More than halfway through 2018, the skilled nursing transactions landscape has mostly met expectations, but there have been more than a few surprises along the way.
The recent deal between Welltower Inc. (NYSE: WELL) and the nonprofit ProMedica Health Systems to take over national operator HCR ManorCare made a splash in the skilled nursing sector when it was announced back in April, and again when it closed last week. But otherwise, transactions in the sector have mostly met expectations that were set at the beginning of the year, when regional chains were predicted to rule.
“On the skilled nursing side, we continue to see repositionings with ownership, with renovations and diversification of income streams, as well as seeing new financing for additions and renovations,” Don Woods, senior vice president of health care finance at the Itasca, Ill.-based First Midwest Bank, told Skilled Nursing News. “So I think we’re kind of right on track as we anticipated. The one thing I would say surprises me is the amount of repositioning that the REITs are undergoing at this point.”
Chad Elliott, managing director of M&A with senior living lender Lancaster Pollard, agreed that the activity by major real estate investment trusts (REITs) is an unexpected development; their share prices were low a year ago, but have bounced back since, he explained to SNN.
As to whether there’ll be more Welltower/ProMedica-type deals, the sector is in mostly wait-and-see mode, he told SNN.
“I don’t expect it to be a wave, unless the outcomes and the readmission rates and the efficacy of the operations are performing,” Elliott said. “I think that’s when you’ll see a bigger wave.”
Owner-operators seize moment
Owner-operators have been very active throughout the first half of the year, which is about what he expected, Elliott said.
For operators in particular — especially those that have worked with REITs — there have been opportunities, Woods told SNN. He’s seen cases where REIT tenants are buying out their portfolios from their landlords, and though Woods wouldn’t necessarily call it a trend, he did note that more and more of these types of transactions are taking place.
“[The REITs] are looking at their portfolios if they have any lessors who are struggling or having issues,” he said. “I think they’re wanting to make sure that they’re in a position to weather the future storm.”
For instance, Omega Healthcare Investors (NYSE: OHI) and Sabra Health Care REIT (Nasdaq: SBRA) have entered into restructuring agreements with operator Signature HealthCARE after it struggled to keep up with rents, while Sabra has made dumping its portfolio of facilities operated by Genesis Healthcare (NYSE: GEN) a top priority for the year.
But the major REITs aren’t the only ones reassessing their position.
“I’ve used the phrase that standing still is not a strategy right now,” Elliott said. “That infiltrates through to these people that own two, three, four [SNFs]. Maybe they only own the equivalent of one, but 25% of four. You are definitely seeing them decide whether they want to face the music and move into the next realm. The one-off people have almost all decided they want to get out, and [owners of] three or four, I think they’re the next phase to go, because they are not big enough to leverage the cost regionally.”
HUD activity stays strong
There have been several major refinancings for SNF portfolios in recent months that involve the Department of Housing and Urban Development (HUD), and Woods in particular noted the strength of HUD activity throughout the year.
“I think the HUD pipeline has been strong, and I think you’re seeing it because people are in essence flying to … safety, a low decent fixed interest rate — and keep in mind, their terms are usually much longer than a typical bank financing would be,” he explained. “HUD will go up to 40 years on an amortization. A bank will not.”
Interest rates are one thing to keep an eye on as the year goes on, Woods added, because they will have a definite impact on transactions overall, even beyond skilled nursing. But in the skilled realm in particular, he expects multi-unit operators to keep focusing on projects that will help them diversify from pure reimbursement-based revenue.
‘Smart money’ incoming
The new Patient-Driven Payment Model from the Centers for Medicare & Medicaid Services has had a direct impact on the deal flow this year, Elliott told SNN. The model is expected to give a boost to SNFs that can specialize and take on more medically complex patients, and it’s jolted the SNF sector in more ways than reimbursement.
“I think the new PDPM model has kind of galvanized all the smart money, because I think they see the opportunity and the frontier,” Elliott said. “It’s heavily due diligenced to sort of figure out whether or not this particular sort of SNF or one-off SNF can actually make it under that model.”
As skilled nursing and its investors prepare for the future, he expects to see a trend toward a narrower focus of services driving sales of SNFs and other elder care facilities.
“The requirements and the push of the government to control costs is making people become experts in focus,” Elliott said. “I think the institutional money … wants to invest in: ‘You’re a SNF guy, you’re an assisted living guy, you’re a home health guy.'”
Written by Maggie Flynn