As Underperforming Skilled Nursing Assets Sell, Private Equity Makes a Move
Amid all the shakeups in the post-acute and skilled nursing sector, private equity funds and others have seen an opportunity to move into the space — and they haven’t hesitated to take advantage.
Much of the focus for private equity and institutional investors has been on senior housing, according to an August report from Fitch Ratings that discussed the trend. But there’s been some interest in the post-acute space as well.
“Real estate private equity funds and other sources are dominating health care acquisition activity — the combination of large amounts of investable cash and optimistic outlooks,” the ratings agency noted in its report.
Eric Smith, founding partner of the Red Bank, N.J.-based Locust Point Capital, has seen this phenomenon firsthand.
“When you go to the national conferences … you’re seeing more and more private equity show up,” he told Skilled Nursing News. “You’re just seeing more and more private equity participation within the industry. And we think that’s a great thing, as the industry becomes more institutional.”
Shifting landscape leads to opportunity
As real estate investment trusts (REITs) in the post-acute and skilled nursing sector reposition their portfolios, they have become prominent drivers of volume in the skilled nursing transaction space. According to Chad Buchanan, chief investment officer at Brick, N.J.-based Tryko Partners, this trend has had an impact on the rise of private equity in the space as well.
“Since the beginning of 2017, a lot of the REIT sales and culling of the portfolios in our mind and most people’s minds is not really opportunistic, but mostly out of necessity, as projections haven’t panned out or as reimbursement continues to be pressured,” he told SNN. “[Meanwhile] expenses have not seen commensurate decreases to continue operating at the projected level. That has left — not a void in the capital markets, but certainly less of a demand in the capital markets.”
As the REITs sell off their underperforming assets, it opens the field for private equity firms who find the acquisition opportunities attractive, Smith said. His firm recently raised a $312 million fund to deploy in the senior housing and care space, and he believes that private equity is drawn to the price-per-bed level of the post-acute sector.
“They believe that if they have the right operator in there running that facility, they can make a very attractive return acquiring that asset at these levels,” he explained.
New money and new deal mechanics
Tryko, however, is cautious with the assets it acquires. Many of those troubled assets being sold by the REITs will likely continue to be troubled, and Tryko wouldn’t likely pursue them, Uri Kahanow, director of acquisitions at the private equity firm, told SNN.
“We don’t acquire any facilities that we don’t feel will be viable in the future, whether that’s a year from now or five years from now,” he said.
But one thing he has seen in the past two years is a rise in new and different kinds of deal structures, such as “creative types of proposals that could be closer to a joint-venture type of deal” or leases with options to purchase down the road.
“Private equity and REITs are thinking of ways they can somehow turn around some of their troubled facilities and get the train on the tracks with some of them,” Kahanow explained.
Buchanan agreed with that statement.
“I think that everyone is trying to figure out creative ways as they realize that these are not real estate investments; these are operating companies,” he said. “They’re trying to figure out ways they can align with an operator that’s investment-minded to reposition and restabilize some of these assets.”
Smith also hammered home the importance of operations, stressing that Locust Point Capital makes a point of performing adequate due diligence on the operators to make sure they have the ability to run the facilities at a high level.
In some types of senior housing, such as continuing care retirement communities (CCRCs), the operations aspect of skilled nursing has made investors wary of the space. But the moves by private equity could be a sign that in some corners of the investment world, that sentiment is shifting.
“Pension funds and sovereign wealth funds were all active acquirers of heath care assets and, in some instances, have entered into joint ventures with REITs,” the Fitch Ratings report said. “Heightened private capital interest could suggest greater acceptance of health care real estate in institutional portfolio strategies, which Fitch would view positively for credit profiles.”
Even though the report doesn’t explicitly call out the post-acute sector, Tryko and Locust Point Capital both expect that private equity interest in the post-acute space will continue into next year.
“I think private equity is seeing the value,” Buchanan said. “Within any decrease in value, there’s going to be private equity interest, right? We see that in every cycle, that private equity thinks they can fill the void.”
Written by Maggie Flynn