The government stepped up in a big way to help the Skilled Nursing industry weather the challenges of the COVID-19 pandemic, providing a backstop to keep facilities operational in what has truly been an unprecedented time for the industry. Government stimulus for the Skilled Nursing industry during the COVID-19 pandemic came from three main sources: The CARES Act, the Paycheck Protection Program (PPP) and temporary Medicaid rate increases. Additionally, there was other non-financial Government support such as the waiver of the Medicare 3-Day Rule as well as state and federally supplied PPE and testing. This support was instrumental in helping owners and operators remain solvent and continue to provide care to residents throughout the pandemic.
While Government support has allowed the industry to remain afloat during the pandemic, the pandemic has changed the industry in many ways and has also served to accelerate some industry trends that had been taking place before the onset of the pandemic. These changes should serve to improve the health and long-term success of operations.
Leading SNF Trends
Focus on Regionally Based Operators
Prior to COVID, many Owners were moving away from nationally based operators to operators with a regional focus, and this has continued. The consensus is that regional operators are able to keep a closer eye on the operations at their properties while maintaining a clearer understanding of the local regulatory environment.
Exit of Single Operators
Many single property or “mom and pop” operators have exited the industry. COVID has accelerated this exodus with smaller operators getting “COVID fatigue” or just not having the resources necessary to adeptly maneuver during the last 18 months.
Greater Emphasis on Star Ratings
For better or for worse, the focus on Medicare.gov Star Ratings from the lending community seems to be here to stay. For example, HUD has now implemented a 3-month Debt Service escrow for facilities that have a 1-Star rating on Medicare.gov.
Creation of Private Rooms
Prior to the pandemic, we were seeing the expansion of existing facilities, or construction of new facilities, to create more private rooms. Private rooms allow for a facility to increase Medicare census, which are higher paying residents. In many cases, the Medicare rates subsidize care for lower paying Medicaid residents. The construction of private rooms also assists facility staff in implementing better infection control protocols.
Impacts for Financing
The impact of COVID on the financing industry remains to be seen. So far, the major impact has been the ongoing impacts to property operations. Nursing Homes are still struggling from the pandemic and occupancy at many properties has not returned to pre-pandemic levels. On top of the occupancy challenges, facilities face an ongoing labor shortage and its effect on expenses. These impacts combine to cause many Nursing Homes to fall short of performing at the levels needed to refinance their current debt.
Much of the transaction activity we are seeing are the aforementioned “mom and pops” exiting the industry or larger owners “pruning” their portfolios of properties that no longer fit with their long-term strategy. In many of cases, opportunistic and well-heeled Sponsors are buying properties with minimal discounts from pre-pandemic performance with the expectation that they can leverage operational expertise to improve on that performance as operations return to a more “normal” level. Given that many properties aren’t performing up to the levels where they are trading, most of the financing activity falls to bridge lending with recourse. Of course, there are nursing facilities that are still performing during the pandemic and those can be financed directly through HUD with the same terms as always.
Positive Outlook Ahead
Despite the near-term challenges still ahead for the industry as we all continue to navigate the pandemic, the future of the industry is a positive one. COVID-19 has illuminated some difficulties that a perennially under-funded and under-staffed industry has encountered both pre and during the pandemic. It’s clear that the spotlight on the skilled nursing industry is brighter than it was before the pandemic. The future of the industry is to continue to align incentives between various stakeholders. One way to do this is continuing to link reimbursements to the quality of care provided and patient outcomes.
The Skilled Nursing industry is a vital part of this country’s healthcare system and for the most part the industry consists of good people trying to provide the best care for residents. Weathering the storm of COVID-19 will result in a more resilient industry capable of dealing with whatever the future may bring.
-Steve Ervin, SVP – Head of FHA and Seniors Housing Finance and Andrew Lanzaro, Senior Real Estate Analyst