Traditional Lenders Take ‘Selective’ Approach to Skilled Nursing

Headwinds are ripping the skilled nursing industry from the ground up, and financing is no exception, according to a debt financing panel at the National Investment Center for Seniors Housing & Care Spring Investment Forum in Dallas.

“We are being selective in our approach to skilled nursing and there’s no two ways about it,”  Jeff Muchmore, chief credit officer for health care real estate at Capital One, said. “That’s not because we doubt the future of skilled nursing — we’re highly confident in the future of skilled nursing. It’s really a question of where it is in its journey, because it is changing in terms of bundled payments, Medicare Advantage (MA), skilled mix.”

Markets and operators


For real estate deals, there’s no shortage of capital for financing, according to William Douglass, who leads the health care team at the New York City-based CIT Group.

“I do think in the skilled nursing sector, we’re selective as well, but we’re very active in it,” he said. “There’s the ‘haves’ and the ‘have nots’… it’s really operator-specific, it seems like. Because they’re all dealing with the same evolution of what’s going on in seniors housing and skilled nursing.”

Within one state, one operator can be doing well, while another could be faring poorly, he explained. This variation even within states could be part of the reason for the slowdown in skilled nursing by banks that Muchmore noted in the panel.


“We’re still committed to it,” he said. “But I have to be honest that we are a selective participant in the space. We’re working with good sponsors, good customers, but it has been somewhat of a slowdown from our perspective.”

Despite the recent bankruptcies in the skilled nursing space, there are still some bright spots in the sector, said Don Husi, managing director at Ziegler’s investment banking team specializing in for-profit senior living corporate finance.

“There’s still high-quality operators, with really good buildings producing very good margins in the space,” he explained. “So I think it has to be very selective by market. We particularly like regional operators that really understand their footprint, understand Medicare/Medicaid reimbursement mechanisms, and understand how to maximize the quality mix in their buildings.”

Ancillary services as aid to liquidity

Faced with lender choosiness and industry pressures ranging from regulation to occupancy, it’s “no closely guarded secret that most of us operate thinly capitalized,” said Anne Stuart, executive vice president and chief financial officer at Avalon Health Care Group.

In light of that, ancillary business lines such as pharmacy or hospice can be attractive additions to a company, both from the perspective of consistent cash flow and quality control, Muchmore said.

That ended up being the case for Avalon.

“We invested in a joint venture for rehabilitation services, ultimately took it in-house as a wholly owned subsidiary,” Stuart said. “That’s been critical to our ability to drive skilled mix, is directing the efforts of that particular subsidiary.”

If a company chooses to sell those ancillary businesses, “it’s a great opportunity to monetize and put money into additional assets,” Muchmore said.

Avalon has 54 nursing and rehabilitation facilities and senior housing communities, and and Stuart emphasized that institutional settings remain the company’s core business. But the ancillaries are crucial.

“Ancillaries have been a way to not only promote services within, but frankly, they’ve been standby funding sources,” she said.

As funding sources, ancillaries can be used in multiple ways; both for monetization through selling, or as the means of exploring a cash flow loan.

“[The ancillary businesses] are not physical, plant-based, but they are producing steady, repetitive, sustainable cash flow,” Stuart said.

Editor’s Note: An earlier version of this story incorrectly identified William Douglass’s title. SNN regrets the error.

Written by Maggie Flynn

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