The gap between current skilled nursing occupancy and pre-pandemic occupancy is “99%” due to lack of staff, and addressing the sector’s workforce crisis is clearly the top priority for 2023.
That’s according to Phil Fogg Jr., president and CEO of Marquis Companies and chairman of the American Health Care Association. Milwaukie, Oregon-based Marquis owns and operates skilled nursing, assisted living and independent living campuses in Oregon, California and Nevada.
“I don’t believe it’s the supply of residents. It’s purely the ability to staff and be able to take those residents. I believe that the recovery of occupancy is going to be dependent on workforce,” he said. If the country experiences a recession, noted Fogg, the industry may be able to recapture workforce numbers.
And he firmly rejected the notion that post-acute care demand has waned.
“People that try to draw insights into there being a fundamental shift where people don’t want post-acute care any longer, it just isn’t the case,” said Fogg.
Fogg also is concerned about how an unfriendly regulatory environment is creating further drag on the sector, saying that the Biden administration has created additional headwinds.
Fogg, along with Bill Kauffman, senior principal for senior housing and care at the National Investment Center for Seniors Housing & Care (NIC), and Brendan Healy, senior managing director with VIUM Capital, provided insight as for the new year during Skilled Nursing News’ 2023 outlook webinar.
In addition to operational and regulatory matters, they weighed in on the finance and investment outlook. They anticipate a slow start to the year, with activity potentially picking up further in the future. And they expressed shared confusion over what has been driving some very high prices being paid for skilled nursing assets.
Staffing mandate will set back occupancy gains
VIUM’s Healy agreed with Fogg that demand isn’t the issue holding back occupancy. It’s clear a federal staffing minimum ratio would be “catastrophic” for the industry, Healy said, adding that it would set back modest occupancy gains for the sector in the last couple years.
“That’s going to be really important to advocate for in the coming months,” Healy advised.
A silver lining from the debate on the proposed staffing minimum – it has forced CMS to talk about Medicaid adequacy among states, Fogg said. There could be closer scrutiny down the line, he said, with CMS holding states responsible to make sure costs are being covered with more timely Medicaid adjustments.
Overall, Fogg is seeing an improvement in staffing; open positions are being fulfilled for entry level workers. However, he’s still concerned about recruiting and retaining licensed nurses, especially due to a large percentage of nurses’ feeling overwhelmed even prior to Covid, resulting in a longstanding shortage.
“The burnout of licensed nurses basically lit a match to the issue,” said Fogg.
Moreover, operators face rising costs from staffing agencies, Fogg said. Implementation of a federal staffing mandate, with nonexistent workforce capacity, will enable agencies to take further advantage and “extort” providers for unreasonable rates, driving up the cost of care.
The typical staffing agency charges 15% to 20% over the prevailing wage for positions, Fogg said. Operators continue to see premiums between 40% and 60% more for nursing home positions, especially on the clinical side.
“We’ve got so many provisions around our support [of staffing minimum ratios],” noted Fogg. “We’re not necessarily opposed to staffing increases, but they’ve got to be funded. There’s got to be workforce supply. There needs to be ways to enable waivers if there’s not workforce supply – there’s a litany of things. It’s a very complex issue.”
Occupancy has dropped from 86.1% pre-pandemic to 79.6% as of the fourth financial quarter of 2022, according to NIC data.
Some industry leaders tie exacerbated occupancy and staffing issues to the current administration’s policies and proposals, with punitive measures and little financial support making recovery so much harder.
“I just can’t reinforce enough how much more challenging the Biden administration has made our recovery, not only with Covid, but the workforce. They are a headwind to us,” said Fogg.
Marquis saw a negative 6% margin in 2021, Fogg said, but he is optimistic that 2022 analyses will be better.
“We could have used other Provider Relief Funds (PRF) with those negative margins,” said Fogg. “There was absolutely no discussion of that, only discussions about further regulatory pressure during a time when the profession doesn’t need it.”
Kauffman agreed that there needs to be improvement in public-private partnerships supporting the industry, saying that “it has to happen.”
