Vikas Gupta

This is VERSED, powered by VIUM Capital, the podcast that brings you conversations with the leaders driving change in seniors housing and healthcare. I’m your host, Steve Kennedy, and together we’ll explore the insights, challenges, and solutions shaping our industry.

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Steve 00:23

Welcome to another episode of VERSED, powered by VIUM Capital. This is your host, Steve Kennedy. And I'm really pleased to have with me today, Vikas Gupta. Vikas, as you may know, is the Chief Investment Officer at Omega Healthcare Investors. And previous to that, for a decade, he was Senior Vice President of Acquisitions and Development. Vikas is on the board of the NIC, ASHA, is very active in our sector of seniors housing and health care, commercial real estate and operations. And so, Vikas, thank you for joining VERSED

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Vikas 00:58

Thank you guys for having me. I'm looking forward to it.

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Steve 01:06

So first of all, if you don't mind, for our listeners, just provide an overview of Omega's business and platform.

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Vikas 01:08

Yeah, sure. So, as you may know, but I'll still elaborate, Omega is a publicly traded healthcare REIT. We own about $13 billion of assets, and the majority of it is skilled nursing across the US. But about 20% of our balance sheet is also now senior housing, which comprises assisted living, independent living, memory care, and now also a big portion of our portfolio is care homes in the UK. So that has become a larger part of our business, especially over the last couple of years. But with that said, we still think of ourselves as the leaders in the skilled space from a capital perspective. As we believe that we are the largest owner of the real estate nursing homes in the country.

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We structure our transactions in many different ways, but our bread and butter there tends to be triple net leases. We do that mostly for our skilled assets as well as our care home assets in the UK. But we have, over the last couple of years, started looking at different structures, including JVs, various loans, pref-equity structures. As a REIT we don't want to grow that type of structure too large, the loan transactions, but we have been trying to take advantage of the lack of capital in the industry in the last couple of years in the loan segment. But with that said, we are an owned REIT, and the majority of what we do is buy real estate.

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Steve 02:33

That's great. And you talked a little bit about the diversification of the platform, not only from an asset type, but also geographically going to the UK. Do you mind talking about what prompted that diversification of the Omega platform?

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Vikas 02:47

Yeah, so we entered the UK in 2015. At that time we were just in the US and we saw an opportunity there and we're like, this is a good place to allocate some capital and partner with a good operator very similar to what we do in the US. So we went out there, we did that transaction. We did another transaction about a year later. Then we kept learning over the next five, 6 or 7 years there a few small transactions, but then about three years ago, it exploded out there where there was such a lack of capital in the UK. And we found it to be a really good market where the operating fundamentals were excellent, the operators were good and we could understand the business. There's a government reimbursement segment to it. There's a private pay segment to it, really a care home, which is a product we invest in. It's like a hybrid of both. It's like a sniff and out form. And so once we got comfortable understanding the government reimbursement, we were confident that this is a place we can allocate capital and assist operators, similar to what we do in the US. So it just really a learning curve. And as we learned more and felt more comfortable, we allocated more capital. And it was at a time when there was a need for capital. So, a lot of times what we say about the UK is it's like 20 years behind the US. We're doing some lease backs, we're doing different kinds of transactions out there, people there are learning and the market’s evolving. But in the short form, people need capital to consolidate, and we saw there to be a good place for us to put out capital. And today, we're looking at owning about 250 care homes with 15 operators. So we're proud of the platform we've created there.

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Steve 04:28

So delving into that a little more, when you talk about governmental reimbursement in the UK, when you think of it here in the United States and the skilled nursing facility sector, you think about the federal reimbursement through Medicare for therapy and like services. You also think, of course, about Medicaid, which is driven at the state level and matched at the federal level. Is it the same type of structure in the UK, or is it a single payer that's not geographically diverse?

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Vikas 04:57

Yes, it is very similar, but I'm gonna use some terms that kind of confuse it.

