By

Dave Kingsley

According to U.S. World & Reports the following five REITs are recommended as the best “health care REIT” investments for a retirement portfolio: Sabra, Welltower, VENTAS, National Health Investors, and The Long-Term Care ETF (https://money.usnews.com/investing/dividends/articles/best-health-care-reits-for-a-retirement-portfolio).   Some of the properties currently owned by these entities were picked up when private equity firms sold off properties from chains they bought out such as HCR Manor Care (taken over by The Carlyle Group) or Genesis (taken over by Formation Capital).

The five REITs listed by USN&WR are publicly traded; hence, their filings with the SEC (10-K, 10-Q, and Proxy statement) are available and provide a picture of their financial performances. I will be tracking these from quarter to quarter and from fiscal year to fiscal year.

VENTAS

Ventas stated in its third quarter 10-Q that as of September 30, it “owned or managed through unconsolidated joint ventures approximately 1200 properties (including properties held for sale), consisting of senior housing communities, medical office buildings (MOBs), research and innovation centers, inpatient rehabilitation facilities (IRFs) and long-term acute care facilities (LTACs).”

The Ventas 10-Q report also suggests that their revenues will equal or exceed 2019 revenues.  As of September 30, revenues were $2.7 billion – total 2019 revenue was $2.9 billion.  Total stockholder equity as of the end of the third quarter was $10.3 billion.  On their cash flow statement, they indicate net cash from operating activities of $1.2 billion.

COVID Relief Funds

The company has received a considerable amount of government assistance during the current COVID pandemic. They indicate that CARES Act and the Paycheck Protection Program and Health Care Enhancement Act distributions under Phase II “are expected to equal 2% of annual revenues from patient care, and to benefit the assisted living communities in the Company’s senior living operating business, as well as it NNN senior housing tenants.”

They indicate that they have applied for “approximately $35 million in grants under Phase II of the Provider Relief Fund on behalf of the assisted living communities in our senior living business.” Furthermore, they state that “substantially all” of their tenants with triple-net leases (NNN) applied for funding under Phase II.

By

Dave Kingsley

In public discourse about the damage wrought by private equity firms in the long-term care system, real estate investment trusts (REITs) have unfortunately been overlooked. REITs specializing in medical care facilities – including long-term care properties – are heavily subsidized by federal and state governments through tax codes, guaranteed revenue, and various supplemental payments from CMS. During the COVID tragedy, they have received funding from the CARES Act and other supplemental funds from CMS.

As pass through entities, they pay no corporate income taxes.  They are, however, required to distribute a specific percentage of their earnings to shareholders who pay capital gains taxes. These are significant tax expenditures and subsidies.

Other important features of REITs with a specialization in long-term care are: (1) they have more than a tenant-landlord relationship with their tenants/operators, i.e., they can exercise managerial control over and serve on boards of their operators, (2) their leases are “triple net” (NNN), which means tenants pay insurance, taxes, and maintenance on the property, or even “absolute net,” in which tenants pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance, and capital expenditures.

Along with private equity and other ownership structures, REITs play a major role in the financialized, extractive processes dominating the long-term care industry.  In other words, the mission of these entities is to extract as much value as possible from the business with as little reinvestment as possible in services to stakeholders.

As this country assesses the underlying causes of the COVID catastrophe, activists, advocates, and scholars must insist on transparency and disclosure of details regarding contractual relationships between REITs and operators, but also between networks of LLCs owned by holding companies, private equity firms, or other legal ownership structures. We need to empirically establish the actual level of extraction versus the appropriate level of extraction.

By

Dave Kingsley

The AARP is defending the indefensible.

Over 100,000 people in the care of nursing home corporations have succumbed to the COVID virus. Perhaps 150,000 have died of COVID in nursing homes – we don’t really know. Furthermore, we don’t know how many patients and employees who recovered from the disease will have life-long medical problems. This is one of the largest medical tragedies in U.S. history. Instead of demanding an investigation into the underlying management failure resulting in illnesses and death in long-term care facilities, the AARP is carrying water for the industry.

