Why Biden’s Crackdown on Private Equity, REITs Won’t Discourage Skilled Nursing Investments

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While the Biden administration is apparently trying to push private equity out of the skilled nursing sector – a clear definition of what is meant by private equity ownership is needed – as there seems to be confusion and growing frustration over how blaming such a small fraction of the industry as a whole is going to solve some of the challenges it currently faces.

The skilled nursing market has been one of the most confusing throughout the pandemic with increased activity and record deals despite tighter margins and slower occupancy recovery.

Of the $3.7 billion spent on skilled nursing transactions in 2021, $3.3 billion, or about 89%, were considered private buyers, according to data released by the National affiliate data service. Investment Center for Seniors Housing & Care (NIC).

The share held by what the administration defines as private equity continues to be debated.

Federal agencies will examine the role of private equity, real estate investment trusts (REITs) and other investments in the nursing home sector, as outlined in the White House nursing home reform proposals, and this information will be used to expose corporations not serving the best interests of their residents.

Biden specifically called out Wall Street corporations during his State of the Union address earlier this month, saying they were taking over nursing homes, leading to lower quality of care and a increased costs.

While Biden views the involvement of private equity and REITs in the skilled nursing space as “dangerous,” some top health care REITs believe his efforts may be misguided and ill-informed.

Investment by private equity firms in healthcare has inflated from $5 billion in 2000 to more than $100 billion in 2018, but only about 11% of nursing facilities nationwide are owned by private equity firms, according to MedPAC.

Alan Schabes, a partner at Benesch, Friedlander, Coplan & Aronoff LLP, recently told Skilled Nursing News that the private equity funds he represents aren’t interested in the operational side of nursing homes.

With for-profit facilities accounting for 71% of providers, according to MedPAC, some wonder who exactly the White House is talking about in its fact sheet outlining the nursing home reform proposal.

“Clearly [the administration] does not understand the difference between private equity, private equity and REITs. Years ago it was private equity that did the ManorCare deal and the Genesis deal, but there’s actually almost no private equity in skilled nursing anymore,” said Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), to SNN. “There’s private capital, individual groups that have raised their own money to buy retirement homes.”

Matros argued that since most REITs are public, “there is an added layer of transparency”, so it is “foolish” to put them in the same category with private equity or private equity.

He added that most REIT-SNF partnerships are under triple net leases, so there is “little interference” with operators.

“REITs don’t actually have much say in what’s going on operationally,” he said. “It’s not the REIT model.”

While Biden’s sweeping reform may have some of the most active REITs in the skilled nursing space, leaders in the space don’t expect him to prompt an immediate exit — or even stop investing in space – at least for now. to be.

REITs take a “wait and see” approach

Summit Healthcare REIT, recently acquired eight SNFs in a $130 million deal in Georgia at the end of 2021, as Elizabeth Pagliarini, Summit Healthcare REIT COO and CFO, remains “excited” about the acquisition and the future growth of the skilled nursing business.

When Summit started, it was about 50/50 qualified and supported housing. Now that’s grown to about 80/20 qualified and assisted people with a portfolio spanning 14 states, she said.

Although Pagliarini admitted she was a little surprised when she first read the proposal, she thinks it will take some time to sort things out.

“We don’t really know what that’s going to mean, but we’re going to have conversations with all of our carriers,” she told SNN. “We’re definitely not jumping up and down, but I think it will take some time to figure out exactly how this is going to affect the industry.”

Pagliarini would be lying if she said she had no concerns going forward, but she doesn’t expect that to change Summit’s long-term plans just yet, she told SNN.

“Are we reactionary and are we selling our portfolio? No, absolutely not, skilled nursing is too important a service in our country,” she said. “But are we maybe taking a step back and slowing down and waiting, taking a kind of wait-and-see approach right now? This is our position until there is more clarity on what this is going to mean.

REITs have been involved in some of the largest skilled nursing transactions in the past year, including Strawberry Fields REIT’s $80 million acquisition of six SNFs in Kentucky and Tennessee.

Not long ago, the Ensign Group, one of the most active operators in the SNF sector, announced that it would launch an in-house REIT as it continues to be aggressive on acquisitions.

Matros doesn’t see Sabra moving away from skilled nursing in light of reform.

“It just seals our support for the industry and fights against reforms that we think are reckless, unfair and have isolated us,” he said.

He added that Sabra will seek to have more “balance” in its portfolio.

“Our skilled nurse footprint is now just over 60% of our portfolio, I expect that to decline, but that’s just because we have interest in other asset classes as well” , said Matros.

What the White House defines as private equity remains unclear

Although there have been several studies showing substandard care in privately owned nursing homes, the White House called for further investigation into REIT and chain ownership, and called on the Congress to extend the enforcement authority of the Centers for Medicare & Medicaid Services to the property level.

Part of this expanded authority will allow CMS to impose enforcement actions on facility owners and operators even after a facility has closed, as well as on owners or operators who provide “persistent substandard care to standards and non-conforming” in some establishments, while possessing others.

Matros thinks the way REITs have “stepped up” during the pandemic demonstrates their commitment to the sector, and he doesn’t think it’s fair to lump them together with other types of ownership.

He pointed to the number of rent deferrals that were granted in the fourth quarter of 2021 by healthcare REITs such as Omega Healthcare Investors (NYSE: OHI), which backed operators like Guardian, Gulf Coast and Agemo after they were unable to meet their rental obligations for the end of 2021.

“Making these statements and pushing these initiatives, without a clear understanding of the differences here and which has really intensified during the pandemic… It’s frustrating,” Matros said. “When it comes to REITs, all everyone in administration should have to look at is despite the negative impact on them in terms of share prices, cost of capital, each of our peers has intensified and delivered, and continues to provide rent relief. , so they have room to recover.

“I think the REITs that are in the SNFs – the Omegas, LTCs, NHIs – we are engaged in this space,” he added.

David Sedgwick, CEO of CareTrust REIT (Nasdaq: CTRE), echoed those sentiments in a recent conversation with SNN earlier this month, calling the lease structure for REITs and nursing homes operating under an “impenetrable wall” between the two.

“The bank’s control over the operations is zero, the control of a REIT is zero – it’s just a way to finance real estate. So if you have a problem with a REIT, you have a problem with an operator who owns the building themselves with a mortgage,” he said.

Pagliarini agreed and felt that since REITs only own the real estate and are not the licensed operator, cracking down on their involvement in the sector seems a bit misguided.

“I think it’s possible that the people working on these reforms may be misinformed about the type of structure of REITs, because with the vast majority of them the operator is a separate, unaffiliated entity.” , she said. “And I think putting so much control on an owner is wrong and doesn’t make a whole lot of sense and makes me think the people in charge are misinformed.”

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