After ‘Frenzied’ Year-End of Skilled Nursing Deals, PDPM and Continued Upheaval Likely to Drive More M&A

The pace of skilled nursing transactions kicked up several notches as 2019 rolled to a close, and multiple deal announcements have crossed the wires to start 2020.

Abbey Mansfield Ruby, who recently joined the law firm Waller Lansden Dortch & Davis, LLP as partner at its Nashville office, sees the transaction boom as a continuation of trends that have been years in the making.

Some of the deals are related to the change in reimbursement for skilled nursing facilities in the form of the Patient-Driven Payment Model (PDPM), but other transactions stem from forces that have been at work in the nursing home landscape for much longer — including the divestiture of assets by major operators and real estate investment trusts (REITs).


Skilled Nursing News caught up with Ruby to talk about her work with lenders in the SNF space, what’s going to drive transactions in the coming year, and what’s looming on the financial horizon in the years after.

How you did you end up having a focus on health care and skilled nursing in particular in your practice?

To go all the way back, I thought I would be a litigator, like you see on TV, because that’s all you see when you don’t grow up with a parent who is a transactional lawyer. That’s what I went to law school to do.

And then while I was working as a summer associate at a large law firm in New York, I rotated through their leveraged finance group, and absolutely fell in love with the pace of the deal work, with the number of transactions that you get to work on at a given time — and in particular with the team that I was working with, who happened to represent a number of large investment banks on loans across the health care sector. So when I accepted my offer at that firm, and joined them, I was slotted into the leveraged finance group and ended up doing a lot of large leveraged finance transactions and syndicated loans, primarily on behalf of lenders for all different types of health care companies.


At that point in my career, I wasn’t doing anything in the senior living industry. It was primarily loans for large hospital groups, renal care and other outpatient facilities, supplement providers, pharmaceutical companies, and others — as well as general finance experience. When I left the New York area after six years of practice and moved to D.C., the D.C. finance market is just a bit different from New York. You don’t have the money-center banks and the Wall Street, large-cap-leverage transactions in the same way. But there’s still a ton of market activity.

In particular, a lot of the specialty lenders in the skilled nursing and other senior housing space are located in D.C. or the surrounding areas. The background that I had, that foundational knowledge of the health care industry led to a quick understanding of SNF lending and that world. And frankly, I like the pace of that SNF work even better than what I had been doing when I was in New York.

In New York, I would work on, you know, maybe four or five giant deals each year and each one would take up a whole quarter. The SNF deals that I work on — I have four closings on Friday. I get to work on five or six deals at a time, they close within usually 30-some-[days]; the outside is sort of 60 days.

It’s great for the operators, because they get quick access to capital, but it’s great for me, too, because it keeps my day really varied — and I get to see and work on all different kinds of transactions every day.

You’ve mentioned the pace and how intense it is. Did that change at all with the arrival of PDPM?

I certainly had a very frenzied year-end; everyone was trying to get deals accomplished prior to the rate change and wanted to complete transactions before that uncertainty came into play. I was curious whether that would just lead to a quieter pipeline for January, February, March. That has not played out.

I think that PDPM is a real opportunity for well-established operators to succeed, and I think it’s actually really continuing to drive that frenzied M&A activity, which we’ve seen in the last couple of years — as some operators who either aren’t able to adapt or aren’t interested in adapting to the new reimbursement environment are seeking to divest their assets. It’s particularly giving some of the smaller operator groups, who have a hyper-focus on a defined region, really fantastic opportunities to acquire new facilities to add under their umbrella and be able to just grow their brands.

Given how many transactions happen in the long-term care space, even before PDPM, what are some of the other drivers?

I think that there’s a couple of things at play. One of them that I saw as a big driver was some of the recent bankruptcies and workouts of some of the large provider groups or operator groups. In addition to having an impact on state laws and the way that some banks underwrote — or undertook their risk analysis of credit and the way that operators structure their ownership — I saw that there was a question of out-of-state operators in some states in particular, and a leeriness for out-of-state operators.

That led some of the larger operator groups to exit certain geographies. I do think that that is something that we might see continue. I don’t think we’ll see more of those large bankruptcies or workouts. I think a lot of those issues have been addressed, and I’m not expecting a further wave of that.

So you’re saying there’s probably not another Skyline in the works.

