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Skilled Nursing Sector Posts an Increase in Occupancy in the Third Quarter

In what some hope is a reversal in long-term trends, skilled nursing occupancy inched up to 82.2 percent.

The occupancy rate at skilled nursing facilities increased to 82.2 percent in the third quarter—a 14-basis-point increase compared to the quarter prior, according to the most recent Skilled Nursing Data Report from the National Investment Center for Seniors Housing and Care (NIC). The change might point to a possible future evening out of supply and demand dynamics in the challenged sector.

The slight change in occupancy trends is encouraging, according to Bill Kauffman, senior principal with NIC, and occupancy in the 82-percent range is “although not a significant increase, is a steady one,” he says. It’s possible the increase is due to growth in the number of seniors between the ages of 83 and 87 using skilled nursing facilities. Over the past few years, there has been a decline in the demographic that age using skilled nursing stays.

However, “we can’t say we’re out of the woods yet,” Kauffman notes. While occupancy levels increased quarter-over-quarter, the most recent figure was still 100 basis points below the rate reported for the third quarter of 2017.

Kauffman points to multiple factors that could have potentially inflated the third quarter increase, such as the winter flu season—meaning more weather-related short-term stays at skilled nursing facilities. It would take improving property fundamentals over the next few quarters to say actual long-term change is occurring in the skills nursing sector, he notes.

NIC’s data shows that both Medicaid and Managed Medicare-funded stays have increased in usage and reimbursement in the third quarter. Managed Medicare “increased both in quarter over quarter and year over year—although less and slower in rural areas,” the report states.

To make sense of the data, it’s important to note that some operators of skilled nursing facilities are able to remain successful even at occupancy of only 80 percent due to the high turnover of patients. Although patients may be at the facility for shorter stays, their conditions may be more medically complex and the skilled nursing operator is able to attain higher reimbursements for more costly care.

“Patients may require a ventilator, for example, which results in high acuity,” says Kauffman.

Data collected in the past three years indicates a downward trend in skilled nursing facility occupancy, according to Peter Siciliano, director of the real estate group with ratings firm Fitch Ratings. He attributes the challenges in the sector to the push for care in other, lower cost settings, among other factors.

“Medicare is steering people away from hospitals and skilled nursing facilities who don’t need to be there or reducing their stays exponentially. The regulatory nature of healthcare determines the length of stay,” says Siciliano.

Overall interest in seniors housing stays strong

Looking at the larger picture, the U.S. seniors housing sector is now attracting a more diverse group of investors, including private equity firms, pension plans and sovereign wealth funds, according to a recent report from Fitch Ratings. Many of those investors appear interested in pursuing properties being put on the market by healthcare REITs, though that interest is multifaceted and hard to track when it comes to skilled nursing facilities specifically.

In a recent survey, Capital One asked 147 seniors housing executives about their plans for future investment in the sector. Thirty-seven percent of respondents cited acquiring existing properties as their top choice of a growth strategy, with an “outlook for seniors housing as strong, with M&A activity expected to continue,” said Chris Taylor, managing director at Capital One Healthcare, in a statement. Another 25 percent of respondents pointed to “repositioning older properties” as their preferred growth strategy, with an additional 24 percent preferring new development.

Surveyed executives expressed high interest in markets including the Southeast and West Coast for future acquisitions. When it came to investment in skilled nursing facilities, survey respondents lacked consensus. Twenty-nine percent predicted increased interest in the skilled nursing sector, while 32 percent foresaw a decline in interest.

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