Eastern Union has only been in the skilled nursing real estate space for about three years, but the executive in charge of its health care group has “lofty goals” for deal volume.
The New York City-based mortgage brokerage has handled about $12 billion in real estate deals over the last three years, with health practice leader Philip Krispin predicting that his group will close $1 billion this year — with a specific focus on skilled nursing properties.
Skilled Nursing News caught up with Krispin to learn more about his outlook for the mergers-and-acquisitions marketplace, the common challenges buyers and sellers face when trying to get deals across the finish line, and why his group has seen an uptick in activity around continuing care retirement communities (CCRCs).
Tell me a little bit about your practice and your goals for the SNF space.
We definitely operate with very lofty goals, I’d say. We really started to focus in the health care space about three years ago. We’re doing several hundred million in debt placement per year. Last year we shook out at about a half a billion, give or take. This year, our team is targeting to hit or exceed about $1 billion in total debt placement.
That is typically weighted more so on the skilled space, followed by assisted, memory, CCRCs — which oddly enough, we’ve been doing a lot of recently — and some more ancillary health care business: pharmacies, home health care and such.
How do you evaluate skilled nursing deals for owner-operators?
The first thing to really come to mind when someone brings a new opportunity to us: Obviously, if it’s a CON [certificate of need] state, that changes things off the bat as far as its long-term viability. The general physical plant layout, when it was built, last renovated. How it can stay competitive in its local space. How it’s been currently performing versus the new operator going in there — what their game plan is.
Is this all a census play? Is it a: Hey, expenses are out of whack, we can go ahead and trim costs without affecting patient care, but save a lot on the expense side? Is it changing from a fully Medicaid play to more of a higher quality mix play? Are there the proper drivers from the referral source, from the hospital networks? How’s the operator been doing overall on his other facilities? What’s their track record?
So those are the first things I go through to vet a deal if it’s got the legs to really get across the finish line.
What are some of the more common challenges you find when trying to get across that finish line?
I think most people would say it’s probably a mix of debt and equity — which one they need to fill out. I find as long as it’s a worthwhile transaction or opportunity, the debt and the equity will find its way to the project.
More challenging would be, I would say, the process — meaning many deals are rushed and then hold up and wait, and then rush again to go ahead and close. You’ve got a client who’s being pressured by a seller to go ahead and go into contract. You go into contract, then you rush the lender to get to a time-is-of-the-essence closing, and then you’re stuck waiting for your CON to be approved by the state. And then you’ve got to close again two days later. That process is more challenging than anything else, and managing all the expectations along the process.
What are some of the debt and equity trends you’re seeing?
As you know, debt and equity, it’s all the same thing, just more a function of your weighted cost of capital to get a deal across the finish line. Typically, you’ll always find debt to be cheaper than equity. I’d say most people are trying to keep the overall capital stack more debt-focused, since it is cheaper and it does provide better economics for the investors — and better cash flow, which is always helpful for a facility to build up that war chest for a rainy day.
However, for deals that require more of a turnaround — a more complex deal — sometimes we do find operators who will turn down higher overall debt load for equity, even though they may lose some ownership or increase the cost of capital. The equity, at times, will be more flexible should they hit a hiccup in their projections, should they need to go ahead and reposition to a degree six months or a year or two years down the road — whereas debt may be a lot more restrictive of that sort.
That’s not to say that lenders don’t work with their borrowers when they’re not exactly hitting everything they need to hit. It’s just a lot easier to do that on the equity or the JV equity side, more so than on the lender side.
What’s your take on the post-PDPM deal flow projections? Some have predicted that it will trigger a wave of M&A activity.
I can definitely tell you, our team at Eastern, we’re really excited about PDPM in general. I think whenever there’s a major change to the industry, it kind of keeps the volume going as far as M&A is concerned. I don’t think it’s going to have a significant impact, per se, on assets in a certain market, or that certain types of operators are going to opt or look to sell more so than they would have if PDPM was not going to be implemented.