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It's more like Medicaid, where each care home is in a local authority and they are getting rates set by the local authority. It's almost like a state setting their rates. So that is their one pot of money, their local authority for the government payer. The government is funding all of this and some of it is going to the hospitals through the NHS. And that's kind of like the Medicare if you think about it. That money doesn't touch the care homes, all one pot of money. And to be honest, there's a lot of discussion about trying to make it have the two groups work together better to ultimately get people out of the hospitals and into the care homes. That has not been figured out yet. So right now and again, it's all government tax money that's going back to, it's a social system where everyone's paid, but ultimately the care homes are dealing with their local authorities, which is similar to a nursing home getting Medicaid from their state. There's no Medicare coming into the care home, as an analogy.

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Steve 05:59

So getting back to the investment strategy of Omega, especially of late, can you talk about the metrics or indicators that you find most valuable when evaluating potential investments? I mean, you talk about seeing opportunity and need for capital in certain markets, but what are those metrics and indicators that you look at maybe more than others?

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Vikas 06:21

I always say we underwrite to three things. We underwrite to the market ,the real estate, and the operator. Those are the three things we underwrite to. Now, there's a lot to each of those. But I mean, just to break them down a little bit: the markets, the state, and then even getting locally to the actual town and the demographics there. But the state also means the reimbursement environment. What's going on there? Is it a good state, bad state from a reimbursements perspective? There's a few states in the US that Omega tries to avoid just because we've either been burnt there, reimbursement’s not good, it's a very political environment, etc., etc..

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Next comes the real estate; that means the quality of the asset itself. Is it just a piece of junk? Is it something that has a useful life? And this also plays into it: is that a CON state versus a non-CON state kind of plays into it. And then to be honest, the operator’s the most important one. Who the operator is a lot of things: the credit behind them, what else they operate, what's their experience, what's their balance sheet look like? And then on top of that, do they know these markets? Do they know what they're doing? Have they turned around assets like these before? But that carries a lot of weight where I'd almost rank that being the very most important item.

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Omega’s business a lot of times comes from its current operators. We do business with 80 some operators now, and I would say about 30 of them keep bringing us recurring business over and over again to the point where we know that they're good. We know that they know to look at the markets and the real estate in the right way, and that we can just keep on doing add-on transactions with them.

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So those are the main things we look at. Also getting a little bit more granular, we have to price transactions to make money for our shareholders. So that becomes a little bit of a math exercise is really what that becomes. It's like we're looking at our cost of capital, which is a factor of our debt and or equity, and then we're putting our money at a rate creating a delta, which then that delta goes to our shareholders. And Omega's business is pretty simple. If you own Omega stock, you get a dividend. And that dividend is basically that delta.

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I get a joke a lot of times where it’s like, Vikas, can you go lower in rate? I'm like, I actually can't go lower in rate because my cost of capital is X. I got to give you Y for us to make this worthwhile for us.

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Steve 08:32

That's helpful to talk about market, to talk about the operator, to talk about real estate. You’re commenting on all the factors really we as a capital provider more on the debt side of things, we look at as well. As I think about VIUM Capital,  we're only five years old, but as we kind of take a step back of kind of having our flywheel turning about converting bridge to HUD, permanent financing and being a GSE correspondent, we also look at our platform, and we're a little heavy on the skilled nursing side. Not necessarily a bad thing, but the way the last few years have panned out as Medicaid is rebased and the cap rates are higher for skilled nursing facilities, and seniors housing has taken in some markets a little bit longer to get back to stabilization from an occupancy perspective and a margin perspective, we found ourselves looking at, as we grow this company, we do want some diversification. And so as I listen to you, I thought about that from Omega, your perspectives. Do you view this continued, maybe diversification a little bit more seniors housing and non skilled exposure as something that you all think of over the next couple of years? Or are you pretty content with the current diversification of your assets?

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Vikas 09:54

Yeah, it's a good question. We don't have targets for our asset allocation. We really just want to find things at the right price. But going to your point Steve, sniff’s been hard for us to buy for several reasons. It's been all the reasons you just said with reimbursement. But couple that with the competition in the space, it's been tough. The prices per bed have gone up. They're crazy. And Omega sometimes we do cap out on our price for bed. And that is because sometimes the way we think about real estate investments is that even if the cash flow is there, just throwing a cap rate on it, if you get to a place like I'm just saying, is a number like 300 per bed. The problem we have, $300,000 per bed. The problem we have with that is that we start thinking you can build a new building for more than that. So we don't want to do that, especially if there's any type of overhaul of Medicaid or Medicare or something like that

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But so with that said, yeah, we are looking at senior housing a bit closer to see if we can find stuff at a good price. And as those demographics kick in and those buildings fill up then yeah, we can make a better return on those assets.

