The skilled nursing industry faces a challenging and uncertain road ahead now that federal funds have largely dried up, but at least for one operator this time may present new opportunities for further expansion.
The Ensign Group, which a short time ago announced it would be launching an in-house real estate investment trust (REIT), continues to be aggressive on acquisitions after purchasing the operations of a 161-bed skilled nursing in Avondale, Ariz to begin the year.
Stifel analyst Tao Qiu thinks Ensign is poised to take advantage of the uncertainty.
“It’s going to be a good year for Ensign at least on the external growth side but it’s going to be a challenging year for the industry just looking at where the expenses are going and revenue is going,” Qiu told Skilled Nursing News.
In fact the industry may face new realities in 2022 without more public health emergency (PHE) support, a recent report published by professional services firm CliftonLarsonAllen indicates.
While the median SNF operating margin of 3.1% for 2020 was significantly higher than previous years, when excluding PHE funds from the calculation the net operating margin dropped to -1.5%. would have been disastrous for many operators.
A total of 134 nursing homes closed their doors in 2021 as of December, according to a Kaiser Health News report.
Ensign, however, is “obviously a different beast” in the skilled nursing world.
“For them, the story is going to be OK, now the industry is in distress, how do we take advantage of that,” Qiu explained. “You already saw some of that in the second half of 2021. They ramped up their acquisitions, and you see more healthcare REITs transition skilled nursing assets to them, and a few that are in the pipeline. It’s pretty robust.”
Before the end of the year, Ensign purchased a five-property portfolio from Invesque Inc. for $93 million, as Qiu suspects the in-house REIT will only push more deals Ensign’s way.
“If you look at the real estate opportunities out there, they get approached about taking over larger portfolios, but Ensign being the way they are, they wanted to operate on a local cluster level and have local leadership [in place],” he said. “There are things in [those opportunities] that they might not like, but with this structure they can put it in the business without operating them. That gives you more upside on the investment pipeline.”
With better margins and a steadier earnings steam, Qiu expects the company to pursue more real estate transactions moving forward.
When it was announced, Ensign CIO Chad Keetch said the in-house REIT would provide more flexibility in Ensign’s use and access of capital through real estate investing.
Qiu also expects Ensign will pursue more seniors housing deals moving forward.
“It just gives them another leg of growth just as things from an organic perspective are going to slow down,” he said. “I think that real estate has a high margin and high value, looking at where the market is. You can extract a little bit more growth. I feel like this is an area they can supplement their current model.”
He said the in-house REIT will give them more leeway internally to build the business without having to rely on the operational side.
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