Rising litigation costs and insurance rates are two of the biggest reasons a commercial health care real estate investment firm is packing up and leaving the Florida senior living and nursing facility market.
Ray Oborn, executive vice president of asset management for American Healthcare REIT, said his company will be taking a $40 million hit once the sale of all nine of its Florida assets is finalized.
“We have felt the brunt and made the decision last summer to go ahead and leave the state,” Oborn told The Florida Record. “We decided we just needed to exit.”
Oborn
| Courtesy photo
Oborn said the company’s facilities were operating at a relatively high occupancy rate. But when the COVID pandemic hit in early 2020, he says the entire equation changed. Occupancy rates fell from 83 percent to 67 percent.
“Couple that with rising wage pressures in Florida and liability claims that went through the roof as well as rising insurance premiums,” Oborn said. “Then there were the hurricanes. Our property insurance rates went through the roof. Deductibles went from $25,000 to $100,000, and our premiums have gone up from 66 percent from 2021 to 2022 and then 15 percent more from 2022 to 2023.
“Our total cost of providing insurance for nine buildings was $2.8 million, and that’s with higher deductibles or it would’ve been more.”
Then, Oborn said litigation costs have skyrocketed in recent years.
“The increase in the insurance premiums could have maybe made a difference for us, but then there’s the risk of these claims,” he said. “We did a claims review, and 50 percent of our claims are from the state of Florida, which is just 20 percent of our properties.”
Oborn said some of the claims are “downright frivolous.”
“It’s ambulance chasing by some of the attorneys,” he said. “It got to be where we were having these claims come in all of the time. Some were COVID. Some weren’t. When you look at it, something isn’t right.
“It’s the same types of buildings and care, but in other states we have less claims activities. And the cost per claim is significantly less as well in other states because of wages, wage pressure, contract labor and such.
“The math just doesn’t add up. The economics doesn’t work. You can’t charge enough to residents to cover labor costs let alone your increase in insurance premiums and these claims.”
By the end of 2022, American Healthcare REIT had sold four of the nine properties. The other five are in the process of being sold. Licenses for two of the sold facilities were handed back in because the buyer had other plans for the facilities, such as turning it into parking for a Whataburger restaurant.
“We were running that one at a loss of $150,000 a month,” Oborn said. “We had about 30 residents we had to find placement for them.
“We felt bad about that, but we didn’t have a choice.”
The other facility is being repurposed as affordable senior apartments by the new owner.
Because the company is moving out of the state, Oborn said officials made the decision to sell its Florida medical office buildings as well.
Being in the business of senior care in Florida seems like smart decision. Oborn said it isn’t as easy as it seems.
“The landscape shifted with COVID … and with no reign on insurance premiums,” he said. “We are a real estate owner, but we don’t manage properties. We brought in new operator two years ago. That was 2021 and post-COVID. We hoped it would help improve performance. But instead, things got worse.
“Part of it is the fact that if you have a newer asset, that helps. We bought this portfolio knowing what it was. The average age of these assets is closer to 30 years old. There are lots of newer facilities going into the state.
“Our net operating loss for the nine communities was $4.2 million in 2022.”
Florida lawmakers have introduced bills to target rising insurance costs as well as tort reform to benefit such facilities. Oborn hope the changes come to fruition, but American Healthcare REIT won’t benefit from them for now. The company has purchased more assets in the Midwest, particularly Texas.
“We were able to step in and acquire seven assets in Texas,” he said. “I looked at business model, and it was a no-brainer. We might be replacing nine assets and bringing in only seven assets, but the net is huge in our favor.
“They’re profitable, largely to do with labor costs. But it’s more business-friendly, and insurance premiums are a fraction of what we’re paying in Florida.”