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I will never say that I want to stop buying scale, though. That's what we do. We love that product. We just want pricing to get back to normal a little bit is what we want currently.

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Not that we're competitors, Steve, but I mean HUD financing changes things. People love HUD financing. They love to buy their own assets and take it to HUD. Omega's just another option. Sell your share to us and make some money. Now, Omega can assume high debt, but that's not usually how people go. They usually go one route or the other. But with that said, there's still a lot of nursing homes available in this country. And, it's just sometimes they just get gobbled up very quickly. And I think people just start looking at if you're a large, large owner, you start looking at your options. And a lot of times it's like sell to a REIT or go to HUD

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Steve 11:45

You know, speaking about HUD and the federal government, we've talked about Medicaid and Medicare.

There's been a bit of activity in DC over the last few months. And, I'll be in DC tomorrow with our Chief Underwriter and President of HMAC, Alison Lemle, for the Mortgage Bankers Association's National Advocacy Conference. And there's a lot of stuff to talk about, and there's obviously a lot of noise. When you're in your chair, what are those things that those items in DC that you're taking a look at and, zoning in on, that could impact Omega's business one way or the other.

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Vikas 12:22

It's the same things you're probably talking about. It's the budget deficit and trying to fill that hole with Medicaid cuts. That's really our primary concern right now. Now, with that said, we have a whole department constantly looking into this, talking to lobbyists, talking to AHCA, talking to other groups about what can and can't happen. We generally feel like the administration is very supportive of nursing homes. So in some ways we feel very good. We also feel like we know some other places that they can make large cuts that won't affect nursing homes, but that is our primary concern right now. If for some reason they do think like be it provider taxes, be it IGT, be it something that affects Medicaid rates across this country. Omega has exposure in 43 states. So and that means our operators could get affected if there's cuts in any of the things I just said.

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We feel this administration understands our business. We feel like they've supported this industry, especially during Covid. So we feel like they'll take the appropriate action to keep things fairly neutral for the nursing homes. But we are watching very cautiously right now.

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Steve 13:28

We appreciate Omega’s being on the front line of that advocacy and really telling just the story so that folks know in DC what certain ramifications would occur with certain cuts. So it's oftentimes that education coming from the providers as well as capital and, those important industries and including AHCA/NCAL, they've been a really good advocate of just making sure we can get that story out clearly, especially to new representatives who have not been steeped in sort of these issues for many years.

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Vikas 14:05

Yeah, there's a lot on the table right now. I mean, there's a lot going on, and there’s strategy involved in how you attack each one of these things. We've got new people getting confirmed every day. CMS revalidation information is due, which is just basically, as you may know, operators have to submit a lot of information about all their buildings. It’s all due on May 1st and Omega, we just play ball. We worked with every one of our operators to get them the necessary paperwork they need on our ownership. A lot of people think this might go away. But we took the time to be like, if it doesn't go away, we have to give our operators the information they need to submit to CMS.

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We're trying our best. We're listening to kind of the cues we're getting from everybody of what we should do and shouldn't do, and we're trying to be supportive where we can.

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Steve 14:49

Well, I think that advice, not only advice, but what you're putting into practice for your operating partners is consistent with what we see as best practices. Whether that requirement gets further delayed or maybe ultimately is not required. At the end of the day, there's a lot of uncertainty and not filing that recertification could have serious consequences. So we look at it from a credit perspective as a risk that needs to be mitigated, for sure.

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One other just business-related question, and then I thought I'd close with a personal question or two. You mentioned providing debt alternatives. Can you talk a little bit about that? What type of debt alternatives can Omega provide that would be appealing to operators in the industry?

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Vikas 15:35

We've done a few transactions over the last couple of years where we provided a pref-loan of kinds, which is kind of like a mezz loan. And it's that place in a capital stack that's above the senior. The owner or sponsor is still putting in some equity. And we are part of the JV that owns the building. And we get a meaningful return for that. And so that's one place we played a little bit. And to us that does two things: it creates an opportunity for a good return for our shareholders. We're also getting to know new operators and new sponsors. And you know ultimately if they refi or they sell the asset, we could be involved with that at some point.

