Unfortunately, we were not able to attend the recent Jefferies & Co. Specialty and Post-Acute Services Conference last week in New York City. We would have liked to “get into the mix” in one of the discussions. Apparently, the topic of ownership of real estate assets came up, but not with the usual opinions. In the past, when industry executives bandied about the merits of real estate ownership, it was relative to concepts of financial flexibility, benefits of real estate appreciation, the limits on growth that owning real estate can induce or some other financial aspect. Often, it just boiled down to the question, “Are we a senior care operating company or a real estate company?” This discussion still continues, with some companies choosing sides and others saying, basically, we are both.
But at the Jefferies conference, some speakers took the argument to another level, and one that on the surface seems to lack credibility, at least in some cases. In referring to recent deals (we assume the acquisitions of Mariner Health and Integrated Health) and proposed ones (we assume the auction for Beverly Enterprises), some speakers commented that the structures to separate the skilled nursing operations from the real estate ownership are in the long run unhealthy for the industry. One participant said that the topic veered to the ability (or lack thereof) to provide quality of care without maintaining ownership of the real estate. Now, there are a lot of reasons to own the real estate, but quality of care is a new one, especially if a company takes the “operating model” line of thinking. If you don’t own the real estate, and if you can’t provide quality of care, you are not left with much else. So for these management-company structured companies, operations and quality of care are the whole shootin’ match, so to speak. To add insult to injury, two of the three skilled nursing company representatives on the panel own very little of their nursing facility assets, and no one was questioning their ability to deliver quality care.
As an aside, we were not in favor of the financial buyer who actually took over the Mariner and Integrated assets, not because it was a financial buyer, but because it was a buyer who knew nothing about the industry, was in it for short-term profits and would contribute little to an industry that was still healing from the wounds of five years ago. And, we might add, we did not think quality of care was on the radar screen in those cases. The Beverly auction is quite different, as that company has not had the best reputation in the industry for high quality of care over the years (although it has been improving), and many people have thought that breaking the company up could have a positive impact on operations (and quality), especially if several management entities have the proper incentives to enhance operations, quality and, ultimately, profitability. Consequently, it is not the concept of real estate ownership, or not, that can influence quality of care, but the motives, ability and industry knowledge of the particular buyer that count. And it is up to the owner of the real estate to make sure the incentives are in place for the operator to deliver the highest quality care possible.
Related links:
Jefferies & Co.
Get the inside scoop on senior care M&A at The SeniorCare Investor
Information on health care M&A activity, including assisted living facilities
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