The Rise of the Mid-Sized Skilled Nursing Buyer

In an almost paradoxical landscape, where the outlook for skilled nursing operators remains bleak while prices for individual SNFs have never been higher, one particular type of buyer stands to benefit the most — and it’s not the big boys or the mom-and-pops.

Mid-sized SNF operators and owners — those with perhaps 15 to 30 properties — are in the strongest position to capitalize on current economic and regulatory trends, according to multiple acquisition and financing experts who have spoken to Skilled Nursing News. As major national players such as Kindred Healthcare (NYSE: KND) exit the skilled market entirely, and single-unit operators struggle mightily to adapt to new payment models and attract top-tier talent, the regional SNF provider could fill the vacuum.

“It’s going to be the mid-sized guys,” said Jason Stroiman, founder and president of Evans Senior Investments, a firm that brokers SNF transactions with offices in Chicago and Boulder, Colo. “They kind of fly under the radar screen. It’s not the Kindreds. They don’t have websites.”

Isaac Dole, the founder and managing partner at the Chicago-based real estate investment firm Birchwood Real Estate Properties, agreed.

“I think the really small groups are selling, and I think the really big groups are selling,” Dole told SNN. “So the guys in the middle are still actively buying.”

Mom-and-pops see pressure

For many years, the SNF model was a simple one: Local operators put out a shingle in a town or neighborhood and took residents from the area. Under the fee-for-service model, reimbursements were relatively straightforward, and independent operators could make a steady living.

But times have changed, and independent operators find themselves less equipped to weather the storms gathering in the industry, from payment-model changes to staffing concerns.

“The biggest pressure that no one talks about is staffing,” Stroiman said. “It is so difficult to retain good staff, and being a mom-and-pop, you don’t have the resources to offer the things that the big people can.”

Those “things” don’t just stop at competitive wages: Stroiman listed 401(k) plans, professional training opportunities, and room for advancement as perks that independents simply can’t offer as well as their larger competitors, which could put them at a disadvantage for finding and retaining the best talent.

And even if a smaller operator has eyes on expansion, he or she may find financing roadblocks: Local banks simply aren’t as interested in taking on the risks associated with SNFs, according to Joseph Weissglass, a vice president in the Atlanta office of Guggenheim Partners, a nationwide investment firm.

“The days of simply making a few calls to your local banks, and talking to two or three of them and getting your refinancing done that way — those days are over,” Weissglass said. “And if you’re really intent on achieving the best rate, the best structure, you really have to be out in the private debt fund world, in front of them with a story that makes sense for them.”

Options could still be limited for the operator who has those valuable connections in the private equity world.

“There are only so many lenders in the world that are comfortable with the reimbursement risk,” Weissglass continued.

Plus, given record-high prices for SNF facilities — driven by certain investors betting on long-term demographic trends eventually boosting demand for skilled nursing services — many smaller operators just don’t see the upside to staying in the business.

“If you’re an owner-operator and you own, say, less than four to five buildings, there is absolutely no reason to stay in the industry, because you can sell for as much money as you’ve ever been able to sell for,” Stroiman said.

Mid-Sized Players Pounce

But despite the pressures, one operator’s shove out the door could be another’s push to expand. Some smaller regional players use the headwinds as a motivator to reach a larger, more stable size that would allow them to offer competitive employee compensation, Dole said — placing the bar at around $100 million in revenues.

“If you’ve got one to five buildings, it’s gut-check time,” Dole said. “Do they get to 10 to 15 properties or bigger, or do they just get out of the business?”

At Birchwood, Dole and his team focus on joint-venture arrangements, in which the investment firm purchases both the real estate and the operations of a skilled nursing facility, then enters into a management agreement with the former operator. He said he finds Birchwood increasingly competing with regional owner-operators for smaller, one-off purchases. This is not only the result of independents exiting the business, but of larger real estate investment trusts (REITs) “pruning” their supply: They’ve shed properties optimize their portfolios after years of large acquisitions, and also to limit their exposure to skilled nursing in the current challenging climate.

In addition, regional SNF operators and owners are generally more able to adapt to regulatory trends, giving them a distinct advantage over large national REITs.

“They know what’s going on with state budgets, and trends in the state from a regulation standpoint,” Dole said, adding that many have direct relationships with state and regional lawmakers — a key strategic partnership that can help them weather the “annual headache” of regulatory reforms and changes.

While some of the changes may permanently change the SNF industry, part of the story might also be about normal market cycles. Weissglass described the general changes in the industry as part of a macro-level cycle, in which industries frequently go through periods of consolidation, followed by fragmentation, as the market for a particular product service finds its equilibrium.

“I don’t think we’re going to swing all the way back to the mom-and-pop, onesy-twosy-threesy type owners,” Weissglass said. “But I think there will be fewer mega-players, and [more] true middle-market players.”

Written by Alex Spanko