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Another structure we've done in the UK is when someone wants to buy something really quickly, and regulatory approvals don't let you do it, we've given people a loan real fast so they can buy it using our loan money, but then it flips to a lease with us at basically the same basis: 100% loan. And so again, as I said earlier, Steve, I don't want to advertise that Omega does loans, but we will do it when it makes sense for us. Iit won't be the lion's share of our capital allocation for a given year. But it'll be something that's meaningful in a return perspective. And more importantly, I personally just love to meet new operators. We want to know who's out there. We want people to know, okay, we gave you a pref-loan for $20 million. You want to sell your portfolio one day? We're here and you know how we work and who we are.

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Steve 17:02

It's a great way to sort of date before getting married sometimes.

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Vikas 17:07

And the truth is, we've gotten to know a lot of lenders like yourself through this process where they wouldn't have capital to do this, but we'll even go as far as to go we'll do the senior loan, but take this out of the senior as soon as you can. And then we can let our pref hang out there until you go to HUD. Something like that.

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Steve 17:23

You know, now just kind of winding down with a question or two personally. You've been in Omega for over a decade. You've been in this industry for quite a while. Can you talk about a major lesson or take away from an investment or investment management perspective over the years?

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Vikas 17:41

Just to refine your numbers a little bit, I've been at Omega 15 years and I've been in this industry almost 24 years. I can't believe I'm one of those people now I like actually. So, I've learned a lot of lessons, but

everyone says this: this industry's ancestral. Everyone's around. Doesn't go away. Ever. You see the same people in a different format.

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One last thing I think everybody knows: just don't burn your bridges with anyone because there's a lot of people out there that come out in different places and, I think said differently: create allies where you can because ultimately that can help you. A lot of what we've done over the years is we've taken risks for our operators that has created a win-win situation for us. And then people remember that, when there's like a slam dunk and they're like, let's deal with Omega, it's easier to deal with them. They stepped up for us when times were tough. So we really try to be that capital allocator where we are relationship driven many times. But then at the same time, I think that it just comes back to us where operators try to take care of us, too. Where they're like, yeah, we could save a point or two and go here, but Omega just is always there for us.

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Sounds cliche, but customer service can go a long way. And relationships can go a long way. I've been fortunate in my career where I am, but I take a lot of phone calls myself, and I talk to a lot of people myself. I think people appreciate that. I’ve taken on the CIO role over the last couple months and people are like, what are you doing different? I'm like, it's a lot of the same staff. I'm on the phone almost all day long, and maybe because I'm a deal junkie, maybe it's because I enjoy it. But I also think it pays off for us a little bit.

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Steve 19:11

It may sound a little cliche, but customer service and relationships and direct relationships are what it's all about. And it is a bit of an ancestral industry. And I think that's really good advice, especially for people coming up in the industry, is creating allies and not burning bridges, and I appreciate you saying that.

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We'll close with something we ask every guest: if you have a recommendation for a book or podcast. We would welcome it.

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Vikas 19:38

My wife would be so happy to hear you ask me that question because she's going to say all you read is industry stuff in emails. And, I should go onto a TV show instead. How's that?

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Steve 19:51

Well, why don't you be the first one to recommend a TV show.

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Vikas 19:53

Well, this just shows how I've been working too much and haven't read anything lately. Good. I watched an awesome show on Hulu called Paradise. It was really fun. Little sci-fi show. It was great. Finished it last night and I really enjoyed it, so I'd recommend it to people. It's a little sci-fi, a little political, and it's a fun show. My wife would love this question because she's like, all you do is read emails all night long. Why you should be reading a book.

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Steve 20:19

Well Vikas, I really appreciate, we really appreciate you being a guest on VERSED. And we'll look forward to seeing you around very soon. So thank you so much.

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Vikas 20:27

Yeah. And, Steve, thanks to you and the whole VIUM family and for putting this together. It's, nice, and I'm looking forward to listening to other speakers.

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Steve 20:34

Thanks, Vikas

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Outro

Thanks for tuning in to VERSED, powered by VIUM Capital. The conversation doesn’t stop here. Let us know what topics you want to hear and let’s make an impact in healthcare and seniors housing together. Till next time, I’m your host, Steve Kennedy, and this is VERSED.