Under Pressure, REITs Back Off Skilled Nursing

Payment reforms have made their sting across the health care industry, with the skilled nursing market taking a hit. And some of the senior housing industry’s biggest real estate owners of skilled nursing properties have started reducing their portfolio exposure in the asset class as a result.

Despite the shift in the attractiveness of skilled nursing properties, those who hold long-term positions with quality operators in the asset class may be positioned to gain.

The “Big 3” senior housing real estate investment trusts (REITs)—Ventas Inc. (NYSE: VTR), Welltower Inc (NYSE: HCN) and HCP Inc. (NYSE: HCP)—have had diverging skilled nursing strategies in light of changing payment models and tenant challenges. Most recently, HCP decided to spin off its skilled nursing assets into a separate, independent REIT as the company struggled with tenant HCR ManorCare.

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More broadly, skilled nursing occupancy rates have also hit a 5-year low, according to data released this week from the National Investment Center for Seniors Housing & Care (NIC).

Other REITs have taken to divesting some of their skilled nursing assets to limit their exposure with operational pains. Payment reforms, particularly the bundled payment initiative, have put pressures on operations as the national payor systems attempt to contain costs. The first bundled payment results have revealed that lower-cost settings, including home health care, are benefitting the most, according to a recent report by Fitch Ratings.

These iniatitives, in addition to a couple other factors, have sent investors to seek out alternative solutions to skilled nursing exposure, such as spin offs or selling assets. Some of the most prominent events in the space include Sabra Health Care REIT’s (Nasdaq: SBRA) plan to sell off 29 properties with its tenant Genesis Healthcare Inc. (NYSE: GEN), in addition to a number of pricey settlements between operators and the Department of Justice (DOJ). While the sector had braced for bundled payments and its potential short-term impacts on operators for quite some time, other factors pushed those pressures into the limelight.

“It was a culmination of a few events that brought the skilled nursing market back into focus,” explained Britton Costa, analyst with Fitch Ratings. “Genesis Healthcare had a pretty meaningful revision, and that came as a surprise. Shortly thereafter, [HCR] ManorCare was back in the news, and there were a few DOJ settlements. All this brought the sector back into the spotlight.”

Winners and Losers

However, in the long term, skilled nursing facilities (SNFs) are poised to become “market share winners” as the health care payment system continues to shift, according to Fitch Ratings.

Bundled payment models are encouraging acute care providers to reach out to partner with post-acute care providers, including skilled nursing facilities, to avoid costly readmissions. Skilled nursing operators that have a large market share stand the most to gain, as acute care partners may feel more confident those operators can handle greater incoming value. The same may not be true for smaller or independent skilled nursing operators.

“There will certainly be winners and losing within skilled nursing,” Costa tells Senior Housing News. “When you think about the pilot programs, there is a big focus on coordination. In some instances, hospitals will be receiving payment and dispersing it out to their partner providers for an episode of care. A major health system that is market dominant will look for partners that can guarantee, to a certain extent, they will be able to accept the volume set.”

REITs are likely to stick with their current strategy over the next few years, Fitch Ratings predicts, based on recent actions by REITs to reduce or eliminate their skilled nursing exposure and a sharp focus on their plans in the most recent round of quarterly earnings calls with investors.

In addition, there is a potential upside for the senior housing industry, says Costa.

“In theory, this should provide some support to senior housing,” Costa said. “With one less food group to focus on, intuitively there should be more dollars and greater demand for senior housing properties. Yet, we would temper the expectation would have a meaningful effect, because REITs haven’t been investing much in skilled nursing in the last few years. There shouldn’t really be very many incremental dollars [shifting].”

Written by Amy Baxter

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