Senior Living Is Driving Health Care Industry Distress

Q4 2021 was a struggle, according to the Polsinelli Report; life plan communities resilient, others said.

A flurry of bankruptcy filings from senior-focused health care facilities has shaped the US economic distress in the fourth quarter of 2021, according to the newest Polsinelli-TrBK Distress Indices Report.

The report illustrates how senior living-focused organizations, independent/assisted living communities and skilled nursing facilities represent a significant portion of the health care bankruptcy filings as health care begins its return to pre-pandemic numbers. 

These health care facilities are dealing with decreased patient census, increased operating costs, and significant pressure on staffing and labor costs.

“We anticipate that the bankruptcy filing numbers will continue to increase, especially in the healthcare and real estate industries, as we enter 2022,” said Polsinelli Shareholder Jeremy Johnson, a bankruptcy and restructuring attorney and co-author of the report.

“We haven’t seen the end of COVID-19 yet and the massive federal assistance that has kept facilities afloat will end soon.”

Financial Distress in More than Just Senior Living

Kevin Giusti, managing director, Walker & Dunlop, who specializes in financing seniors housing, tells GlobeSt.com that many segments of the economy and commercial real estate asset classes (notably retail, office, and hospitality) have experienced financial distress from COVID-19.

“I don’t think bankruptcies are unique to senior housing,” he said. “I actually think senior housing and skilled nursing facilities fared well during the pandemic; it highlighted the importance of these facilities that provide care for vulnerable residents within our communities.”

Giusti said that given the lack of senior living construction projects during the pandemic and the continued aging demographic of this country, the next 5 to 10 years will be very positive for owners of senior housing properties.

Life Plan Communities Resilient

In the current environment, though, there is clearly some distress but some of senior living’s sub sectors did better than others, Michael Lincoln, principal at GreenRock Capital, points out.  

“Life plan communities have been fairly resilient while stand-alone, single site nursing care facilities have been the hardest hit by the pandemic,” he tells GlobeSt.com. “I expect providers will continue to look for size and scale to improve operational efficiencies fueling further growth in the number of affiliations, acquisitions, and mergers. 

“It’s a little bit of the haves and have nots. We are seeing providers with stronger balance sheets looking to raise capital for reinvestment, expansions and repositionings to make their offering more relevant to a savvy consumer. 

“While there may be no place for providers to hide from labor and talent pressures, we are still bullish. Regardless of where on the care continuum a senior housing provider is positioned, the inexorable demand from a growing 75+ demographic will continue to create tailwinds for the senior housing industry.”

Buying Opportunities

Another point to consider is that few lenders want to take on operating a senior living facility that has gone into distress. 

“There are a number of distressed senior living communities due to the recent pandemic and over building but to date, lenders have really worked with owners to extend maturities to give owners more time to implement their business plan,” Mike Garbers, managing director, JLL Capital Markets, tells GlobeSt.com. “We do not see many, if any, Chapter 11 filings due to these communities having an operating business that gives 24-hour care.

“There are a number of investors looking for distressed properties to buy. They like this value-add model due to buying these communities well below replacement costs and the extremely good demographic trends.”

Replacing Infrastructure Adding Financial Pressure

But the cost pressures for these facilities cannot be overlooked. Mark R. Ustin, partner, Farrell Fritz, P.C., the firm’s health care policy expert, tells GlobeSt.com that COVID-19 has exacerbated prior trends in institutional long-term care, where occupancy rates were already falling as a result of older adults preferring to age at home.

“At the same time, the advent of managed care and the need to replace older infrastructure simultaneously increased costs and reduced reimbursement,” Ustin said. “COVID added to that the increased cost of salaries needed to retain staff, who like other Americans often had to leave the workforce due to increased demands at home from children out of school, and also had a more general desire not to work in an environment that was frequently a hotbed for transmission of the disease.”

“Add to that the additional costs of new legislative and regulatory mandates in some places aimed at correcting perceived shortcomings in service delivery (e.g., via minimum staffing requirements, new equipment mandates, or caps on profits in the for-profit space), and you have a recipe for financial disaster.”

Smart operators will harness new technologies to assist with resident care and address the ongoing labor shortage, Peter DeMangus, chief marketing officer, Solterra Companies, tells GlobeSt.com. But these staff shortages will likely continue to be a challenge for the foreseeable future, he acknowledged. 

Ustin said that, going forward, institutional long-term care providers are going to have to aggressively reevaluate their service delivery models and focus even more strongly on private-pay alternatives to subsidize inadequate Medicaid revenues. And they will need to work closely with state policymakers and regulators to bring their new ideas to life.”

More Details from Polsinelli Report

Other significant updates in the report include:

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