Low occupancy, political and regulatory uncertainty, staffing crunches, and reimbursement pressures present a fraught landscape for skilled nursing players to navigate.
But companies that are looking to sell — or buy— will have plenty of opportunities in 2018. And as they seek each other out, localization will be a major force.
“The skilled nursing business is very much a regionalized business,” Tim Cobb, investment sales lead for senior housing and health care at mortgage broker Berkadia, told Skilled Nursing News. “It’s very dependent on knowledge of legislation within a specific state or region. So it’s very difficult for the larger players to be everything to everyone, and the opportunity to buy those assets and create value exists.”
Dan Revie, a director at the Chicago-based specialty investment bank Ziegler, pointed to issues with major national players as a reason for this local surge.
“You saw a lot of the larger companies either exiting the business or running into difficulties with their existing portfolios,” he said. “And a lot of those skilled nursing facilities (SNF) transitioned from very large operators to smaller and regional operators. I expect that trend will continue in 2018.”
Major provider Kindred Healthcare, Inc. (NYSE: KND) exited the space entirely last year, and those large players that remain — including HCR ManorCare and Genesis HealthCare — are facing serious problems of their own. The former company is currently battling a receivership filing from its real estate investment trust (REIT), Quality Care Properties (NYSE: QCP). The latter, meanwhile, has seen landlord Sabra Health Care REIT (NASDAQ: SBRA) embark on a plan to offload all of its assets by the end of 2018 — the so-called “Genesis Exodus.”
“The phrase ‘too big to fail,’ it really doesn’t fit into the SNF world,” Chad Elliott, managing director of M&A with senior living lender Lancaster Pollard, noted. “You do fail when you’re too big, because you’re not really able to stay local and focus on those referral sources.”
Bigger Companies Divesting
Nationwide companies are still looking into downsizing their portfolios to focus on their core assets, Cobb said, and he expects that to continue this year. REITs will keep selling one-off assets or even groups of assets, he added.
Don Woods, senior vice president of health care finance at the Itasca, Ill.-based First Midwest Bank, is also seeing this phenomenon with larger operators and REITs.
“I think a lot of transaction activity is driven because the REITs didn’t receive what they anticipated out of transactions over the past five to ten years,” he said.
Perhaps because of that, the buyer profile in the skilled nursing world has changed “dramatically,” according to Revie.
“When we sold a skilled nursing facility five years ago, you could reach out to a number of very large national chains, as well as a number of REITs, and there was generally very strong interest among both groups,” he said. “Flash forward to today and the buyer is significantly different. Those large buyers for the most part have exited or are changing.”
The move to regional is how things ought to be in the skilled nursing space, according to Don Kelly, senior director at CapitalSource Healthcare Finance.
“Super large companies have a tough time keeping track and keeping their eye on the ball… and I’m not sure economies of scale pencil out in the skilled nursing space as they might in other industries,” he said.
Regional players are more capable and skillful in running their operations, Woods said, leading to transactions trending in that direction. But they might not be solely looking to buy.
“There’s still a very robust market for regional and local players… it’s still a good time for them to sell,” Cobb noted.
These local entities could have an advantage within managed care organizations in a particular market, which Cobb said positions them to be highly competitive with national companies. It reflects the importance of referrals in an area, which Elliott sees as absolutely crucial to success in the skilled nursing space.
“They [skilled nursing providers] don’t have to be dominant, but they have to be secure in the primary referral sources, whether it’s the hospital or the Medicaid base,” he told SNN.
So who would be looking to buy them?
“The buyer today, it’s a lot of below-the-radar screen, high-net-worth individuals or groups of such individuals that’ll buy the skilled nursing real estate and lease out the buildings to local or regional operators that are familiar with the market,” Revie explained.
Standing Still Is Not an Option
As the skilled nursing industry shifts to a more regional mindset, Revie expects fewer multi-state divestitures and more state-by-state and market-by-market ones. For his part, Kelly does not expect mega-deals in the billions this year, and neither does Cobb, but both anticipate a certain amount of medium- to large-sized deals.
Elliott and Woods both anticipate an acceleration in activity for 2018, with Elliott projecting an uptick of activity in the second half of the year as buyer and seller price expectations draw closer together.
Change reverberated throughout the skilled nursing industry in 2017, however, and 2018 will likely see more of the same pressures of occupancy, regulations, and staffing — to say nothing of upheaval in the health care sector in general.
“Operators and owners need to recognize that the next couple of years… it’s a time and an era of action needed,” Elliott said. “[With] the status quo, you’ve got more downside than upside if you’re not addressing these headwinds.”
Written by Maggie Flynn