Reposition or Wrecking Ball: Combatting Obsolescence in Aged Nursing Home Stock

Whether the aging nursing home stock can be saved through capital expenditures for repositioning, or is suited only for the wrecking ball, is an issue those involved in the skilled nursing industry don’t exactly agree on. 

The average age for the industry’s skilled nursing stock is about 35 years, according to data from the National Investment Center (NIC) for the Seniors Housing and Care Industry’s Investment Guide. That’s five years more than the next oldest segment, continuing care retirement communities (CCRCs), and far older than independent living properties’ average median age of 22 and assisted living properties’ of 14. 

Many nursing homes are already considered to be functionally obsolete, and lots more are headed in that direction, was the general consensus at NIC’s 22nd National Conference held last month.

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So far, though, nobody’s really doing anything about it, according to Zeke Turner, the founder of Mainstreet Development. His company is currently one of just a couple involved in ground-up construction of brand new skilled nursing and rehabilitation facilities. 

“Most groups are going back and putting in upgrades or renovations into the existing properties,” he says. “Although that makes them a bit nicer, it doesn’t change anything programmatically. You can make the case that it’s actually compounding the problem; by putting $1-2 million into an old building, you’re putting yourself deeper into debt.” 

There can be buildings that are brand new, but that Turner considers to be functionally obsolete by virtue of being designed on a 25-year-old model.

It’s the physical structure of these buildings that can be the problem, he says. Many were build in the late 70s and early 80s and were based on hospital design, with semi-private rooms and cafeteria-style dining options. 

“You have to change the very essence of the way these properties are designed,” Turner says. Design used to center around medical services, with a nod to consumer preferences and socialization. These days, it’s almost the complete inverse—or should be, he argues.

But older buildings can still have value and serve residents well, if owners are willing to invest appropriately, according to Brian Beckwith, CEO of private investment management firm Formation Capital. His company recently purchased a $750 million skilled nursing portfolio with joint venture partner Safanad, a Geneva, Switzerland-based equity firm.

The portfolio has more than 70 assets concentrated primarily in the Southeast states of Florida and North Carolina, and marks the fourth portfolio Formation purchased with Safanad. When investing in portfolios of skilled nursing assets, says Beckwith, Formation generally follows a two-pronged approach.

“When we buy a portfolio, we want to spend enough capex to make them competitive in the market and generally make sure that they’re able to service the patient well,” he says. “A lot of the approach in capex is to make sure we’re providing the right clinical outcomes, and to create the ability to have the right mix of patients.” 

When it makes sense, Formation positions its skilled nursing facilities to attract Medicare patients rather than Medicaid, says Beckwith, and when investors can make capital investments, it helps attract the Medicare clientele. 

The industry agrees that the need and demand for skilled nursing and long-term care isn’t going anywhere.

“We believe skilled nursing is going to play a significant role in the delivery of healthcare for the foreseeable future, and we think it’ll have one of the largest roles of controlling costs in the healthcare system,” Beckwith says. “Our overall strategy is to position our assets so they can take advantage of that.” 

Whether companies are choosing to build from the ground up or reposition existing facilities, they will have to take action.

“Operators and their real estate ownership—whether it’s a REIT, bank, or private investment group—are going to have to get to a point, some time in the near future depending on the building, where they decide to either let that building go to obsolescence, or to completely replace or reposition the building,” says Turner. “That’s a difficult equation.”

Written by Alyssa Gerace

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