Why SNF Investment Risk Exists In The Eye Of The Beholder

October 15, 2017, Alex Spanko, Skilled Nursing News - Among large swaths of the real estate investment community, reducing exposure to skilled nursing assets is considered a smart play at the moment. Given the uncertain regulatory landscape and shifting payment models, betting on SNFs may just not seem worth it.

But several players in the SNF investment market believe that the asset class isn’t necessarily something to fear.

“Risk is in the eye of the beholder,” said Talya Nevo-Hacohen, the chief investment officer at Sabra Health Care REIT, Inc. (Nasdaq: SBRA), during a recent webinar hosted by mergers-and-acquisitions research firm Irving Levin Associates.  “Ultimately, risk that’s acceptable is risk that you believe you know how to manage.”

Sabra recently weathered a fight over its decision to merge with Care Capital Properties, a nearly “pure play” SNF real estate investment trust (REIT).  Several activist investors rebelled, and Sabra CEO Rick Matros was defended his decision by pointing to the enduring necessity of SNFs within the health care landscape.

Nevo-Hacohen echoed those sentiments in the panel discussion, which also included Joseph A. Deans, vice president of acquisitions at Brentwood, Tenn.-based Diversicare Healthcare Services (Nasdaq: DVCR), and Steve LaForte, director of acquisitions and finance at Cascadia Healthcare.

For instance, if an operator can handle higher acuity rehab patients and the associated high turnover in facilities that handle a large volume of these cases, an investor might not see these properties as prohibitively risky, Nevo-Hacohen stated.

“That risk may be very acceptable to you, especially because you get paid more to accommodate that,” Nevo-Hacohen said.

LaForte emphasized the benefits of regionalization in the industry: Cascadia, a relative newcomer to the skilled nursing scene, operates a small portfolio of properties around its headquarters in Eagle, Idaho, including all seven former Kindred SNFs in the state and additional properties in Washington State, Oregon, and Montana.

“Part of what we’ve identified is being a regional player, focusing on certain states, knowing the reimbursement systems, knowing the continuum-of-care relationships,” LaForte said.  “We feel strongly that opportunity is there and it’s not going to go away for operators that focus on the market in that way, and can take on the challenges that are going to come.”

That’s also important when negotiating managed care contracts, such as with Medicare Advantage insurers, LaForte said: After acquiring the Kindred facilities, Cascadia made a deliberate play to work with managed care companies.  While participating in those programs might result in lower lengths of stay and reimbursements, LaForte said, the referral streams could potentially become stronger.

“We’re measuring all of those things, but to us, the big part is being proactive about the collaboration with the managed care organizations,” LaForte said.

Location, location, location

In response to a discussion about a 123-bed Boston facility that sold for $23 million, Nevo-Hacohen emphasized the importance of location in dense urban areas — regardless of what the census, rent or other metrics may look like before taking the plunge.

“If you have a building that’s located in dense area which is now incredibly accessible to the kind of customers you’re seeking, it can be extremely valuable, regardless of the underlying operations currently in place,” she said.

That kind of access and convenience can often trump other considerations in residents’ minds, even as some players in the industry have moved toward souped-up SNFs with amenities that mirror some of the higher-end assisted and independent living facilities: round-the-clock dining choices, private rooms, spacious common areas and hotel-style concierge services.

“There doesn’t need to be a bistro and a barista in place in the lobby,” Nevo-Hacohen said.  “That’s not why people are going there.  They’re going there to hopefully get out as soon as they can.”

In the end, the panelists emphasized the sheer necessity of SNF care as a reason the business will continue and could remain a smart investment — despite the occasional negative headlines.

“We don’t see it as an archaic product,” LaForte said.  “There’s a lot of reimbursement pressure, without question.  But we look at it over the near-term and going out longer, over the next 20, 25 years, the demographics are there, and there’s going to be a lot of demand.  The care is going to be needed.  And the specialization is going to be needed.”