Yeah, exactly. I don’t think we’ll see that — I could always be wrong. But I do think that we will continue to see some of the larger operator groups exit some of those geographies, and give those smaller groups who are focused on regional operations the ability to acquire facilities there.

I also have seen some of the national provider brands and REITs looking to divest non-core assets and rebalance their holdings in other parts of the continuum of care. I think that is something that will continue, and give rise to opportunities for smaller providers. Some of them are not as interested in offering a fully diversified continuum of care platform, and they are focused on just skilled nursing. So there’s going to be opportunities for those SNF-only providers to come in and take some of those facilities.

Are you seeing any trends of how that’s playing out geographically — are there particular regions that stand out?

From my finance perspective, that’s not something that I am necessarily as focused on, but I’d be curious to ask the lenders that I represent — who go out and look at these deals, and sort of structure them before they then bring them to me for documentation and closing — what they’re seeing.

One thing you noted was changes in how banks are doing risk analysis; without naming names, can you go into that a bit? How will that play out in 2020?

The banks that I represent are primarily what I would call more of a health care specialty lender, that does this work day-in and day-out all the time. Their credit committee sees hundreds of these transactions each year, and they’re doing billions of dollars each year in these loans. They are as equally nimble in understanding changes to the space as some of the operator groups who are really well-performing.

I have seen some of the financial institutions who see what everyone sort of calls “the silver tsunami,” this wave of aging baby boomers that’s coming for this industry. They see that as an opportunity, and then are trying to sort of dip their toe in the water of the senior housing industry, and maybe not with the very deep, sophisticated credit understanding of how the reimbursement rates have a real impact on the operation and success of these facilities.

So for the for the lenders that I represent, it really has not been an issue. But I could see that for some other players in the space, it might be more challenging.

What about private equity buyers in the space — is that a trend you’ve seen or worked on?

I would say about 50% to 60% of my practice is in the SNF side … I have not done a lot of private equity health care work. From my experience, a lot of the lenders that I represent are providing capital to some of these smaller operator groups to be able to quickly take advantage of some of the M&A opportunities or to finance the operations of their facilities.

The private equity companies are largely focused on the much larger operator groups who are just seeking a different type of capital and a different lending arrangement than what I typically advise on. But I think that is definitely a trend that’s going to continue. I mean, this is a successful, growing industry that I still am very optimistic about, and I think that the private equity dollars follow optimism.

What is it about the SNF field now that makes you optimistic?

I just see such a a convergence of factors, from a generational increase in demand for the need for care, and a change in the way that people’s families and lives are structured — where they are not going to be in a position to care for aging parents in home the way that generations past might have.

So not only will we have an increased population in need of care, but there’s just a difference in the way families are structured. People are having less children; those children have maybe more two-income households or careers, where they’re just not in a position to have their parents move in with them, necessarily. So I think there’s just going to be a lot of need and demand here.

I certainly think that the regulatory landscape will continue to change and shift and could be a challenge. An overall market downturn could certainly have a negative impact on all lending, including this type of lending. But overall, in the long term, I do think that this is going to continue to be a space with a lot of activity, one way or another.

What are some of the things SNFs should be thinking about in terms of financing that haven’t gotten the attention they should?

One big one, that I think is going to be market-wide in the finance industry, but will impact the operators that take advantage of loan capital in this space, are the changes to LIBOR. Nearly all of the loans that I see in this space are LIBOR-priced. And I think that we’re going to see a market-wide confusion with LIBOR ending as a reference rate and a new rate coming in — especially because there’s going to be a need to reset the applicable margin.

Certain operator groups don’t have large in-house finance departments focused on pricing issues and this change, and they’re used to having a rate of L plus a certain number. And when that number changes, because LIBOR and whatever the successor rate — everyone’s expecting it to be this SOFR rate — they’re not going to be an apples-to-apples comparison.

I think it won’t necessarily cause a disruption in the actual finances, or what the capital looks like. But I do think it could have some significant relationship concerns for operators who feel like they’re now paying more if their margin increases, and just don’t understand this huge shift to the financial markets, how it’s going to play out for them.

I’ve been advising lender clients not just to focus on language that they can put into their documents now to legally protect them, but also to focus on education with their operators to ensure that they understand that that is something that’s coming in the next couple years. There will hopefully be more conversations around it, because I can see it being very disruptive.

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