Traditionally, skilled nursing has been a challenging asset class for raising institutional funds. However, this paradigm may be shifting with a growing perception among institutional investors that nursing homes are a type of infrastructure, and the sector is already seeing financial gains.
According to Northwind Group’s Ran Eliasaf and Jonathan Slusher, investments in nursing homes are benefiting from the view change for the entire health care sector in general, but also due to a realization among investors that nursing homes are highly regulated – and operationally sound.
“We’ve been seeing more and more institutions refer to health care as infrastructure or infrastructure-like investments,” Eliasaf said. “As institutions look at it more as infrastructure, we see more and more institutional capital flowing into the space.”
Eliasaf said that since a significant portion of income in skilled nursing facilities stems from government programs such as Medicare and Medicaid, and SNFs provide an essential public service, these factors liken them to traditional infrastructure investments.
Moreover, long-term financing often comes from government-backed programs like the Department of Housing and Urban Development (HUD), and the transaction structure in skilled nursing often involves a triple net lease, further aligning it with infrastructure investment models.
Perception of the Industry
The recognition of skilled nursing as akin to infrastructure investments means that they are seen as less risky investments, Eliasaf said.
“I think people are realizing that it has some sort of safer reality than the perception,” he said. “The perception was [that skilled nursing investments are] higher risk, and the market is starting to realize that it’s highly regulated and it’s highly operational.”
Helping the positive perception is greater financial backing by the government in some states, which are beginning to issue more supportive measures, including increasing Medicaid rates, Eliasaf said.
“Operators drive the biggest part of the success in this asset class, the right state and being with the right operator [matters],” he said.
Meanwhile, Slusher said it’s extremely important for banks and investors to provide efficient capital so those operators can expand their mission, provide care, and invest in technologies.
“In order for an asset or enterprise to operate and provide very good care and expand their mission, they have to acquire buildings and run those buildings, which is capital-intensive,” he said.
Slusher also said that despite the sector’s historically perceived higher risk due to stringent regulations and operational complexities, investors are increasingly acknowledging its long-term viability.
Demographic shifts and supportive regulatory measures, particularly evidenced in states like Ohio and Florida, are bolstering investor confidence, which has also helped with the increase in Medicaid rates and success with lobbying for higher rates.
Slusher said these Medicaid rate increases enable operators to allocate resources towards various projects such as building infrastructure, technology integration, and enhancing patient care standards. The reinvestment facilitated by these rate hikes not only bolsters operational efficiencies but also emphasizes a commitment to optimizing patient outcomes, he said.
“It was really about people understanding that skilled nursing is much better than they understood it before, [understood] the purpose of where it sits within the health care supply chain,” Slusher said. “Right now, when someone goes to the hospital, they go to skilled nursing. The traditional thought was that skilled nursing is very much like assisted living.”
Shifting investor attitudes
Institutional investors have been prone to blurring the critical distinction between skilled nursing and assisted living. While skilled nursing primarily caters to individuals requiring ongoing medical attention following hospitalization, assisted living places greater emphasis on lifestyle choices and consumer preferences.
“Many investors, including institutional investors, often view them as being in the same category,” he said. “They see it as involving an elderly population living in facilities and receiving care. However, it’s important to note that while a person going to a facility absolutely needs to be there—having an absolute health care requirement, with the expectation of improvement and eventual return home—seniors housing is quite different.”
Since seniors housing is a private-pay model driven by choice and consumer preferences, it’s critical for supporting the lifestyle of seniors but isn’t essential for health care in the same way skilled nursing is, he said.
“Skilled nursing provides ongoing care for individuals discharged from hospitals who still require long-term care that hospitals no longer provide,” he said.
And the investor confusion isn’t helped by the negative tenor of the political debate around the industry.
Slusher said that while there has been more discussion since Joe Biden took office about skilled nursing, the tone and conversation around it has been misguided.
“Some of Biden’s comments were focused on Wall Street, and that’s my point of misguidance,” he said. “Capital flow is good for the industry – it’s necessary. Otherwise, the best operators won’t have access to capital to ensure they can repair and renovate buildings and provide good patient care when the prior operator may not have been doing that in the past.”
Skilled nursing is absolutely critical and misperceptions around it aren’t helpful, Slusher said.
“During Covid, skilled nursing facilities were taking care of some of the most complex patients so hospitals could provide ventilator care and address more acute needs of patients without nursing facilities, resulting in a full hospital boom,” he said. “It’s fundamental that when someone has an absolute need for care, a skilled nursing facility is critical. That’s why states and the federal government provide significant support for it.”