The AARP’s report on the “crisis” – written by a business writer – is better propaganda than real estate, finance, and nursing home lobbyists could hope for. Instead of demanding to know how the COVID tragedy could have happened, AARP commissioned Harris Meyer, a business journalist, to write a report regarding the nursing home industry’s performance in the COVID pandemic.  The report, “Nursing Homes’ Flawed Business Model Worsens COVIC Crisis” was posted on the AARP website (https://www.aarp.org/caregiving/health/info-2020/covid-19-nursing-homes-failing-business-model.html).

The AARP & Harris Meyer do not Understand the Nursing Home Industry

Meyer claims that the nursing home business is beset with a “flawed business model,” which in his view really isn’t the industry’s fault. As an explanation of the long-term care business, he provides nothing more than gibberish. I addressed some of the finance nonsense in Meyer’s report in a recent post (December 27th). He obviously doesn’t understand the industry and most of his claims in the article are not worth a comment. For instance, he claims that nursing homes “had an operating profit margin of negative 3 percent on patients paid for by Medicaid and other non-Medicare sources.”

Meyer doesn’t say where he found that information. Most nursing homes corporations are privately held and keep their financials close to the vest. Furthermore, he doesn’t indicate if he is referring to a mean or a median. Without a standard deviation and more information about the distribution of data on which a mean is based, an arithmetic average is meaningless. Without data by quartiles and a box plot to demonstrate distribution of data across each quartile, a median is nonsensical.

The Long-term Care Industry Devalues Human Life

There is so much about AARP’s whitewash that could be discussed, but suffice it to say that it is an embarrassment and should be grounds for an apology to the elderly and disabled people of America. The death and suffering of so many long-term care patients is simply due to the devaluation of the lives of disabled and elderly Americans in a system returning hefty value to investors at the expense of humane medical care.

By:

Dave Kingsley

A PUZZLING REPORT COMING FROM AN ADVOCACY ORGANIZATION

The AARP commissioned Harris Meyer, a business journalist, to write a report regarding the nursing home industry’s response to COVID.  The report, “Nursing Homes’ Flawed Business Model Worsens COVID Crisis” was posted on the AARP website (https://www.aarp.org/caregiving/health/info-2020/covid-19-nursing-homes-failing-business-model.html).

The advocacy work of the AARP during the COVID pandemic has been less than stellar. It will take more than one blog post to call out the AARP for a report that minimizes industry negligence and the size and scope of the COVID tragedy in U.S. home nursing homes. This is the first one.

The title of Meyer’s report might lead one to believe that the AARP is criticizing the industry and advocating for patients because of a “flawed business model,” which might be interpreted by ordinary taxpayers and stakeholders as “greed.”  Nothing could be further from the constructed reality presented in the report.  It is a delicate attempt to “carry water” for an industry that failed to protect patients entrusted to its care.

 By reducing the COVID tragedy in nursing homes to his perception of a “flawed business model,” and inadequate Medicaid reimbursement, Meyer gives more legs to a false narrative: nursing home corporations aren’t paid enough for providing the care elderly patients need and deserve. The flawed business model as he sees it has been imposed on corporations. That is untrue and unrelated to reality.

The report is full of misinformation and fails to address the dominance of finance and real estate driving the legal and financial structure and functioning of the nursing home system while Medical care is incidental.  Meyer even absurdly compares the daily Medicaid reimbursement rate to daily hotel rates of $200.  I know of no person, having checked into a hotel, was told they would be sharing a room with a stranger paying the same rate.

AARP – OSTENSIBLY AN ADVOCACY GROUP – IS TAKING ON A DEFENSE OF A NEGLIGENT INDUSTRY, WHICH NEEDS TO BE HELD ACCOUNTABLE

Meyer begins his article by taking the grossly negligent industry off the hook:

“It’s tempting to heap blame on the owners of America’s nursing homes—to argue that the pursuit of profits led to poor care and so many coronavirus-related deaths.” He claims that “The reality, however, is more complex.” He then makes a contradictory and untrue assertion: “Clearly most operators reacted to the pandemic as best they could. But what I found was that the industry’s complex and murky financial structure fails to safeguard the health of residents and staff.”

