REITs owned 12% of US skilled nursing assets in 2021, ownership trends are changing
Real estate investment trusts (REITs) owned about 12% of all skilled nursing assets in 2021, which equates to about 1,870 establishments.
This is according to a research letter published in JAMA Health. The researchers also looked at REIT ownership trends of hospitals and other healthcare properties.
The data comes at a time when the Biden administration and the Centers for Medicare & Medicaid Services (CMS) are pushing for greater transparency around nursing home ownership and increased scrutiny of REITs and private equity ownership. specifically.
According to Administrator Chiquita Brooks-LaSure, CMS released groundbreaking nursing home ownership data in mid-April in an effort to bring more transparency to health care and inform future policy decisions.
Mergers, acquisitions, consolidations, and ownership changes for Medicare-enrolled nursing homes are listed on the CMS website; data goes back to 2016.
FPI ownership of skilled nursing is important to study given the lack of research in this area, and the landscape is changing, Tamar Katz, co-author of the research letter, told Skilled Nursing News.
“For some time, there has been this general trend of national consolidation. You saw that with HCR Manorcare, with Genesis, really these national conglomerates have nursing home facilities – they were perfectly aligned to be funded by REITs,” Katz said. “But it’s a very complicated business to run on a national scale. Today, the industry trend seems to be more towards regional ownership, which is much less compatible or conducive to refinancing.
Katz, one of six authors listed in the research letter, was a research affiliate at the Center for Economic and Policy Research in Washington, DC and a former investment banking analyst for Citi.
REITs and regional portfolios
Pure play REITs like Omega Healthcare (NYSE: OHI) “will adapt over time,” Katz said, as the sector continues to see smaller, more regional portfolios acquired and sold.
More diversified REITs – Katz uses Welltower (NYSE:WELL) as a prime example – won’t invest as consistently in NFCs because potential portfolios are minor relative to their overall balance sheet.
In the first quarter alone, Welltower disposed of seven more SNF assets, bringing its exit from the sector to $525 million over the past year.
Sabra Health Care REIT (Nasdaq: SBRA) announced earlier this month that the company would diversify its portfolio by reducing exposure to SNF. The REIT’s growth strategy would leave its SNF assets at an “all-time low”.
SNF funding structures will also play a role in future REIT involvement, Katz said. Traditionally, facilities are tied to 15-year triple net leases; Katz wonders if the returns REITs would earn from these leases would be enough to keep up with rising interest rates.
“Are people going to be interested in these investments? This poses a real challenge to the triple net business model that skilled nursing operators tend to use, in a way we haven’t really seen since before the Great Recession,” she added.
Given these changes, federal scrutiny of REITs may be overdue, Katz said.
The “financialization” of the NFC industry has been happening since the mid-1990s, while REITs have only very recently begun to inject capital into acute care, she added, mainly because it is an even more complicated regulatory environment than the NFC sector.
“There are finally people for [President Biden’s] level talking about those conditions and really making sure federal policy is aimed at preventing them,” Katz added, speaking of concerns about quality at some REIT-owned or PE-owned facilities. “I could see this happening in acute care hospitals in five to ten years.”
Analysts have said much the same about the disconnect between government action and investment by large private equity firms.
Stifel analyst Tao Qiu told Skilled Nursing News in a previous interview that he hadn’t seen any major deals involving such players “for some time.”
While the private equity market got involved in skilled nursing between 2005 and 2015 – and those efforts were largely unsuccessful – very large companies have, for the most part, left the space. A notable example is the Carlyle Group’s sale of the HCR ManorCare portfolio to a nonprofit health system joint venture ProMedica and Welltower.
“Understudied” REITs and Government Control
The authors consider IPFs an “understudied force” in the healthcare continuum; REITs owned more than $3.5 trillion in US assets last year, including the healthcare sector.
Coinciding with the Biden administration’s efforts to increase scrutiny of private equity and REIT involvement in the space, the JAMA authors said there was “concern” that REIT ownership by REITs can divert funds from clinical and operational investments to generate high returns for investors. Instead.
Capital from a sale-leaseback could be used for facility investments, but these funds are often diverted to a holding company and distributed to investors, according to the research letter.
As REITs and private equity have used NFCs as a source of profit for more than 25 years, Katz said the Biden administration’s emphasis on scrutinizing REITs is “long overdue and a entirely appropriate measure”.
Yet no research quantifies the association of IPFs with quality of care, cost to patients, or the financial security of healthcare operators, according to the research letter.
The JAMA authors urged policymakers and facility operators to ensure that FPI’s business model aligns with long-term healthcare delivery priorities.