What I do see, or what I am excited about with PDPM, is more so: It’s supposed to be a net-neutral budget plan. I do think it’s going to go ahead and help operators provide if not the same quality of care, better quality of care at a lower cost. For example, therapy: They’re able to provide more small-group therapy, which is I believe proven to be as effective as one-on-one, while reducing the overall spend minutes and cost in that sense.
As far as the revenues going down, I think everyone is in agreement that there’s definitely going to be some flex to what reimbursements are going to look like. But again, it’s a new system, similar to the system that there was about 10 or 12 years ago. There’ll always be those who figure out a way to use the new system to benefit, making sure they’re reimbursed in line with the actual care that they’re providing, and making sure that the facilities are overall profitable.
And in a more simple sense, I guess I’d say: It’s supposed to be net neutral. It’s going to be net neutral. Those who have been sitting by the sidelines and not trying to stay ahead of the curve, those are the groups who are probably going to feel the pinch early on. But long-term, it’s going to work itself out, I find. The savvier operators are already prepping for it, they’re already getting prepared to go ahead and switch over, and those are the guys who are going to see the benefits of both the cost reduction and change in reimbursement style — ahead of everyone else who’s just been a little more lax about it.
PDPM only affects a small percentage of each building’s overall income, so I think it’s interesting that there’s been all of this attention while Medicaid remains such a pressing issue.
I’m actually a lot more concerned if they do make serious changes to Medicaid. Medicaid is definitely the bread and butter, the backbone for the majority of the facilities across the country. If they do move from a provider-tax model today to more of a block grant or something that’s handed over to the local municipality or officials, you’re going to see that move from — where PDPM is supposed to be a cost neutral change — to that not being cost-neutral and more of a cost-cutting avenue, or place where local municipalities can try to shave down their costs.
I was just talking to an operator in Wisconsin that had to sacrifice a good chunk of its Medicaid business because the Medicare side was no longer covering the losses.
It’s funny you mention that. We were working on a facility in the same state, maybe a month or two ago. It was a CCRC — old CCRC model — where after our for-profit operators took over, the actual skilled or SNF division, they made more of a focus on the vent play, as opposed to your traditional SNF, for those same exact reasons. You need to focus on those to really sustain the overall SNF operation, and if you didn’t have that specialty, you were probably in the red.
What are you seeing in the CCRC space? That model seems to be in upheaval with operators reconsidering the depth of their skilled play.
CCRCs definitely have a stereotype around that naming — and it’s not necessarily a good stereotype from a lending perspective. As I’m sure you’re aware, the old entrance-fee model is definitely dead as far as I’m concerned, and as far as most operators are concerned. What I do see is the evolution of the CCRC and senior living market taking one of three tracks.
[In] existing CCRCs, like I mentioned a bit earlier, we’ve noticed a major uptick in some of those transactions, those facilities trading hands. The way we’re seeing them being operated on a go-forward basis is obviously on a non-entrance-fee model. As opposed to one large facility, each individual discipline — the SNF, the IL, and the ALF — run independent of each other, yet share some economies of scale, where they’re sharing some marketing, they’re sharing some grounds costs, plant and maintenance. Some of those items can positively benefit each other; however, they’re kind of their own individual business within the group. And that’s where we’re seeing success with those existing structures.
Independent of that, I do see a lot of operators talking or thinking about moving more into the senior living space, or independent living space, but either with limited or a la carte services to provide that semi-assisted living model — or tying together the home health and independent living until they find a proper match and stay with the times.
As I’m sure you know, the overall senior living population — while people talk about 55 and older — it’s probably more so 70 years old for the average age to really fit into that demographic.
And then for skilled nursing, you’re talking mid-80s.
Nationwide, probably somewhere like that. If that’s the case, you definitely don’t just have independent living for 55 and older. Those are true independent departments, just age-restricted. For those in the 70s, you need some services. Blending those with the home health care or some limited services that can be provided is probably where a lot of those operators are going to look to focus.
This interview has been condensed and edited.