WHO IS RESPONSIBLE FOR THE “MURKY FINANCIAL STRUCTURE?”

Special interests representing real estate and finance are responsible for legislation that rewards high net worth individuals and institutional investors seeking shelter from the IRS and return on investment in medical care funded by federal and state governments.  Tax expenditures such as accelerated depreciation allowances, carried interest, pass through entities, interest deductions, and so on infuse cash into nursing home corporations that are above and beyond Medicaid/Medicare/Private Pay reimbursements.  There is no other industry rewarded as well by the tax codes as is the real estate industry.

GENESIS CORPORATION IS HARDLY AN EXEMPLAR FOR NURSING HOME CORPORATIONS

To determine how well corporations – paid to care for medically fragile and vulnerable patients – fulfilled their responsibilities, it is important to objectively examine evidence available from publicly listed corporations, but it is even more important to penetrate the opaque financial information behind the nursing home system’s veil of secrecy.  I have reported some of my examination in a recent post (e.g., on December 17, 2020 regarding The Ensign Group – a publicly traded company).  The ENSG has had rather robust earnings during the past three quarters compared to the same three quarters of 2019.

What Meyer doesn’t do is explain much about the financial structure he blames for (and what he minimizes as) the “COVID crisis” – one of the greatest medical tragedies in U.S. history. He uses the failing Genesis Healthcare Corporation as an exemplar of the industry.  Genesis, founded in the 1980s, grew into the largest chain of long-term care facilities in the U.S.  It was taken over – raided – by Formation Capital in 2007 and basically looted.  Formation sold off the property to Welltower – a player in the nursing home industry and publicly traded real estate investment trust (REIT) with over $4 billion in revenues.

The facilities were leased back to Genesis.  Triple net leases (tenant pays for maintenance, taxes, and insurance) are standard in the long-term care industry.  Meyer doesn’t understand that the variety of business models in the industry are conscious decisions of investors – they are not something over which corporate executives and investors have no control.  They choose how to structure their corporations, which is mostly for maximum extraction at the expense of care.

Genesis is basically a zombie company; its stock is practically worthless.  Here is what Welltower stated in their third quarter report:

“Genesis Healthcare Update As a result of Genesis Healthcare noting substantial doubt as to their ability to continue as a going concern we have written off all existing straight-line rent receivable balances and revised our method of revenue recognition to a cash-basis accounting method from a straight-line accounting method, effective July 1, 2020. Genesis Healthcare is current on all obligations to Welltower through October.”

MEDIAN NET OPERATOR EARNINGS ARE MISLEADING

Meyer cites a MedPAC report indicating a “operating profit margin of negative 3 percent on patients paid for by Medicaid and other non-Medicare sources.” This is a nonsensical statement.    Operators are at the bottom of the food chain in the nursing home system.  Much of what they are expensing is revenue that flows up the chain.  In the next post, I will discuss “net earnings” versus “earnings before interest, taxes, depreciation, and amortization” or “EBITDA.”  A financial metric that provides a much better picture of financial performance.

Also, I will be discussing a report paid for by the industry and produced by the major accounting firm Clifton, Larson, Allen (CLA).  This report also misleads the public and is used by the industry in its hardship pleas, which should be taken with a big grain of salt. Nevertheless, it contradicts and undermines Meyer’s report.

By:

Dave Kingsley

The Chestnut Street Project

This is the first in a series of posts about the “Chestnut Street Project:” a group of citizens attempting to reclaim an African American neighborhood on the East side of Kansas City, MO. As part of the project, members of the group have undertaken research into residential property ownership in the area – neighborhoods abandoned and neglected by city government.  Property records reveal that thousands of homes are owned by either investors or the Kansas City Land Bank. 

The activists have set up a center of operations in a rehabbed house on the 3800 block of Chestnut Ave (see pictures below). The 32 houses on the block are for the most part in a state of abandonment and deterioration.  A few homeowners still living on the block and in the neighborhood have made valiant efforts to maintain their homes while investors and the Land Bank neglect property which devalues all homes in the area.

