Despite Positive Occupancy Signs, Operators Still Face Structural Financial Challenges

May 27, 2021, John Yedinak, Skilled Nursing News - The last year has been difficult for skilled nursing providers but there are plenty of signs for optimism coming out of the pandemic according to George Mesires, Co-Leader, Senior Living & Care practice Faegre Drinker Biddle & Reath LLP.  Skilled Nursing News got the chance to chat with Mesires about what he is seeing in the market and how the pandemic is impacting the law firm’s clients in skilled nursing and senior care.

You told me that despite all the challenges skilled nursing has faced, it has demonstrated resilience, and you’re cautiously optimistic about the future.  Why is that?

First, I think, occupancy has troughed.  Certainly, the rollout of the vaccine has made a tremendous difference in terms of fixing the occupancy problem, and setting a floor, and will [grow from] the steep drop-off [in occupancy levels] that we have seen.

With the rollout of the vaccine, the numbers on the uptake have been really promising.  Hopefully, that loosens up a lot of [marketing] activity [such] that admission flow can get back to normal.

From a litigation perspective, what do you think skilled nursing operators need to be ready for as we work our way through this?  How do you think they should prepare themselves?

I think there’s a general concern that operators and those around the space will face some sort of COVID-related liability.  Today, the litigation has not been as rampant as some have thought or predicted, and that’s a very good thing. 

There’s a patchwork of effort among the states to address some of the liability issues.  From my perspective, it would be ideal if there could be a federal fix to that.

Generally, from an operator’s perspective, continued vigilance, the duty of care, and execution of best practices with infection control should carry the day.

You’ve done a lot of M&A and distress work in the past.  Do you expect a lot of pain coming after the CARES Act funds eventually run out?

No doubt, some operators have been buoyed by CARES Act funding; it’s a tremendous amount of money that went into the system.

After it runs out, there isn’t going to be that mask on any of the financial challenges that some operators were experiencing pre-pandemic.  The pandemic obviously hastened financial challenges that some of the operators were [already] facing pre-pandemic.  There will be a subset of weaker operators that are going to face the same challenges that they faced pre-pandemic, but just aggravated by the pandemic.

For instance, the labor issues that were preexisting will still be there, if not heightened.  For those communities whose physical structure was aging, there’s still going to be a lot of deferred CapEx to be done.  I do think that there will be a need to address some of the structural financial challenges for some operators — there is an incredible amount of capital on the sidelines.  [With respect to ongoing M&A activity], for the communities that have been trading through the pandemic, the market has been quite strong.

Does it surprise you at times when you’re seeing some of the properties traded during the pandemic, how well they’ve traded?

No — I think the pandemic has underscored how important the operator is.  We’re going to hear that refrain louder and more often now.  Strong operators that run communities that are outperforming their peers in the market in this environment will be able to garner disproportionately strong returns.

There’s been a lot of attention on private equity in terms of who’s investing and whether they should be investing in skilled nursing.  How do you view all this attention on private equity?

From a market participant standpoint, I view more participants and capital as a good thing for the industry.  More participants lead to a more liquid market and generally leads to a healthier market environment.

That said, I do think that there’s significant headline risk, if you will, just based on the easy bipartisan political attraction that naming the private equity as the bad guy can have.

I do think that private equity and private equity-backed communities are going to face a lot of scrutiny from both parties across the aisle, which may make it a little unappetizing for some private equity groups that aren’t comfortable with that scrutiny.

If they’ve already taken on private equity, would you recommend your clients be ready to deal with the scrutiny going forward?

My view is that private equity-backed communities should be aware that they may face inquiry from state and federal regulatory bodies and legislators.  That is just a risk.  It’s certainly not, in my view, a significant impediment because the story at the end of the day is a compelling story that private equity has been a significant benefit to the industry.

In general, what types of problems are your clients really dealing with right now in the skilled nursing space?

I’ve looked at the different phases of the pandemic.  At the outset of the pandemic, it was what I call operational triage.  There was obviously a tremendous amount of focus that needed to be done on how to prep the communities to deal with the operations on a day-to-day basis to best face the pandemic.  That involved acquiring PPE, setting up operational protocols, following all the best practices that were being articulated by the CDC and state regulatory authorities.

Those operational challenges then manifested themselves financially, whether it was on the revenue side or the expense side, both lines were adversely affected.  I think lenders were patient, and have generally been patient, and have given operators the runway that they need to care for the health and well-being of residents.

Eventually, you’re going to see the lenders really start to take a look at their credit, and make sure that the financial institution is being best protected as well.

I think that’s the phase of where we are now, as there are some interactions and negotiations with lenders about how to deal with some of the issues that have occurred or some of the financial outliers that have been caused by the pandemic.

Outlook for skilled nursing — long or short?

From my perspective, I’m optimistic.  At the end of the day and when the dust settles, I think folks are going to recognize that the best place for our frailest — and the most important constituent in that marketplace, the elderly — is going to be in a community that is custom-fit for them.

With the demographic tailwinds, with the demonstrated resilience, and with the marketplace’s ability to get through a 100-year event the way that it has, I think it’s going to attract more and more participants to the space in a similar way that the participants were attracted to it after the Great Recession.

(This interview has been edited for length and clarity.)