portfolio and intentions to build up its workforce, leveraging the fact that it is an employee-owned company.
Earlier this fall, 24 skilled nursing facilities formerly operated by North American transitioned to a new operator, Ensign Corp. Headquartered in Mission Viejo, California, North American now operates 12 facilities across the West Coast.
North American’s primary goal is to achieve operational effectiveness for those 12 facilities, which in aggregate perform at high levels, CEO Michael Moore told Skilled Nursing News.
“We have really competent leaders in each one of those facilities,” he said. “Obviously, there’s lots of opportunity to be continually better. And I think with that, one of the things that we’re going to do is continue to find ways to be innovative.”
The focus moving forward will be on compliance and operational efficiency, through redirecting financial investment to find technically advanced ways to monitor vital signs and ensure comfortable living spaces for residents.
Evaluating triple-net leases
The challenges of COVID-19 raised questions throughout the skilled nursing sector about the viability of having facilities in triple-net leases. As operators faced mounting costs and declining census, many landlords had to extend rent deferrals or consider other alternatives, including transitioning buildings to different operators or selling them.
Unsurprisingly, after the transfer of the 24 facilities, which were in leases with Sabra Health Care REIT (Nasdaq: SBRA), executives at North American continue to review the effectiveness of triple-net leases for facilities. In a typical scenario, triple-net leases can be successful for operators as long as mutually beneficial parameters that reduce the margin for error remain intact.
“In theory, the benefit of a triple net lease for the landlord is that the tenant assumes responsibility for property expenses, like property taxes, insurance, and building maintenance,” Moore said. “But the exchange is for lower rents … than what the market may currently demand.”
However, for smaller companies without the capital structure to absorb unexpected expenses, leases could pose serious concerns for long-term sustainability.
“I don’t think that our industry has ever really experienced an operating headwind that is as devastating as COVID-19,” Moore said. “I think it’s safe to say that typical operational challenges don’t pose the same threat level of a global pandemic.”
All 12 facilities are owned by separate, private owners.
North American’s employee stock ownership plan
Severe labor headwinds have also struck the skilled nursing sector, even as COVID-19 has become a more manageable condition. Operators are considering a wide range of strategies to boost recruitment and retention, including tying employee compensation more directly to company performance. For example, Canada-based Sienna Senior Living in 2021 launched a $2.3 million employee stock ownership plan.
North American is also a pacesetter in such efforts.
In 2018, the company transitioned into an employee stock ownership plan (ESOP).
Employees who are 21 years of age or older and work at least 1,000 hours in the employment year are eligible to participate after their first year of employment. Employees are fully vested at six years of service.
“This really helps to promote longevity, and, and in a way also rewards employees for their service,” Moore said. “The nice thing is that the values of those shares are directly connected to company performance. So if the company benefits, so do the employees.”
The ESOP plan only requires time served, so there is no monetary contribution made by an employee like there would be in a 401K plan.
“All contributions in terms of money invested into the ESOP are employer provided,” Moore said. The company currently has approximately 4,700 employees.
“The key to successful ESOP structure is really the employees understanding what the ESOP is,” Moore said. “Each employee, no matter their title or position, contributes by increasing revenue, decreasing expenses, and just essentially being good operators in their specific sphere of responsibility.”
Moore said that employees have the greatest impact on company performance and are in the best position to positively impact their own share value if they do well.
“The biggest challenge, really, is that if the company does not perform well, then the share values are impacted,” he said. “But, the response to that is that it is also the greatest benefit. If the company does well, then the ESOP does well and the valuation is positively impacted by that.”
Labor is a multifaceted challenge for skilled nursing operators who are still struggling to replace a core of 200,000 and 400,000 employees who left the industry in 2020. Moore said he is doubling down on communicating to potential employees that North American is an employee-centric company by focusing on offering competitive wages.
“The market will determine those price points,” he said. “But really, money only drives recruitment. It’s company culture that will drive retention. If you pay well, but your culture doesn’t support your employees who are driving your business, they’re not going to stay around.”
While executives at North American can’t control inflationary impacts, he said, “We can control making sure that we continue to provide competitive wages as well as really trying to be the best place to work.”
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