Despite positive signs of occupancy, operators still face structural financial challenges
The past year has been difficult for skilled nursing providers, but there are many signs of optimism emerging from the pandemic, according to George Mesires, Senior Living & Care Co-Head, Faegre Drinker Biddle & Reath LLP.
Skilled Nursing News had the chance to chat with Mesires about what he sees in the market and the impact of the pandemic on the law firm’s clients in skilled nursing and senior care.
This interview has been edited for clarity and length.
You told me that despite all the challenges that competent nurses have faced, they have shown resilience and you are cautiously optimistic about the future. Why is that?
First, I think the occupancy rate has gone down. Certainly the deployment of the vaccine has made a huge difference in terms of solving the occupancy problem, and setting a floor, and going [grow from] the difference in height [in occupancy levels] that we saw.
With the rollout of the vaccine, the adoption numbers have been really promising. Hope this relaxes a lot of [marketing] activity [such] this intake flow can return to normal.
From a litigation perspective, what do you think qualified nurses need to be prepared to get there? How do you think they should prepare?
I think there is a general concern that operators and those around the space will face some sort of liability related to COVID. Litigation today has not been as rampant as some have thought or predicted, and that is a very good thing.
There is a patchwork of efforts among states to address some of the liability issues. From my perspective, it would be ideal if there could be a federal solution to this.
In general, from an operator’s perspective, continued vigilance, duty of care and the application of best practices in infection control should prevail.
You’ve done a lot of M&A and distress work in the past. Do you expect a lot of pain after the CARES Act funds run out?
There is no doubt that some operators have been supported by the funding of the CARES law; it is a huge amount that has been invested in the system.
Once exhausted, there won’t be that mask on any of the financial challenges that some operators faced before the pandemic. The pandemic has obviously accelerated the financial challenges that some operators [already] in the face of the pre-pandemic. There will be a subset of weaker operators who will face the same challenges they faced before the pandemic, but who will simply be made worse by the pandemic.
For example, pre-existing workforce issues will always be there, if they are not exacerbated. For communities with aging physical structures, there will still be a lot of deferred CapEx to be achieved. I think it will be necessary 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 communities that traded during the pandemic, the market has been quite strong.
Does it surprise you sometimes when you see certain properties traded during the pandemic, how much they have been traded?
No – I think the pandemic has underscored the importance of the operator. We’re going to hear that chorus louder and more often now. Strong operators who run communities that outperform their market peers in this environment will be able to generate disproportionate returns.
There has been a lot of interest in private equity in terms of who is investing and whether they should invest in skilled nursing care. How do you see all this attention on private equity?
From the perspective of market participants, I see more participants and capital as a good thing for the industry. A larger number of participants leads to a more liquid market and generally leads to a healthier market environment.
Having said that, I think there is significant risk, if you will, simply because of the easy bipartisan political appeal that naming private equity as the bad guy can have.
I think private equity and the private equity backed communities are going to come under scrutiny from both sides across the way, which may make it a little unappetizing for some groups of people. private equity investors who are not comfortable with this review.
If they have already subscribed to private equity, would you recommend your clients to be prepared for the review in the future?
In my opinion, communities backed by private equity should be aware that they may face an investigation from federal and state regulators and lawmakers. It’s just a risk. This is certainly not, in my opinion, a major hurdle, as the story at the end of the day is a compelling story that private equity has been of great benefit to the industry.
In general, what types of problems are your clients currently facing in the field of skilled nursing?
I have looked at the different phases of the pandemic. When the pandemic started, it was what I call operational triage. Obviously, there was a great deal of focus on how to prepare communities for day-to-day operations to better cope with the pandemic. This involved the acquisition of PPE, the establishment of operational protocols, following all the good practices that were articulated by the CDC and the regulatory authorities of the State.
These operational challenges then manifested themselves financially, whether on the income side or on the expenditure side, both lines were negatively affected. I think the lenders have been patient, and generally have been patient, and have given operators the lead they need to take care of the health and well-being of residents.
Eventually, you will find that lenders will really start to take a look at their credit and make sure that the financial institution is better protected as well.
I think that is where we are now, as there are interactions and negotiations with the lenders on how to deal with some of the issues that have arisen or some of the financial outliers caused by the pandemic.
Prospects for Skilled Nursing – Long or Short?
From my point of view, I am optimistic. At the end of the day and when the dust settles, I think people will recognize that the best place for our most fragile – and the most important constituent of this market, the elderly – will be in a community that is customary. fit for them.
Given the favorable demographic winds, demonstrated resilience, and the ability of the market to weather a century-old event like it did, I think this will attract more and more participants to the space in the same way as the participants were. attracted to it after the Great Recession.