REITs Are the “New Kids on the Block,” and they Swing a Lot of Weight

You may be wondering how the Carlyle Group unloaded 338 facilities in 2010 as it dismantled HCR ManorCare and pocketed over $6 billion from the sale of real estate.  You also may be wondering why that’s important.  I’m suggesting in this post that it’s important because legal entities known as “real estate investment trusts” (REITs) have purchased significant amounts of senior housing properties in the past two decades and are fundamentally changing the structure of the industry. Indeed, HCP (now Healthpeak), an REIT, picked up the HCR ManorCare properties from Carlyle.  Because of these kinds of deals, REITs have been integrated into the fabric of for-profit nursing care in a big way.

PE takeovers and massive sell-off of long-term care property in the first and second decade of the 21^st Century ushered in a new REIT era in nursing home ownership. REIT’s and PE firms have been a “hand and glove” phenomenon in what amounts to a revolution in nursing home ownership.  As I will demonstrate in this and later blog posts, REITs are the new, and now the big, kids on the block in the nursing home business.

Furthermore, the growth of REIT ownership of skilled nursing property has been fueled by well-established chains such as Brookdale that are selling property for an infusion of cash.  These chains typically sell their property to REITs and hold themselves out as management companies. REITs create LLCs as operators (100% owners) and place each property in a newly created LLC and contract with companies like Brookdale to manage the facility. 

What is an REIT?

I’m writing this post to make a very important point that will be expanded, illustrated, and clarified in the months and years ahead on this blog: the primary mission of the nursing home industry is not medical care, nor is it real estate; rather, the corporate function driving the business of long-term care is financial engineering. Finance is not an ancillary function of REITs – it is the function.  The same can be said about the rest of the industry – whether the ownership structures of facilities are embedded in REITs, private equity portfolios, family trusts, family offices, limited liability companies, publicly listed holding companies and privately held corporations in their various legal forms, the mission of providers is extraction of cash as expeditiously as possible.

The financialization of the American corporation has roots that can be traced beyond the take-off period of Reagan-Thatcher neo-liberalism and Chicago School theories of corporate management.  REIT’s became part of the U.S. financial landscape with President Eisenhower’s signature on legislation creating publicly listed real estate trusts.

This legislation provided an opportunity for the “average American” to invest in real estate trusts, which prior to that time was limited to wealthy investors.  REITs as corporations could issue IPOs, raise capital, and gain a listing on a public stock exchange.  There are considerable tax advantages to the REIT as a corporation because these entities pay no corporate income tax on net income distributed to shareholders.  They are, however, as REITs, required to distribute 90% of their income to common stockholders.

When REITs Entered the Senior Housing Industry

Until 1999, REITs were legally authorized to own, lease, and trade in real estate.  They could not create wholly owned taxable reit subsidies (TRSs) for the purpose of owning and managing licensed skilled nursing facilities.  That changed with passage of the “Ticket to Work and Incentives Improvement Act of 1999,” which was ostensibly “intended to amend the Social Security Act to expand the availability of health care coverage for working individuals with disabilities, to establish a Ticket to Work and Self-Sufficiency Program in the Social Security Administration to provide such individuals with meaningful opportunities to work,and for other purposes” (https://www.congress.go/bill/106th-congress/house-bill/180/text).

Often, major pieces of legislation include an assortment of items that have no relationship to the law at its introduction. Tucked into the “Ticket to Work and Incentives Improvement Act of 1999” was Title V (Tax Relief Extension Act of 1999), Subtitle C, Part II, subpart a – “treatment of income and services provided by taxable reit subsidiaries.” From the perspective of how the nursing home industry would be changed in the years ahead, this arcane piece of legislation is a big deal.

With this legislation, “healthcare REIT” entered the lexicon of long-term care. As a new legal corporate structure, healthcare REITs interacted with private equity and well-established chains in a way not yet comprehended by advocates, activists, legislators, and the public in general. A massive amount of skilled nursing real estate has been shifted to these entities that not only own property but also manage operations. Furthermore, financial engineering is in continuous motion with property acquisition and trading, formation of joint ventures, contracting with facility management services, and formation of ownership networks.

REITs Are Spreading their Tentacles throughout the Long-Term Care Industry

If you are familiar with the skilled nursing industry, you will recognize corporations such Sunrise Senior Living, Kindred Healthcare, Brookdale Senior Living, Genesis, and so forth. As you peruse the financial statements of the major REITS such as Welltower (the biggest), Ventas, Healthpeak and others, you will also see those well-know company names as managers of REIT facilities, as joint venture partners, and as buyers and sellers of real estate.

Furthermore, REITs entered the senior housing market in 1999 – not nursing home care alone. Many nursing home facilities are embedded in in Continuing Care Retirement Communities (CCRCs). Some of their properties and operations are stand alone assisted living facilities, or senior apartments.

Federal dollars Flowing into REITs Are Not Only From Medicare & Medicaid

It would be difficult to identify an industry that is as subsidized by federal and state government as the long-term care industry. REITs are subsidized through a steady stream of patients reimbursed through Medicare and Medicaid. With relief from corporate income taxes, and subsidies such as capital gains, depreciation allowances, and interest deductions, REITs are provided with major tax expenditures.

In future posts, I will explain why the amount of public funds flowing into REITs and other legal structures through Medicaid, Medicare, and tax subsidies enriches investors and executives but does nothing to improve conditions in long-term care facilities. It is important for advocates and activists to use financial information to rebut the industry’s claim that operators can’t afford to provide better care. It is probably the case that facility-level management can’t afford to provide higher quality of care. However, that can be attributed to extraction of funds by holding companies, REITs, and other endpoints in the flow of capital from the front door of the facility to the consolidated financial statements of the entities at the top of the chain.

By Dave Kingsley 2/14/2021