In a bombshell announcement, the real estate investment trust (REIT) Welltower—the biggest owner of nursing homes in the US– is divorcing from Genesis Healthcare—the nation’s biggest operator of nursing facilities. At same the same, Genesis, whose share price has plummeted in recent years, announced it is delisting from the New York Stock Exchange.
It is common for REITs to own nursing homes and other long-term care facilities that are run by chain operators—often with close business ties to the REITs.
Welltower is terminating $880 million in leases for 51 Genesis properties and looking for regional operators to take over their management. Separately, the REIT is divesting 25 facilities that were managed by another of its joint ventures, ProMedica, while bringing nine short-stay acute rehab facilities into its joint venture with ProMedica. Welltower says its goal is to “de-risk” its portfolio.
Genesis, which runs about 325 facilities and has had access to financing not available to smaller operators, has struggled to weather the covid-19 storm. Last year, Genesis warned investors it was at risk of going out of business. In January, its CEO retired. Now Genesis is engaged in a fundamental restructuring.
These changes appear to signal Welltower’s move away from traditional skilled nursing/ long-term care facilities to newer, more intensive post-acute care. Another major for-profit player, Kindred Healthcare, made a similar move several years ago when it sold its traditional nursing homes to focus on post-acute care in both home and institutional settings.
With a market capitalization of nearly $36 billion in 2020, Welltower is a major player in senior living. Along with HCP and Ventas, these REITs were worth more than $80 billion last year. They invest in a mix of assisted living, skilled nursing, and other health care facilities.
A fading model
Industry observers say this model for nursing homes probably peaked five years ago. Since then, more operators have faced financial challenges as their costs rose and government payments declined. A big reason for shrinking payments: The growth of Medicare Advantage managed care plans that now cover about one-third of Medicare recipients and pay about 20 percent less for post-acute rehab than traditional Medicare. Another reason: already-low Medicaid payments for long-term care residents have fallen further behind costs.
Indeed, two years ago, George Hager, the then-CEO of Genesis, told a health care conference, “I would argue that the traditional REIT structure in skilled nursing has been proven to be a failure.” And one year ago, another industry insider had an even tougher assessment. “I think that the REIT model is dead,” Robert Hartman, founder of Symphony Post Acute Network, told the same conference.
And that was before the Covid-19 pandemic, which has crushed many nursing homes. Not only have more than 170,000 residents and staff died in long-term care facilities, but post-acute care business collapsed last summer and has not returned to pre-pandemic levels. In addition, costs for labor, personal protective equipment, and other infection control measures have skyrocketed.
Bob Kramer, founder of the consulting firm Nexus Insights, says covid-19 bared the weaknesses of senior housing and long-term care: “All the disfunction in they way they are structured got exposed by the length and severity of the pandemic.”
On top of that, Congress is about to pass a major pandemic relief bill that will increase federal support for home and community-based care under state Medicaid programs but provide no additional Medicaid funding for nursing homes. This shift likely will further reduce demand for long-stay beds.
Despite tens of billions of dollars in federal bailout money, the industry is in serious jeopardy. Some observers predict as many as half of operators will fail without major changes in their business model. In December, the American Health Care Assn, the trade group that represents for-profit nursing homes, estimated that two-thirds of its members were operating at a loss.
The Genesis-Welltower split does not mean the end of the for-profit nursing home industry by any means. Some large publicly traded chains as well as some regional chains appear to be navigating the pandemic better than Genesis has. But their divorce is an indication of the industry’s distress.