Skilled Nursing M&A Remains Active: Investors Don’t ‘Have a Better Place to Put Their Money’

The ongoing pandemic has rightfully shifted attention away from dealmaking in the long-term and post-acute care space, but several leaders have expressed optimism that investors will support the sector moving forward — though the influx of federal cash keeping operators afloat could scramble valuation math for some time to come.

With overall uncertainty in the future of various industries, health care companies represent a safe bet for real estate-minded equity partners, banks, and other lenders, LTC Finance managing partner Steve Zicherman said during a virtual panel discussion last week held by accounting firm Roth & Co.

“I don’t know if they have a better place to put their money at this point,” Zicherman said. “I don’t know that office buildings, or retail, or restaurants, or hospitality are better at this point, or more secure, than health care.”

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Similar to the predictions made about the effects of the Patient-Driven Payment Model (PDPM) on skilled nursing deal flow, Zicherman said that wave of COVID-19 stress could be the final straw that convinces already struggling owners and operators to leave the space altogether.

“There are deals happening,” Zicherman said. “A lot of the sellers that were on the brink prior to COVID see this as a tremendous opportunity to sell — especially the mom-and-pop type operators, the non-profits that don’t want to or don’t have the strength or the stamina to go through this for another year.”

Early details about the depths of the COVID-19 pandemic’s effects on nursing home finances seem to back up the outlook for serious upheaval ahead. Survey data collected by industry trade group the American Health Care Association found that 72% of nursing home operators do not think they can sustain their operations over the coming year at current expense levels, with 40% reporting that they wouldn’t last six months.

Publicly traded nursing home giant Genesis HealthCare (NYSE: GEN) last week became the most prominent example of that brewing trend, disclosing that cost increases and occupancy declines in COVID-19 hotspots have cast “substantial doubt” over whether the company can continue as a going concern over the next 12 months.

“Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties,” the Kennett Square, Pa.-based operator announced.

That said, at least in LTC’s practice, there hasn’t been a sufficient rush to the exits to drive pricing down substantially.

“The distressed purchases or the heavy discounts that people thought would be coming our way have not presented themselves at the time,” Zicherman said. “There are slight adjustments in valuation. But overall, there’s interest in buying, and the valuations are not yet at a sharp discount.”

But the question of valuations has become complicated by the vast influx of federal stimulus cash for skilled nursing operators. The Department of Health and Human Services (HHS) so far has earmarked nearly $10 billion exclusively for nursing home operators, on top of billions in Medicare- and Medicaid-based CARES Act relief tranches that providers can also access.

Providers have also seen state-level bumps in Medicaid rates, and have been able to take advantage of the Paycheck Protection Program (PPP) and advance Medicare payment programs.

That temporary shot in the arm for operators can make determining the underlying value of a given skilled nursing facility or operator difficult, Sabra Health Care REIT (Nasdaq: SBRA) chief investment officer Talya Nevo-Hacohen observed on her company’s most recent earnings call earlier this month.

“It becomes really challenging to do this — you have to peel out the stimulus money so that you can see what the real underlying economics are, as opposed to numbers that are offsetting losses in occupancy,” Nevo-Hacohen said. “You have to make an assessment of the fundamentals of the location and that particular building, or those particular buildings — how they’ll recoup occupancy and normalize.”

Genesis and fellow publicly traded skilled nursing giant The Ensign Group (Nasdaq: ENSG) provided contrasting case studies in the effects of the federal cash on stability.

In sounding the alarm about its near-term viability, Genesis emphasized that far more federal funding would be necessary — despite the fact that it had already logged $186 million in CARES Act grants and $56 million in state aid. Even additional support may not be enough, the operator warned.

“Even if the Company receives additional funding support from government sources and/or is able to execute successfully all of its these plans and initiatives, given the current challenging environment the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued, which could force the Company to seek reorganization under the U.S. Bankruptcy Code,” Genesis noted.

Ensign, meanwhile, sent back all $110 million in federal aid that it had received, citing yet another record earnings quarter.

“Most of our revenue comes to us from sources that are funded by taxpayer money, and as stewards of those funds, we know that there’s a high degree of responsibility that accompanies government reimbursement,” CEO Barry Port said earlier this month.

Ensign chief investment officer Chad Keetch also acknowledged Washington’s largesse as a complicating factor in getting deals done.

“In some cases, some of the deals that we expected to see this year have been delayed as the CARES Act funding has provided additional capital to provide temporary assistance to undercapitalized or struggling operations,” Keetch said. “However, we anticipate that there will be a significant influx of older and newer deals that come out of this pandemic.”

But others have also argued that the government’s support of skilled nursing facilities during the crisis illustrates that the industry will always have support during tough times — turning heavy regulation of the space, long considered a risk for operators, into a benefit.

“Hopefully this highlights the fact that the quote ‘stroke-of-the-pen risk’ so many in the credit community and elsewhere wring their hands over actually goes both ways,” CareTrust REIT (Nasdaq: CTRE) CEO Greg Stapley said earlier in August.

Zicherman echoed Stapley’s comments last week.

“The risks have changed — not necessarily gotten better or worse, but the the lay of the land has changed where we see that our industry has turned upside down, our world has turned upside down,” Zicherman said. “We’ve seen that pen-stroke risk actually work the other way, where the federal government came in and helped us stabilize our industries and our businesses and our facilities.”

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