Big-picture concerns about the skilled nursing industry haven’t slowed down transaction volume in the space, with nursing homes accounting for 55% of all deals in a second quarter that saw $6.3 billion in senior housing and care investments.
The major real estate investment trusts (REITs) certainly played a role in that strong quarter, with multiple firms continuing to execute on long-term divestiture plans. But when the big names sell, the properties still have to go somewhere, and a recent industry conference opened a window into the minds of the smaller players that have stepped up to fill the void.
“There’s a lot of operators … that are newer, younger, and may have been shut out from the traditional New York market, or maybe trying to accomplish what they’ve been able to accomplish on the East Coast in different, new markets,” Vincent Fedele, director of analytics at Zimmet Healthcare Services Group, said during the consulting firm’s annual event in Atlantic City, N.J. earlier this month.
Unfamiliar with the territory in certain states, these buyers often approach Zimmet and other consulting firms to feel the pulse of the individual markets before making the decision to buy. And smart investors need to look beyond state-level data regarding occupancy, Medicare reimbursements, and other familiar metrics to figure out exactly what’s happening in each individual “micro-market.”
“The pendulum has certainly swung back to, in our perspective, supporting local business, local operators,” Frank Small, chief investment officer of Greystone Healthcare Investments, said — mirroring others in the space who predicted the rise of the regional operator in 2018. “There’s a diseconomy of scale if you’re across multiple different states. I think you’re of out touch with what’s happening in your buildings.”
Investors thinking of buying a particular property should first compare an individual building’s historical performance against its projections. Financial reports showing that a certain SNF’s operations hit a high note three years ago might be troubling, Small said, specifically if the past performance doesn’t gel with the owners’ outlook.
“Was it peaking in 2015, or has it always kind of bungled along?” he said. “The business plan is that it’s going to do a hockey-stick [of growth] — well, why is that? Is that possible? Is there really kind of the capacity for doing something like that?”
The next step involves analyzing the market factors that can hold significant sway over a skilled nursing facility’s fortunes, preferably down to the county level, according to Fedele. And when evaluating a property in an unfamiliar marketplace, it’s important to remember that one county’s weak occupancy benchmark is another’s pinnacle.
Fedele gave the example of a New York operator who might see a 75% occupancy figure in a Southeastern SNF and think he or she can easily do better, since occupancy in the Northeast can routinely run as high as 90%. But if no other building in the county has occupancy figures higher than the mid-80% range, Fedele said, such a turnaround would be challenging to achieve.
“If you pull back and see how other providers in the market are doing to provide a county average, that will provide some validity,” he said.
In addition to county-level demographic trends — such as projections for the proportion of seniors aged 85 and older and the prevalence of Alzheimer’s disease — Fedele suggested looking at the intangibles that could signal opportunity or challenge in a given market. It isn’t enough, for instance, to just look at hospital referral patterns; a good investor should know if there’s a hospital in the area that’s considering the addition of a step-down acute care unit, which would siphon referrals away from third-party SNFs.
That subjective analysis also comes down to the culture of any given building.
“It’s a data-driven business, and every day there seems to be more data and more information,” Small said. “[But] it’s going to be driven by some kind of compassionate mission. Otherwise, it’s going to fail.”
Written by Alex Spanko