Greystone CEO: Investor Demand for Skilled Nursing is High, But Turnaround Churn Remains

Under the leadership of founder and CEO Stephen Rosenberg, Greystone has grown from a small consulting shop to a heavyweight in the health care and multifamily lending space, with its hands also extending into operations and development.

Rosenberg has seen a few decades’ worth of change in the industry in his time at the helm, and he says that investor interest in nursing homes remains strong — despite the emergence of failed turnaround properties that repeatedly hit the market amid cash-flow issues and other operational challenges.

SNN invited Rosenberg to speak about his career and the skilled nursing landscape at large for the latest episode of our podcast, “Rethink: The Future of Skilled Nursing.” Over the course of our conversation, the CEO discussed how his firm evaluates skilled nursing deals, the rise of creative new loan options for investors, and other trends roiling the industry.

You can download the full episode at SoundCloud, Apple Podcasts, and
Google Play; excerpts from the interview are presented below. If you like what you read and hear, be sure to subscribe to “Rethink” on the podcast service of your choice so you never miss an episode.

Tell me about the genesis of the company and its current place in the overall investment world.

I founded Greystone 30 years ago in 1988 — at the time to do consulting. I had been the national director of housing finance at Dean Witter Reynolds. Left Dean Witter, started Greystone with really no capital whatsoever, really just to do consulting. An opportunity here or there came up, and frankly, only people that had problems and had defaulted loans would return my phone calls. So obviously I wasn’t that compelling of a salesman.

People would call me back and I would try to help them out, and over the 30 years, we’ve really never actually raised any equity. As a company, we’ve been committed to giving at least half of our profits to charities every year, and sometimes it’s actually significantly more than 50%. Notwithstanding the fact that I’m not that good of a salesman, and we didn’t raise any capital over the time — we started with no capital — and we’re giving half away; notwithstanding that, the company magically grew to its current size.

We’ve got over 7,000 employees, and we are significant lenders in the multifamily and health care areas — multifamily rental housing, skilled nursing facilities, senior housing. Our loan portfolio is just about at $34 billion right now. We’re the number-one HUD lender in the country, top 10 Fannie Mae, Freddie Mac, and we do about $12 billion a year of lending.

When I think about it, it’s been a magical ride, because when I look back at where we started from, it’s kind of crazy. Starting out with no capital, giving half of the profits away at a minimum every year, and knowing my own personality limitations — and the fact that I don’t really know how to ask for equity or ask for investors, at least historically, it’s been a magical growth story, and I’m really proud of it. And we have a very unique culture at Greystone, where we treat each other with high levels of respect — losing your temper at somebody could cost you your job.

Greystone has its hands in development, transactions, and operations. Tell me a little about the buy-versus-build calculus for investors and operators.

Building new has the benefit of: You can create what you want to create. The real issue is that it always comes down to an analysis of: What’s the cost of land in a specific area? What are the construction costs in a specific area? The equity that you’ve got to put in, or that you’ve got to raise, what’s that equity going to cost you? The economics of building new as opposed to buying and refurbishing, those are unique to specific states and unique to specific areas within a state. Everything depends on what the alternative uses are of that piece of land — as well as what the construction costs are in that given state.

We’re clearly seeing the need for patients that, in many cases, want more private space. I see a transition, especially in the skilled nursing industry. There’s a lot of focus on post-acute rehab patients coming in directly from hospitals that need rehabilitation, and what kind of environment do you create for those patients? Those are generally younger, healthier patients, and they don’t want to be in a depressing environment. I think there’s a movement now in the industry to create more activities, and to make even post-acute, skilled nursing facilities more about maintaining lifestyle and more activities. We’re talking right now about whether or not we can have a happy hour in a number of our facilities.

It’s not a place just to be. I see the industry moving to skilled nursing facilities that are not giving up on the patient. Even if the patient will be there longer term, the idea is: How do we make their lives happier, easier, more social, more friendly? Activities — even drinking. I definitely see that movement in the industry. Clearly, sometimes it’s easier to do that when you can build your own facility. But again, buying existing facilities, rehabbing those facilities, is definitely a way to go as well.

Given the average age of the SNF plant, rehabbing a building is pretty much a necessity if you choose not to buy new.

We’re seeing that as well. Because there was such a demand from our clients that are acquiring facilities and essentially need bridge loans to acquire the facility and provide the capital to rehab the facility. We had been carrying about $1 billion of loans on our balance sheet for years, and we expanded that program to a $3 billion program, because we see such a need for acquisition financing where there’s a repositioning that’s going to happen. You’re absolutely right, and we’re seeing that literally every day.

With those repositioning efforts, are they looking to be in and out within five years, or are they in it for decades?

On the multifamily side, we see a lot of folks that come in, acquire, reposition, and sell. What’s really interesting is that on the skilled nursing side, I’m not seeing that. Most of our clients come in expecting to hold onto the facilities for the long term. I never really focused on that, but that is a differentiation. We’re not seeing anyone that is coming in with a flip strategy, and I think that’s one of the reasons that people are so attracted to FHA long-term financing. It’s that 35-year, self-amortizing loan.

