Is There an Investment Case for Skilled Nursing in the Intra-and Post-Pandemic World?

With all-too-frequent headlines of “nursing home deaths,” federal and state deficits, increased competition from home health agencies, and historic low occupancy levels while wage pressures continue – how will the nursing home industry emerge from the pandemic? In the latest NIC Leadership Huddle event, expert panelists, and then attendees in small groups, joined a spirited discussion on the skilled nursing sector’s short-term and long-term operational challenges and the impact on property valuations.

The event titled “Is There an Investment Case for Skilled Nursing in the Intra-and Post-Pandemic World?” began as always with expert commentary from experienced leaders in the space. In a short presentation, Colleen Blumenthal, MAI, chief operating officer/partner, HealthTrust pointed to some pre-pandemic slides indicating that demand was declining before COVID-19 hit the U.S. She also pointed out that a search in Google for “nursing home deaths” now yields over 150 million hits. She said, “It feels like there’s been a complete barrage of headlines, starting with Lifecare Center of Kirkland back in March, and it’s still continuing to this day.” She continued, “It’s a stigma that’s going to impact everyone in the nursing home sector, not just those that did not provide the standard of care that we expect.”

Blumenthal, explaining the impact of COVID-19 on the sector, pointed to CMS’s decision to limit visitations to nursing homes, among other factors. While likely saving lives, the policy negatively impacted many residents and their families, many of whom were left living in isolation for much of 2020. The policy also made it difficult for buyers and lenders to evaluate and transact on properties. Occupancy rates, which declined across the entire seniors housing and care industry, dropped more dramatically for nursing care than other sectors. Blumenthal observed that skilled nursing occupancy rates, which had been around 80% nationwide pre-pandemic, are now ranging from 55%-80%, with widely varying numbers across the fifty states.

Closing her self-described “Debbie Downer” introduction, Blumenthal pointed to pricing, which remained fairly steady, at around $100,000 per bed in 2020. That, she suggested, reflects sustained investor interest in the sector. With that, she asked panelists Wendy Simpson, chairman & CEO, LTC Properties, Inc., and Ben Reisman, senior vice president of Finance, TL Management, why they remain attracted to skilled nursing. They had similar responses. Both feel that the services provided by these businesses are needed and will continue to be supported by reliable government payers. In addition, according to Reisman, there are opportunities for investors to “stay ahead of the curve” by investing in new technologies, treatments, and other innovations.

2020 saw a pause in deal-making, as many investors focused on helping their operators weather the pandemic. This year, according to Reisman, deals are happening again. Simpson also is seeing an uptick in activity so far this year, saying, “We’re finding a relatively slow start to the year, but things are feeling a little bit better, as the spring comes along, than before.”

Both panelists pointed to difficulties finding lenders. Reisman said, “Lenders are going to look for very strong borrowers, which they always do, but will be more important now because they know, and we know that you can’t just say ‘there’s a vaccine’…to get back to pre-pandemic levels is going to take a long time.” That focus may result in fewer, and smaller, deals happening in the short term.
The deals that do get done may rest on the quality and reputation of the operator. “I think the industry is more interested in the operator now than necessarily the asset,” said Simpson. She continued, “You know, in real estate it’s ‘location, location, location,’ well, in investing it’s ‘operator, operator, operator.’” She indicated her company would like to help existing, trusted operators expand their portfolios.

Asked about the high numbers of prospective residents switching to home health care, neither panelist sees a long-term problem for skilled nursing. Rather, Reisman sees a temporary shift driven by the pandemic, followed by a return to congregate settings. Saying, “Isolation is a horrible thing,” he explained that current nursing home residents are isolated, but that, as group activities and visitation return, and people return to work and school, “that might flip.” He explained, “Even if people are reading the news and are scared today, in a few months or a couple of years, when they’re making a decision, talking to their doctor who’s recommending a nursing home as the best place for them to get better, I think a lot of that fear can easily go away, if we do a good job of communicating that.”

On the same question, Simpson pointed to skilled nursing’s investments in rehab facilities, as well as shortages of labor. She said, “Even before the pandemic, we didn’t have enough of an employee base, so if you take all of these people who are going to be able to see one or two patients a day, because of the travel between patients, and that person could see four to six people in a nursing home – I just don’t see how that math works.” She believes that home health will appeal to high income patients who can afford expensive round-the-clock nursing care at home, or strong families who can provide such care themselves. She argued, “that’s just not the United States.”

It should be noted here that in the follow-up discussion several attendees took a different view of the impact of home health care. Some small groups were unable to agree on whether the trend will be short term or have a lasting impact on long term care occupancy rates. If there was general agreement, it was on the fact that, for now, skilled nursing valuations are holding steady.

Another consideration for underwriters will be the relative health of state Medicaid systems, as well as the healthcare networks that refer patients. The panel discussed Texas, an example of a state with a rapidly growing population – but that has some of the lowest Medicaid reimbursement rates in the nation. In some smaller Texas markets hospitals have gone many months without referring rehab patients – a real concern for investors in an industry that often depends on those referrals for survival. Again, according to the panelists, they will be looking at the operator as they consider these and other investments.

Another potential source of trouble is rising insurance and liability costs driven by the pandemic. The panel suggested they will look at tort-reform laws and the litigation environment in any given state as part of their underwriting process.

The panel also discussed the trend towards reducing the numbers of beds in facilities, and the recent Ohio bed buy-back program. “Ohio may give up a thousand beds, but none of those beds were in service,” pointed out Simpson. She said, “I think there’s more value in the private room, if its available, but there’s always going to be need for at least double occupancy in properties.”

Immediately following the panel discussion, attendees hopped onto a group Zoom video meeting to discuss further. After a general discussion, attendees were divided into smaller breakout groups, and asked to address two questions: Has the pandemic inherently eroded skilled nursing values? And, where do occupancy/census levels stabilize, and how long will it take to get there? As noted above, discussion was frank and spirited – and not everyone in attendance was in agreement. However, when everyone returned to the larger group discussion and reported out their findings, the general sense was that, despite all the bad news of the past year, and despite disagreements on how deep and lasting the impact will be, there is still plenty of value in skilled nursing – and there will likely be more in coming months and years.