What’s Ghetto Property Worth to Investors?

Why would limited liability corporations (LLCs), private equity firms, real estate investment trusts (REITs) and other entities invest in houses surrounded by vacant and/or deteriorating property in a neighborhood with high levels of poverty and few city amenities?  High net worth individuals benefit in several ways from investing in dilapidated ghetto property.  Given that wealthy investors tend to prioritize sheltering income from the IRS, rental property provides tax advantages in addition to revenue.  For instance, residential homeowners living in their homes cannot take depreciation allowances in tax codes, but landlords can.

Second, low-income tenants often qualify for Section 8 housing subsidies.  Hence, property that investors pick up very cheaply produces revenue from HUD that outpaces the market value of the property.  Over the past few decades, HUD and city housing agencies have allowed slum lords to neglect property while they collect hefty rents. For example, one house on Chestnut Ave was owned by an Australian retirement fund.  A family with several children lived in the home.  People were dumping trash in the right of way directly behind the house about which the city and owner did nothing (even though we incessantly called the city about the problems).  Polluted water was incessantly draining from a leak in the street next to the home where children played. The house was in disrepair and the yard overgrown.

Third, private equity firms and investors in general purchase property and make investments with other peoples’ money (OPM).  Interest can be deducted from taxes – along with other business expenses. 

Fourth, LLCs are pass through entities and do not pay corporate income taxes.  Investors pay capital gains taxes, which are lower than taxes paid by many wage and salaried employees.  Furthermore, capital gains taxes are often lowered further by other sheltering devices such as family trusts.

Two private equity firms have each bought hundreds of homes from the Land Bank, rehabbed them for little cost, and moved tenants in.  This is a form of what one could call internal colonialism: out of state and out of country financial firms expropriate African American land, extract value from that land, and put little to no resources back into the neighborhoods.

Future posts will discuss the history of apartheid in Kansas City, the destruction of viable African American neighborhoods by federal, state, and city policy, and how ongoing city politics related to economic development is continuing to rob African American citizens of the wealth they have been able accumulate.

By:

Dave Kingsley

Here are some questions to ponder: Why would the Family Office of a Billionaire be a major investor in a nursing home located in the tiny Southeastern Kansas town of Cherryvale?   Why would TIAA-CREF – a teachers, insurance, and annuity program – be the biggest owner of land in the Mississippi/Arkansas Delta?  Why would the Harvard Endowment Fund buy up forest land in Europe? 

The answer to each of these questions is that the U.S. economic system has undergone radical change in the past fifty years.  Indeed, the economic ground has shifted under our feet.  This shift has been tectonic, global, and influences every institution of society.  Much of government responsibility for the “general welfare” has been privatized and provides opportunities for investors with an immense amount of accumulated capital.

 Regardless of the theory of political economy to which one subscribes, throughout the past fifty years, monetary, management, and regulatory theories have driven a merger of government and business into a wild, wild west of unfettered capitalism.  This corporatocracy has resulted in massive pools of wealth in the hands of ultra-high net worth individuals, corporations, and institutions such as universities and sovereign wealth, and retirement funds.

Like water naturally seeks its own level, capital flows toward return on investment. In addition to a high return, investors seek protection from taxes, creditors, and all forms of liability.  Many state legislatures have accommodated that tendency by enacting laws for protecting and hiding assets.

Among other things, these massive pools of capital have resulted in monetization of every societal issue from crime to end of life care. Indeed, as the previous post indicates, even housing in neglected, abandoned, and deteriorating neighborhoods have been attracting private equity funds and institutional investors.

 Revenue producing real estate has become central to the institutionalization of human commodities such as frail elders, prisoners, soldiers, and troubled youth. Government guaranteed revenues are transferred opaquely from middle- and low-income strata of society through captured agencies, and secretive networks of shell companies to family offices, holding companies, Real Estate Investment Trusts, and other investment vehicles.

