Post-Acute Plus Assisted Living: Attractive Investment or Risky Endeavor?

Interplay between skilled nursing facilities (SNFs) and assisted living communities is certainly nothing new, but some signs suggest it makes more sense than ever to co-locate these services. Yet, even with the implementation of the Affordable Care Act and further emphasis on moving patients through the continuum of care as efficiently as possible, industry leaders see a limited future in combining Medicare-certified skilled nursing beds with assisted living.

The recent $1.125 billion acquisition of Trilogy Health Services LLC has drawn attention to models involving assisted living and skilled nursing in one location, without being part of a traditional continuing care retirement community type of campus. The Trilogy model centers on a mix of skilled nursing beds and assisted living and memory care units; of the 96 properties in Trilogy’s portfolio, 83 are considered integrated senior campuses and 13 are deemed skilled nursing properties, all with an average age of less than seven years, according to an SEC filing.

The skilled nursing element of the portfolio reportedly made it very attractive to buyers, who have appeared increasingly bullish on the prospects for post-acute, transitional care. Major players like Health Care REIT (NYSE: HCN) submitted bids before Griffin American Healthcare REIT III, Inc. officially acquired Trilogy in a joint venture with NorthStar Healthcare Income, Inc. Despite the apparent appetite for this type of portfolio, though, it’s not very common—and might not be one that other providers are looking to emulate.

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“Trilogy is not the predominant model,” Mike Hargrave, principal with health care real estate data service Revista, tells Senior Housing News. “I’m a fan of that model, but it’s not something that a lot of providers tend to pursue. It’s just not the norm.”

There’s no denying the advantages to placing skilled nursing and assisted living together and allowing them to feed off of each other, though, Hargrave says, particularly when it comes down to dollars. He pointed to data from the National Investment Center for Seniors Housing & Care (NIC), which indicated that combinations as a whole generate more revenue than standalone facilities, no matter what types of senior housing units are involved.

“[Assisted living and skilled nursing] work very well together, and the combination produces more revenue per bed than just plain assisted living or skilled nursing,” Hargrave says.

Earlier this month, Imran Javaid, managing director of health care real estate for Capital One Bank, echoed this sentiment when debating the sustainability of standalone memory care with Sabra Health Care REIT (Nasdaq: SBRA) Chairman and CEO Rick Matros. Javaid noted that investing in properties that combine several senior living services tends to produce more consistent results, from a revenue standpoint.

Market-by-Market

Regardless of the profitability that might stem from teaming skilled nursing up with assisted living, the likelihood of such setups inundating the senior housing industry is slim, Raymond Lewis, CEO of Care Capital Properties Inc (NYSE: CCP), tells SHN.

Instead, Lewis predicts specialization of care will play a bigger role in shaping the landscape in the next three to five years, as hospitals are incentivized to more carefully choose post-acute options for patients. This means there will be “bright lines” to distinguish between care settings moving forward.

“I don’t think you have to have them in the same building in order to be a meaningful participant in the health care system,” Lewis tells SHN. “It’s really going to be about providing quality care while patients are in your setting, and you don’t necessarily need assisted living there to do that successfully.”

CCP is primarily a pure-play skilled nursing REIT, and in August, it officially spun off from Ventas (NYSE: VTR). The Chicago-based large-cap REIT held onto the private-pay senior housing assets in its portfolio. From that perspective, it may appear that CCP and Ventas are betting on a continued division between senior care settings.

Not all REITs have a firewall here, though, as the Trilogy deal might suggest that some REITs are willing to treat skilled nursing more like private-pay housing, particularly in terms of entering into a RIDEA structure. REITs tend to steer clear of such a structure when skilled nursing is involved, mainly due to the increased risk associated with care for higher-acuity residents and its dependence on government reimbursements. The Trilogy acquisition reflects a willingness on the part of the purchasing REITs to further expose themselves to the operations-related risks of skilled care.

And while the Trilogy model isn’t commonplace and may not become more prevalent, it isn’t the only example of mixing assisted living and post-acute, either. Indiana-based Mainstreet considers the majority of its properties to consist of 70% transitional care and 30% assisted living. In fact, Mainstreet had invested in the operations of 15 Trilogy facilities, but that joint venture will end under the terms of Trilogy’s acquisition.

As is often the case in senior housing, the viability of the assisted living-skilled nursing model might come down to market-by-market decisions. Some properties that Mainstreet currently has under construction will be deemed 100% transitional care, due to significant demand for skilled nursing beds and transitional care units in certain markets, said Gary Smith, senior vice president of health solutions at Mainstreet.

In certain markets, pairing skilled with assisted living can make sense, CCP’s Lewis said. What’s important is making sure the assisted living portion can “stand on its own two feet” with minimal reliance on internal referrals.

“I think it can work, but it has to be sized appropriately,” Lewis said. “If an assisted living component is too large, they’ll have a hard time keeping it full.”

Written by Kourtney Liepelt

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