Kauffman was surprised there wasn’t more of a push to promote and support the sector, with a large number of baby boomers due to need such services in the later part of the decade.
“There’s going to be many adults in that cohort that are just too sick, too frail and simply unable to stay in their home, wherever home is,” said Kauffman. “I think that does set up a positive demand factor when you talk about costs, because many cannot afford private pay, assisted living.”
Dealmaking to slow until Medicaid rebasing kicks in
In terms of skilled nursing transaction volume, Healy said he anticipates deals to generally decline this year, pointing to higher costs of care, market inflation and climbing interest rates as well as cash flow.
High inflation is still here, he said, and the Fed is likely to raise interest rates one or two more times. Just one day after his comments, the Fed hiked the federal funds rate by 0.25%.
Operators looking for financing in 2023 will find it much more challenging on the equity side, Healy noted, again with inflation, high labor costs and unfavorable short-term rates creating less than stellar returns.
On the debt side, Healy has seen a lot of reluctance in the fourth quarter of 2022 from financing sources, also driven by rising interest rates.
Healy expects inflation to ease in the second half of the year. Quick occupancy recovery isn’t likely to happen given the staffing crisis, he said, creating cash flow concerns from the debt service perspective too.
Medicaid rebasing serves as a silver lining into this year, he noted, but for many, it hasn’t happened yet.
“That cash flow is not going to be coming into a lot of states until probably the second half of the year,” said Healy. “The math isn’t there for the buyers and it’s not there for the sellers, either, because they know they’re not going to get the values they want.”
Depending on the timing of Medicaid rebasing, deals may tick up later in the year, but still be down compared to last year. Private buyers will continue to dominate M&A this year, a trend carried over from 2022, Healy said.
Private buyers dominated the transaction market in 2022, Kauffman noted, representing 79% of closed transactions; this group represented 52% and 57% of transactions in 2021 and 2020, respectively.
“I expect regional owner-operators looking for strategic acquisition opportunities, driven by enhancing scale or blocking out competition – maybe a couple of facilities within a referral hospital network they already know, or trying to create a pocket of operations within a state or region that they already operate in; I imagine that’s going to be the majority of it,” said Healy.
Kauffman agreed there will likely be more transactions in the sector in the second half of the year, with a possibly higher number of distressed properties impacting deal volume in the coming months.
“I think that is certainly possible as floating rate debt causes more issues for some owner-operators, especially if occupancy doesn’t rebound more quickly,” said Kauffman.
Public buyers may get more aggressive as distressed properties come to market, potentially able to close faster with existing credit lines, Kauffman said.
Meanwhile, Fogg said a lot of transactions in 2022 were being made by operators with liquidity, or those that had loans maturing and either couldn’t refinance or were out of compliance.
“[Sellers] were looking for a lifeline, or they were just tired,” said Fogg. “A lot of friends were done after the stresses of Covid, and there was private money out there that would pay them a value that was more than fair, or indicative of the current [earnings before interest, taxes, depreciation, and amortization] EBITDA of the building. Getting out made sense.”
Marquis owns virtually all of its real estate, he said. The operator is very conservative and disciplined in creating value and will likely buy properties with a more conservative margin of error than other providers or investors.
Fogg said Marquis likely won’t go into the acquisition space this year, unless the market reprices, driven by interest rates, or if the transaction has sustainable assets.
Panelists were overall puzzled by high valuations for nursing home properties in the past year. Pricing “defies logic,” Fogg noted, with just a few variables to determine valuation, including decent EDITDA and capitalization rates.
Nursing care ended the fourth quarter of 2022 at $97,700 price per bed, representing an increase of 9.5% from one year ago, according to NIC data.
“Are they seeing something that we’re not seeing? I think illogical acquisitions are going to decline or slow dramatically this year. I think logic will start coming back,” said Fogg.
Still, Healy believes premium transactions will continue to command higher prices, citing liquidity out there and regional buyers looking to scale up.
“Good assets and good markets are going to get value premiums, but I do think overall it’s going to be flat or down from last year,” said Healy.
Companies featured in this article:
American Health Care Association, Marquis Companies, NIC, VIUM Capital
