WASHINGTON, DC -— Valuing skilled nursing properties remains a widely varying challenge for lenders, with labor shortages, inflation and Medicaid rate increases adding to economic uncertainty.
But deals will continue, especially as negative pressures such as the cost of borrowing increases for some buyers, a panel of operators and underwriting experts told attendees at the 2022 NIC fall conference Friday.
Among the key reasons? Refinancing will be harder to finagle as interest rates continue to rise, and that may force some operators to sell, making a wider selection of assets available. Meanwhile, some REITs are looking to step back into the skilled buying ring after taking a back seat to private equity for much of the pandemic.
Bed prices approaching $100,000 again continue to attract certain buyers, who see even more room for growth.
“Although they’re still interested, the institutional private equity is very disciplined in terms of their investment profile and what they’re able to do. So we’re seeing them, but by far, the vast majority are private owners picking off the onesies and twosies, for some of their large portfolios,” said Aaron Becker, senior managing director at Lument, noting the 35% of nursing homes are still owned as standalones.
“That number will continue to decrease. This was just a very difficult couple of years for a lot of these mom and pop organizations. Those that were thinking about selling before the pandemic are definitely going to sell now, after what’s happened the last couple years.”
But exactly what they’ll get for their assets comes down to a variety of factors, some reliant on the broader economy and some all about the current operator’s performance and the buyer’s ability to demonstrate potential in its plans for future use.
Per bed nursing care prices ranged from $38,000 in the lowest decile to $165,000 in the highest, noted Bill Kauffman, principal at the National Investment Center for Seniors Housing & Care, citing NIC data.
Amy Sitzman, senior director for Blueprint Real Estate Advisors, contrasted the differences in valuing a traditional, underperforming SNF against one that could bring in more Medicare patients, as well as demand and potential in transitional care settings that can show high Medicare occupancy — or struggle to do so and need to rely on growing Medicaid census.
“Two very different models, $200,000 a bed vs. $50,000 a bed, and it all has to do with reimbursement,” Sitzman said.
Operational changes drive value
All of those deals involved some kind of change in strategy, explained Zach Bowyer, senior managing director and head of living sectors for real estate services firm Cushman & Wakefield.
“That really sums up how valuing a skilled nursing facility has been,” Bowyer said. “Typically, you’re coming in, and this is even pre-pandemic, and there’s some strategy to reduce costs, to do something to drive your quality mix, increase your Medicare rates. You’re really trying to understand those dynamics.”
At Idaho-based Cascadia Healthcare, looking for opportunities to improve operations has been a key growth factor, said Steve LaForte, the company’s director of corporate affairs and general counsel. But it’s also looking to take on more risk if the market will allow.
In two and a half years, the chain went from 16 facilities all in REIT leases to 37 SNF properties, with 10 owned outright.
“That’s been a paradigm shift for us, and a goal for us to own our real estate and create a different asset foundation for ourselves,” he said.
As rates this year went up and agency staffing costs continued to eat into margins, Cascadia was still able to tap institutional and specialty lending sources, LaForte added.
“The deals that we’re doing, because of the turnaround nature of our business, there’s enough there when we’re going to get it stabilized, and our relationships with our lenders are good enough that we can make it work.”
Building on hold
Panelists echoed a common theme at this year’s NIC conference in terms of construction: Accelerating costs are putting a stop to plans to modernize and break into new markets with new facilities.
LaForte said Cascadia had built two ground-up facilities and had planned a third, acquiring land in the Vancouver, WA, area during the pandemic. But rapid cost increase forced the operator to reconsider.
“Right now, the project doesn’t pencil out. We’ve had to put it on hold, and we’re actually selling the land,” he said, noting the decision was fueled by interest rates that are expected to climb three more times this year, as well as elevated labor and supply costs.
“As we go forward, for sustainability in the industry, we need cap-ex improvements and we need new development. It’s unfortunate, but I think it’s a pause and we’re going to get back to a place where we can do it.”
Clint Malin, co-president and chief information officer of LTC Properties, said the REIT’s plans for a $13- to $14-million construction project escalated to $15 million about six months ago; the REIT put it on hold only to have the latest estimate come in at closer to $17 million. LTC is retaining the land in hopes of a course correction.
REITS are typically countercyclical, Malin said, and the selling that they’ve been doing is to recycle capital, meaning they’re selling for the opportunity to reinvest in other, potentially better performing assets. But in the current environment, capital costs have actually gone down for REITS, Malin added.
“It makes us more competitive in the market to buy assets,” he said. “But from LTC specifically, we’re not looking to go back and buy older assets. There’s definitely a bifurcation in the skilled nursing market around that.”
Malin said LTC Properties is “selectively” looking at development or acquisition of newer skilled nursing facilities. But building age, he said, made many potential buys unattractive, especially when those facilities are compared to newer seniors housing inventory entering the sales market.
The company has more than 200 investments with 30 operating partners in 30 states, split about 50-50 between skilled and seniors housing.
