Mom-and-Pop Skilled Nursing Facilities Could Find Safety in Numbers Under PDPM

Standalone skilled nursing facilities are likely to depart in droves under the new Medicare payment system, at least according to several executives with major skilled nursing players.

In fact, the new Patient-Driven Payment Model (PDPM) is likely to force many mom-and-pops out of the space altogether, CareTrust chief investment officer Mark Lamb said in the Clemente, Calif.-based real estate investment trust’s (REIT) second quarter earnings call.

Rick Matros, chairman and CEO of Sabra Health Care REIT, Inc. (Nasdaq: SBRA), said the same on his company’s second-quarter earnings update.


“I think with all the changes in the reimbursement model, we’re going to start to see the smaller traditional long-term care providers determine it’s in their best interest to get out of the business,” he said.

If they decide to make that exit on their own, however, they could be leaving money on the table. That’s according to Laca Wong-Hammond (pictured below), a managing director at the corporate finance M&A practice of New York-based global advisory firm Duff & Phelps. She believes that standalone SNFs, which will face significant pressure under PDPM in addition to the other headwinds in the sector, can bolster their sale price per bed through a strategy she calls “reverse syndication.”

Duff & Phelps


Skilled Nursing News caught up with Wong-Hammond to discuss the reverse syndication concept, which she has applied in other health care real estate sectors, and how it could work in the SNF world.

Can you talk about how the pressures in the skilled nursing industry, and why they’re particularly affecting smaller mom-and-pops?

From my observations and experience in doing health care M&A, specifically skilled nursing transactions for the last 13-plus years, [PDPM] is a big change which is coming on board. The new model is going to have a dramatically negative pressure on reimbursements and actually our conversation comes very timely, because it’s expected to happen exactly 12 months from today: October 1, 2019. 

The pressures to large and small skilled nursing operators being the most hurt are similar, but the ways they can react are different … What they can do to offset these cuts is operators can cut overhead, labor expenses, and other operating costs. Maybe they can raise rates for particular services or diversify revenues outside of therapy to other kinds of skilled nursing care services. But the problem — when you’re a large operator is, you can do that because you have negotiating power with vendors, and you also have a diversification, such as by location, by size of facilities and usually a large variety of services. You can focus on, say, ventilation services more than rehab therapy services to mitigate the impact of the cuts.

If you’re a mom-and-pop type operator, where you have one or two or maybe even just three facilities, to turn around these reimbursement pressures are much more different, right? You have a limitation on how much overhead you can actually cut without hurting the quality of care. And you have a limitation on how much you can raise rates just because you don’t have a lot of beds necessarily to offset. How quickly you can diversify revenue is also limited, with the same constraints of size. What we’re seeing is that larger is still better in this new reimbursement environment, scale is important, and size really matters.

If mom-and-pop SNFs decide to pursue a sale, what are some of the hurdles they face?

The observation from the investment environment — whether it’s a strategic investor, i.e. someone that also operates in the same sector, or a financial investor, i.e. a passive investor that will just back management — there’s a size premium to acquisitions. When these mom-and-pops just operate one or two facilities and they’re looking for a liquidity event — not to fully sell out to exit the industry, but just to conduct, let’s say a sale-leaseback on their real estate and continue operating, it puts negative pressure on the price paid per bed, or even on a cap-rate basis. That’s because the investment environment, be it private investors or public investors, really applauds and will pay up for size.

Case in point, to give you a review of [Irving Levin] data from the last 12 months of sales [in skilled nursing], if we define portfolio as “two facilities or more,” in the last 12 months of sales — that’s August of last year to August of this year — there were 32 nursing home portfolio, i.e. two or more [facilities], and 49 single nursing home sales. On average, if you just looked at the price paid per bed, $10,000 more was earned per bed when you look at the portfolio transactions. That’s a 13% premium over the single asset transaction, on average. So that’s a really marked difference. When you start multiplying this premium by sold beds, when you’re divesting of 100 beds or 200 beds, those dollars really become magnified.