It is important for those of us advocating for economic justice to focus on how the economic system works and what it portends for the future of institutionalized Americans and the future of democracy.  The COVID pandemic swept through long-term care facilities, meat packing plants, and prisons because in the current economic system management theory accords priority to investors over stakeholders.  Patients, customers, inmates, students, and communities are not the priority of management – finance and extraction of value for shareholders is the top priority of executives, and this aided and abetted by government.

By:

Dave Kingsley

Avocado Post-Acute Care in San Diego is a facility owned by a limited partnership – Eldorado Care Center LP. This facility came to the attention of the media because of a large number of COVID deaths, and a rating of 1 on the CMS Nursing Home Compare website.  I was contacted by a reporter for a local PBS station. She was attempting to trace ownership of the facility.

The “indirect ownership interest” (100%) is listed by CMS as the Jacob Graff Living Trust.  Living trusts are set up by wealthy individuals for managing and protecting their assets – usually a family’s wealth.  I won’t get into the weeds on trusts in this post.  Suffice it to say that trusts are financial vehicles for keeping wealth away from the IRS – especially from collection of inheritance taxes.  This is a problem because these types of financial machinations are fueling wealth maldistribution.  This is the reason I have been advising advocacy organizations to add attorneys and financiers who understand corporate ownership structuring and finance to their boards.

I checked the San Diego County property database and discovered that the building was owned by an LLC. Property records won’t reveal the owner of an LLC – neither will secretary of state business search databases. However, addresses on the documents and Jacob Graff’s signatures revealed that his real estate business is the owner.  The market value of the property was assessed at $11 million.  Indeed, the long-term care business is far more about real estate than it is long-term care.  This property LLC most certainly has a “triple net lease” with Eldorado Care Center LP.  Under a triple net lease, the leasees pay taxes, maintenance, and insurance.

Continued searching of records regarding Jacob Graff revealed that he owned four other long-term care facilities in California – all of which were under the umbrella of a real estate property management firm in Beverly Hills, California.  Furthermore, on February 14, 2013, McKnight’s reported this: “A federal jury recently assessed penalties of 28.1 million against the former owner of an Illinois nursing home on charges that include Medicare & Medicaid fraud.”

According to the article, the defendant was Jacob Graff.  Apparently, this case arose from two nurses who “blew the whistle” for substandard care and fraudulent billing.  The nurses were fired to “silence their complaints.” 

The facility, Momence Meadows Nursing Center (MMNC) in Kankakee, IL was fined more than $19 million for “filing more than 1,700 false or fraudulent claims to state and federal agencies.  “Additional fines were levied because the “worthless services” provided by the nursing home resulted in the government losing more than $3 million.”

How many owners like Jacob Graff can we find among owners of the 15,500 long-term care facilities in the U.S.? That is still unknown.  We need to determine that.  I keep discovering them as I search through murky ownership structures in the nursing home business. 

By:

Dave Kingsley

Macroeconomic Trends & Long-term Care Ownership

The long-term care industry reflects macroeconomic trends of the past half century.  With excess liquidity in the capital markets and increasing concentration of wealth in the hands of a small number of ultra-high net worth individuals, asset protection and finance have become major, if not dominant, purposes of corporate management.

An analysis of ownership structures in the nursing home business suggests that a large proportion of investment is driven by protection of personal/family, institutional, and corporate wealth. In the past few decades, state legislatures have passed legislation designed to provide secrecy and shelter from taxes, liability, and creditors.  Wealthy individuals avail themselves of these laws to keep their wealth intact and safe from the IRS and creditors during their lifetime and after their death.  Because of recent legislation, for example, South Dakota collects a large amount of fees for setting up the most protective of asset protection trusts.

States such as Nevada, Delaware, and Alaska are the most beneficial places to incorporate businesses and the shell companies (shell corporations have no offices and no employees) useful for hiding assets and keeping tax collectors and creditors at bay.  Long term care corporation ownership is mostly designed around processing funds through a network of Limited Liability corporations – many of which are shell companies.

