The headlines for the skilled nursing sector include such uplifting topics as bankruptcies, lawsuits, and declining occupancy — to name just a few — and are enough to make any investor think twice about putting money in the industry.
But “the perceived risk is higher than actual risk” in the sector, at least according to one panel discussion at the National Investment Center for Seniors Housing & Care (NIC) conference in Dallas in March.
“A long-term investor can see the bright future ahead, in that skilled nursing remains the most cost-effective option, as opposed to hospitals, for example,” Ben Firestone, senior managing director at Blueprint Healthcare Real Estate Advisors, told Skilled Nursing News. “And the government is going to continue to fund it in some way, shape or form.”
Skilled nursing compelling in long-term
Despite the headwinds in the skilled nursing industry, there may be more smoke than fire, at least with regard to risk, Frank Small, managing director of health care at private equity firm GMF Capital, said at the NIC event.
“I guess from our perspective and our experience, the perceived risk is higher than the actual risk,” he said when asked by Firestone how he explains skilled nursing headwinds to equity investors.
This is because returns remain strong, with cap rates in the sector usually coming in around 12.5%, with some fluctuations over time, Firestone explained to SNN. This compares favorably to cap rates in other commercial real estate classes such as retail, which is seeing at least as many issues as skilled nursing and far lower cap rates.
“I don’t know another asset class on a stabilized level, where you’re not changing something in the business plan, where you can reap those kind of returns,” Firestone said of skilled nursing.
Even though a recent survey from the CBRE (NYSE: CBRE) U.S. Healthcare Capital Markets Group indicated that SNFs were near the bottom of investors’ wish list for 2018, the investors Small deals with are looking at the sector from a long-term perspective, he said at the NIC conference.
“From the perspective of the capital we talk to, they’re looking at it on a 10 or 15 year basis,” Small said on the panel. “So if they look at it with HUD still available and flowing. You got a long-term asset matched with long-term liability, and the cash flow dynamic is compelling.”
Working past bad press
Even with the bad press skilled nursing has been getting over the past few years, the market is strong, Firestone told SNN.
“What the market is saying is that they’re okay accepting that risk for the returns — they’re wiling to pay for these assets,” he said. “And there is so much demand right now, not only for stabilized transactions but also non-stabilized deals… the price per bed of skilled nursing for deals that are not stabilized is actually going up.”
But the sector is undeniably a chancy one, notorious for thin margins and low reimbursement. That’s led to premium valuation for portfolios, because individual property risk can be diversified through such acquisitions, Firestone said. Though an individual property could see a performance downturn, purchasing 20 properties increases the likelihood of a downward performance being offset by others improving.
“We have diversifcation at the asset level, so that any of these individual problems that would tackle one facility’s performance financially can be offset by another’s good fortune,” Firestone said.
Operators are also a crucial part of managing the risk, Small noted at NIC.
“A lot of it… candidly, is spending a lot of time with the operator and understanding are they the right operator for that asset in that market,” he said.
Operators need incentives to provide quality care, and though the sector will have to go through “some purges and resets,” the nursing home business will not be done away with entirely, Firestone said. Investors are betting that despite short-term hits, occupancy will bounce back as the population ages, allowing good operators to survive and thrive in the medium-to-long run.
“The savvy investors out there are able to pick their spots, make bets, hedge against short-term stress or adversity, and come out victorious in the long run, with sustainable, profitable practices and portfolios and compaines that care for our aging seniors,” Firestone said.
Written by Maggie Flynn