Part 1

At CFO Network we have been analyzing skilled nursing facilities for over ten years, and have witnessed some significant industry trends over that time. One of the most interesting, but least understood and discussed, is the dominance of Formation Capital as an owner and investor in the industry. To provide our customers and the public with better information about the role of this firm in the industry, we have developed a series of emails to educate and inform.

Formed in 1999, Formation Capital has become one of the major players in the skilled nursing market and grown to include multiple companies. Currently, Formation Capital claims to own the real estate for over 60,000 beds in 35 states, however their portfolio also includes investments in some of the largest skilled nursing facility management companies in the country. Formation Capital’s partners are some of the largest providers of senior care in the nation including: Genesis Healthcare (the largest provider of skilled nursing care[1]), Consulate Health Care (6th largest provider1), LaVie Care Centers, Life Choice and Millennium Home Healthcare.

Figure 1: Formation Capital Ownership Density by State

Formation Development Group (“FDG”) is Formation Capital’s acquisition and development services partner. FDG specializes in senior living acquisition, development and investment, from site selection through construction and oversight. FDG is owned by Formation Capital and FDG’s founders. CEO Brian Beckwith describes Formation’s recent investment strategy as “50 percent services and 50 percent real estate.”[2] Formation Capital invests its own capital and the capital of others. The list of “others” includes high-net-worth accredited investors and several institutional investors like Safanad and several publically held REITs. Beckwith also readily admits that Formation Capital prefers complicated transactions, because he believes those deals do not make sense for a publically traded company and offer an excellent opportunity for a great return.

Though Formation has grown to include several related ownership and management companies, the four companies listed in the table below are their most significant ownership companies, according to data.medicare.gov.

Figure 2: Formation Capital Investment Entities

It should also be noted that some facilities have more than one of these companies listed as an official owner in CMS’ data. In other words, Formation Capital is associated with 590 unique facilities in Medicare’s data as opposed to the over 750 shown above. Those 590 facilities are spread across 39 states. Florida, Pennsylvania and Maryland have the highest concentration of Formation Capital facilities.

Figure 3: Formation Capital Affiliated Facilities by State

The next email in this series will take a closer look at one of Formation Capital’s entities, FC Investors XXI, and take a look at some of the staffing and deficiency data related to their facilities.

Part 2

It is clear there was a lot of interest in our first email detailing the role that Formation Capital has played in the skilled nursing industry in recent years. As part two of our series on this major industry player, we have performed some comprehensive analysis of one of the biggest ownerships groups within the Formation Capital business model: FC Investors XXI, LLC. What follows is an overview of some of the most interesting statistics on the performance of the facilities owned by this particular investment arm of Formation Capital, including analysis on average star rankings, deficiencies, penalties, and staffing.

FC Investors XXI, LLC is one of the many entities owned by Formation Capital. These entities, in turn, are the actual owners of skilled nursing facilities and are listed as such in the CMS’ official data. FC Investors XXI is listed as having a 5% or greater indirect ownership interest in 181 facilities. These facilities are spread across the United States, as shown in the map below, with 77 of the facilities located in Florida.

The facilities were purchased between 2011 and 2015 with over 90% of the facilities being purchased between December 30, 2011 and July 31, 2012.

The typical FC Investors XXI facility has around 110 beds with the smallest facility only having 30 beds and the largest having 240 beds. Perhaps surprisingly, the facilities licenses are, typically, not new. In fact, the average FC Investors XXI facility has had a Medicare license for around 26 years, and only 7 of the facilities’ license have been formed in the last 15 years.

According to Medicare’s star ratings, the average facility has an overall rating of just over two stars. The histogram below shows the distribution of FC Investors XXI’s facilities by overall star rating. Over 70% of the 181 facilities owned by FC Investors XXI have an overall rating of 1 or 2 stars according to data.medicare.gov. The table below shows the average overall star rating for the facility by state.

Staffing

The following charts show the staffing patterns for the average FC Investors XXI facility compared to the average facility in the United States, a sample which includes over 14,000 facilities. All the data in this sections was gathered from Data.Medicare.Gov. From 2013 to 2015, the average FC Investors XXI facility staffed Registered Nurses at a lower rate than other facilities during the same time period. Facilities

While the difference is clear for Registered Nurses, the difference isn’t as clear for licensed practical nursing and certified nursing assistance. The average FC Investor XXI facility was well below the average facility in 2013 and 2014, but that trend dramatically reversed in 2014. Though, the average FC Investor facility’s staffing of CNAs did increase from Q4 2014 to Q1 2015, it still wasn’t very far beyond the average facility during that time period. On the other hand, the average FC investor facility LPN staffing rates were well above the average facility for the entire time period.

Broadly stated, the average facility in FC Investors XXI’s portfolio staffed RNs at a lower rate than a typical facility, but kept CNA and LPN staffing at a similar or higher rate than the average national facility.

The table below provides a breakdown of the average staffing rates, again from 2013 Q1 to 2015 Q4, for FC Investors XXI by state. From this table, some other trends become clear. States with more facilities like Pennsylvania, North Carolina and Ohio generally show a trend of being closer to the total average than the states with a single or very few facilities. This could be an indication that staffing patterns are determined at company level and that state specific effects are minimal. On the other hand, Florida is an exception, despite staffing below the average for RN and LPN hours, as they staffed well above the average for CNA hours.

It should also be noted that Maryland, where all four facilities had a star rating of 1, was the only state to fall below the FC Investors XXI average in every staffing category.

Penalties and Fines

Between 2013 and April 15, 2016, The facilities in FC Investors XXI’s portfolio were fined over $4 million dollars. Over 48% of those fines actually occurred in 2015, after a bulk of the facilities were acquired. Nevertheless, it is clear that the average fine per facility actually peaked in 2015 at approximately $11,171 per facility. Of course, the 2016 fine data is incomplete, as it is for the rest of this section.

Below is a matrix of the facilities recorded deficiencies by year. The Centers for Medicare & Medicaid Services (“CMS”) ranks deficiencies in increasing severity from A, an isolated deficiency with no actual harm and minimal potential for harm to a patient, to L, a widespread and repeated deficiency which may immediately jeopardize resident health or safety. Again, the data for 2016 is clearly incomplete. Still, it is interesting to note that 2015 had the most total deficiencies with 2,583. It was also the year with the most D, E, F, G and J level deficiencies. According to the CMS, J level deficiencies are characterized as isolated incidents, but those incidents could lead to immediate jeopardy to resident health or safety.

Considering those deficiencies by state, it is clear that the facilities in Florida incurred far more deficiencies than anywhere else, however, if these numbers are adjusted by the number of facilities, the average shows that Maryland, Nebraska and Michigan were actually the most cited states in FC Investors XXI’s portfolio.

The final email in this series will provide a higher level view of all of FC’s different holding entities and examine some of the identified trends based on holding company or state.

Stuart McLendon
Senior Analyst, CFO Network
smclendon@cfonet.biz
501-823-2368