Low- and middle-income Americans expend all their assets in long-term care before they find themselves in a position to ask for “welfare medicine,” i.e., Medicaid.   These are assets they would otherwise leave to their heirs. Personal and government funds are extracted by investors who use the tax codes to avoid meeting their obligations to support the public interest and repay the society enriching them.  A dollar in real estate related and other forms of tax avoidance is worth more than a dollar in operator profit.  Extraction from the mass of wage and salary workers by the wealthy exacerbates maldistribution and becomes a feedback loop in which inequity becomes continuously worse.  

The essence of the long-term care industry is the parking of capital owned by ultra-high net worth individuals in networks of entities designed for maintenance and enhancement of individual and family wealth.  Various forms of trusts are set up to protect and grow individual and family wealth.

By:

Max J. Skidmore

The election is over.  Joe Biden won.  But a serious issue related to the funding of Social Security is hanging over the Biden Administration and the next congress:  will the funds deferred from the payroll tax by President Trump be restored to the Social Security Trust Fund?

Background

The financing for America’s Social Security system comes from a payroll tax, FICA (the Federal Insurance Contributions Act) levied on wages up to $142,800 (for 2021; the amount changes yearly). Wages above that amount do not count for purposes of the system.

The tax is 6.2% deducted from the employee’s wages. The employer matches that amount, thus providing an additional 6.2%.

Those amounts go into trust funds. Benefit payments come out of those trust funds, as do the very small administrative costs. Those costs are extremely low, less than 1% of the amount collected, making Social Security the most efficient such system in the world. 

The rest of the amounts in the trust funds (that is, the amounts left over after paying benefits and paying administrative costs) are invested in government bonds. Those bonds are completely safe, and regularly pay interest back into the trust funds.

Under the law, all benefits must come from the trust funds. So long as FICA taxes keep coming into those funds, there will always be income to pay for some level of benefits. 

Under the Obama administration, during the financial crisis that President Obama inherited, FICA taxes were temporarily suspended in order to make more money available to workers. This did not affect the trust funds, however, because the government replaced the amounts that the trust funds would have received from FICA.

President Trump’s Executive Action Regarding Payroll Taxes

Last August, President Trump issued an executive order delaying the collection of FICA taxes for the rest of the year. This order did not reduce the taxes owed; it only delayed their collection. 

Employers and employees will have to pay the accumulated taxes after the first of the year, and therefore many employers are continuing to collect FICA taxes, and are holding them to provide them to the government when they come due. This prevents them, and their workers, from having to come up with large payments to catch up on the amounts owed. 

The reason for this rather confusing policy has not been made clear. It may reflect a misunderstanding by Mr. Trump regarding how Social Security’s financing operates. 

On the other hand, he may have been making a move toward eliminating the payroll tax, and thus eliminating Social Security. Mr. Trump suggested that this may be his preference, but this cannot happen without a change in the law. Such a change would only be possible if Mr. Trump is re-elected, and if Republicans keep control of the Senate, and gain control of the House.

If the law were to be changed, and the payroll tax eliminated, it would be only a few months before the trust funds would be completely exhausted, and Social Security would be eliminated. Mr. Trump has made no secret of his desire to kill the system, and many Republicans – probably most of those in Congress – agree. Since Republicans did not have the courage to oppose Donald Trump, even those who do not agree with Trump would almost assuredly vote to do whatever it was he proposed.

Democrats all desire to retain the system, and even to expand benefits. Thus, the November 4th election was crucial to Social Security’s future. 

For the system to continue, it was essential to vote Trump out of office, to retain Democrats in control of the House, and to elect more Democratic senators, so that Democrats will control the Senate as well as the House. Now we have some uncertainty due to the two senate races in Georgia.  Those races could be critical for restoration of deferred taxes to the Social Security Trust Fund.

It is impossible to overstate the importance of massive Democratic victories at all levels, if Social Security, Medicare, and many other essential programs are to continue, and if other much-needed programs are to be enacted.  We had some important victories, but not a massive blue wave that we were hoping for.  Now, saving the Social Security System will be a matter of activism and fighting hard for a system so many people depend on in retirement and in other ways.  It will be important to learn your senator’s and congressperson’s phone number and make yourself know to them.