But in our experience, you don’t have to have [20-plus] nursing homes in order to transact successfully. Even you have five, they would sell better as a portfolio to get you a higher price than one alone, or five sold individually.

Henceforth is my modest proposal for reverse syndication: pooling assets together to create a portfolio premium for the sellers.

Can you explain this concept a bit more?

Pure-play syndication is most often employed with lenders. They have a very large loan, let’s say a $5 billion loan, to a single borrower. They want to diversify away the risk, so they’ll invite other banks or other lenders into the syndication. So they form a club, and then they pool together their money to lend to one borrower.

In my view, the syndication I’m proposing is a reversal of that. The borrower becomes the one buyer, and there’s multiple sellers pooling their assets together. An adviser like ourselves would represent them, the sellers, on the sell-side packaging assets into one portfolio. Each asset would have an allocated rent to it, thereby pro-rating their contribution to a portfolio. So the value that the buyer would assign to it would also be indicated in their bid, and detailed on an asset-by-asset basis.

But for the buyer, let’s use the five-seller example. Five individual nursing homes located in different [metropolitan statistical areas], now they have this package together of — I’ll make it up, 1,000 beds with five sellers — but for them, it’s one portfolio with cash flows they can underwrite and a set of operators that they can underwrite, and now this acquisition becomes a sizable portfolio for acquisition, which gets more attention.

So that’s the definition. Sellers pooling their properties together to sell in a portfolio format so that one buyer can make a bid to purchase it.

Where else have you seen the reverse syndication concept work?

In practice, where this has been employed a lot outside of the lending universe is in health care, by physician offices and hospitals. Where I have experience doing this is hospital clients of mine may say, “I have independent doctors that are on my campus or near my campus, but I want to have a very good relationship with them. And since you’re selling my medical office buildings and surgery centers and labs, and since I’m going to get national attention from your marketing efforts because of my portfolio size, reputation and credit quality, I would like to invite these independent doctors as a goodwill gesture to throw their condominiums or buildings into my portfolio so that I can create a halo effect on the premium that the hospital will get as a result of the marketing to national buyers, and have that translate on a higher price per square-foot, price per-unit basis for these independent doctors.”

This practice has been very successful … and the portfolio premium is staggering. In some cases, no one would buy a condo in, say Lima, Ohio, that is 2,000 square feet owned by a primary care doctor if it wasn’t part of a portfolio of a regional health care system. That’s one instance of where I’ve had experience and realized a lot of success.

Can you walk us through finding groups interested in coming together, step by step?

It’s definitely through my own network of contacts as well as the sellers’. We [then] set up a series of town hall discussions for a large audience. The ones that become interested, we have private, one-on-one discussions to figure out their own objectives, price expectations. We educate them on the process, and then if they’re still interested, they become a client of mine and when we have a sizable enough portfolio, then we go to market upon agreement by all sellers.

Why do you think it translates well to the SNF sector, particularly for the smaller entities?

I think the mom-and-pops are most hurt by the new payment model. They would be the ones that would have the most limitations to cut overhead, the most limitations to raise daily rates or diversify revenues quickly in order to reverse the negative pressures that PDPM is bringing to them. Because the mom-and-pops as a result of PDPM would be more hurt in profitability, they should be thinking about financing alternatives. Not just going to a bank to get a second mortgage or getting a line of credit as they have limited collateral to do that with banks.

They ought to be considering pooling assets together to get more liquidity for their real estate rather than going at it alone. They should know in this negative pressure environment what the large scale operators have benefited from — that is size and getting a portfolio premium — is achievable for mom-and-pops to a large degree, and it’s achievable through this reverse syndication strategy that I’ve outlined here.

Is there anything else that you want to make sure to add on this topic?

One thing that’s important to keep in mind is that the Federal Reserve just raised rates again last week. So we are in a rising-rate environment. What that means is investors will need an increasing return on their invested capital. So the higher the return they need, the lower the price they are willing to pay.

But in spite of the rising rate environment, the next few quarters are still an opportune time to transact from a seller’s perspective, because buyers still have a lot of capital in reserve waiting to make the right investment.

This interview has been condensed and edited.

Written by Maggie Flynn

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