Once you put it in place, you’re never forced to think again about how you’re going to finance, because your financing is in place. You can always replace it with another HUD loan, or replace it with something else, but you’re never forced to. I think that type of financing is meant for people who want to stay in for the long term.

The other side of the coin is that there aren’t many other options for long-term SNF loans.

It’s interesting that you say that. You’re absolutely right. There is no other long-term financing alternative in the skilled nursing area, but we’re actually endeavoring right now — and one of the top priorities of our finance department — is to create at least a 10-year, fixed-rate, debt vehicle for nursing home operators. And so we’re in the process of creating that right now.

We actually did — even in our bridge loan program, which his shorter-term because the loans go only up to three years — just last year, we executed the first 100% skilled nursing CLO, which is essentially aggregating skilled nursing short-term loans and essentially securitizing those loans in the market. So we were the first ones that ever did that.

The market was very receptive to buying those bonds that we created. It was relatively small — a $300 million securitization — but the market was very receptive to that, and we are planning to take that to the next step and create a 10-year, fixed-rate vehicle so that people have an alternative to HUD.

Interesting that the market was receptive to that, considering continued Wall Street skepticism of skilled nursing.

Very positive reception, which also resulted in very aggressively low interest rates. … You’ve got to remember, also, we’ve been doing this type of lending for definitely more than a decade, and so we really had the statistics. Our default rates were as close to zero as you can get. The rating agencies were comfortable with us, the investors were comfortable with us. I’m not sure that a company that had less experience could have pulled that off as well, but the market was definitely receptive, and we’re hoping that we’ll be able to create this 10-year product as well so that owners and borrowers have another option on the table.

How do you evaluate deals? What’s your strategy?

The first thing is: We want to focus on the quality of care they provide. We want to visit their facilities. We want to talk to the state regulators. We want to see: Do they just operate four- and five-star facilities, or are most of their facilities two-star facilities? We want to get in and interview the administrators that are operating the facilities.

Because we ourselves own and operate about 4,000 beds, I see that as almost our in-house laboratory. Our head of clinical care, if we want, can get on a plane an interview the head of clinical care at that borrower. We have staff in place that are deep into providing care at our own facilities, and we have that resource to call on to help us do our due diligence for potential borrowers that have come to us for a loan.

Quality of care is clearly number one. And we’re looking for track record. When they say that they can turn a facility around, show us number one — that you’ve done it in the past, and not only that, tell us exactly how you’re going to do it. Is that you expect to have a different type of patient, so you’re going to market differently than the existing owner of that facility? Or is the focus on expense reduction?

If they’re using a lot of outside nursing agency nurses — and we’ve seen people make that mistake a lot, where they come in and say: “We’re going to be able to reduce our nursing expense, because we’re just going to eliminate agency. But once they get in, what they’re finding is — there just aren’t nurses in the market. And so they can’t get out of agency.

And so what we’re seeing for the first time is that … people that are buying facilities, and two years post-purchase, they see they’re unable to turn those facilities around as they had hoped they would, and they’re putting those facilities back on the market and trying to sell them. And we’ve not seen that before.

We have a platform at Greystone where we’re putting equity also behind operators that we believe in. Again, the properties that we’re seeing on that acquisition platform, are properties that we may have financed two years ago, or someone else financed two years ago, but the borrower was unable to pull off their plan. And we’ve really never seen that before.

Why is that happening?

People that have operated well in a certain state, they were able to raise outside capital from investors that saw these were successful in that state. They’re trying to use their expertise in state A and plug investors’ capital where investors are pushing them to expand, and they’re going into states that they’re just not comfortable [with]. They were unfortunately too comfortable in moving into the states, but it’s just a different dynamic.

We’re definitely seeing good operators that were good in their state, but once they start going into a state where they’re not known and they’re not as familiar, we’re seeing them not meeting their projections. Access to capital is pushing them to broaden their horizons, and a sense that: “If we can figure it out in a state we’re in, we can figure it out in a another state.” Those two things, I think, are creating the problem.

We’re talking to banks all of the time that also provide acquisition financing, and they’re telling us the same thing. They’re telling us that they have loans in their portfolio that are on the watchlist because they’re not performing as they expected they would.

There have been a lot of high-profile headlines in the last few years about companies that have failed because they took that multi-state trajectory.

It’s really unfortunate. It’s really sad. It’s especially unfortunate when companies are not meeting their projections, and then they don’t have the cash flow to provide the services or the care to their residents. That’s who really suffers. Sure, people might lose some of their equity, but the people that are really suffering in those circumstances, when there just isn’t cash flow, are the residents. And that’s the unfortunate thing. And that’s why you’re seeing regulators getting so aggressive and going in and monitoring facilities. A lack of cash creates a lot of problems.