Prior to the pandemic, any discussion of investment in skilled nursing facilities usually came with a mention of the “stroke of the pen” risk — the concern that any action by the government around reimbursement could have a substantial impact on the value of properties, given that the majority of revenue in the sector comes from state and federal authorities.
But during the COVID-19 public health emergency, it became apparent that there were benefits to having the government provide the majority of reimbursement. SNFs received multiple rounds of targeted government aid through the Provider Relief Fund (PRF), created through the CARES Act passed in late March 2020; for many providers, the aid helped them maintain operations throughout that entire year.
It also scrambled mergers and acquisitions in the SNF world. While initially, some thought the pandemic would drive some operators to exit the space, the CARES Act funding ended up allowing operators to hang on and considerably complicated valuations, Skilled Nursing News reported in August of last year. While M&A didn’t grind to a halt, there were not enough people looking to exit the business to drive prices down substantially, LTC Finance managing partner Steve Zicherman said during a virtual conference last year.
In large part, that’s because of the support from the federal government, according to Bill Janis, managing director at the Chicago-based advisory firm Helios Healthcare Advisors. Distressed inventory that would have hit the market in the first half of 2020 because of difficulties — COVID-related or otherwise — ended up staying on the sidelines because of the stimulus from the federal government.
“These were facilities that weren’t going to make it, or there’s a high chance they weren’t going to make it before COVID,” he told SNN recently. “But because of the additional CARES Act, they were able to do quite well, [or] at least more than break even.”
This point echoes one made during SNN’s virtual Payments, Policy and Capital Summit, held in February, by Amy Sitzman, senior director at the Chicago-based Blueprint Healthcare Real Estate Investors.
“I’m not seeing people taking things to market that are in a dire need to sell thus far,” she explained during the summit. “Not to say I don’t have any — I do have some — but the amount of interested people that want to see these facilities that are falling apart, or they think they’re going to fall apart, come to market haven’t really been happening.”
Laca Wong-Hammond — managing director and head of M&A at the senior housing finance firm Lument, a subsidiary of ORIX Corporation USA — told SNN that while a number of transactions did close in 2020, including one involving three dozen nursing homes, there were others that were pulled for a variety of reasons, ranging from COVID-19 outbreaks to performance declines.
Seller motivation was also a factor, with some having “a gut feel this was a bad time to go to market” in 2020, she noted.
The effect of the government stimulus on transactions is harder to quantify, since most investors understand that this was a one-time event, with uncertainty around when some of the grants might have to be paid back, according to Wong-Hammond. That meant there is little to no credit given for stimulus funds on deals conducted during the pandemic, she said.
“We’re going to see more distressed transactions coming to market, be they portfolios or be they single assets,” she also predicted.
Chad Buchanan, managing partner and co-founder of the private equity firm Twin Light Capital, told SNN that the stimulus funds have made it hard to value portfolios and investment opportunities in the SNF space, because the funds obscure how successful those places would be on their own.
Before COVID-19, a facility or portfolio could be assessed on its own merits, he explained.
“Today, for the majority of facilities, you’re talking about the bottom line being propped up in large part due to government aid,” Buchanan said. “And it’s entirely speculative, on how much aid will continue and for how long. When you adjust your evaluation of these opportunities and test the sensitivity of: If the aid stops tomorrow, or if the aid stops in six months, where do I need to be in order to simply pay pay my bills? You come to a conclusion that the sensitivity of that aid dramatically affects the ultimate outcome of that facility. And really, that’s what operators are reporting. They’re saying that the sustainability of our business directly depends on this aid continuing.”
Because of this, Twin Light has been “taking a wait-and-see approach” on SNF investments, Buchanan said. He has heard the argument that the aid represents the positive side of the “stroke-of-the-pen” risk, especially combined with the fact that the government provides loans backed by the Department of Housing and Urban Development (HUD). The argument here is that the stimulus should give investors confidence that the government “has the industry’s back,” as he put it.
“I think that argument does have merit to it,” Buchanan acknowledged. “But as we know, especially in the last eight years, eight to 12 years, government policy can change very quickly and dramatically with with the administrations that are in charge … and I think there also is merit to the other argument, that says: If it’s wholly dependent upon HUD financing and government aid, what are the opportunities in this industry truly worth? I think that’s a valid question as well.”
But for buyers of a certain profile, the pipeline for deals could start to pick up this year. Janis noted that “a good amount of regional buyers” are still looking for deals aggressively, even though the top 5% of larger operators are being more cautious. But smaller and regional operators have relatively stronger balance sheets, especially if they were not as affected by COVID, and want to use the opportunity to grow, Janis said.
And with the vaccination effort well underway — not just in SNFs, but in wide swaths of the general population — interest in deals is starting to gather steam again, according to Wong-Hammond.
“Any way you slice it right now, for a myriad of reasons — the vaccination created more confidence, people people just feel better about a new year, the pandemic coming to hopefully the tail end — we are seeing the strongest deal flow and pipeline that I have ever experienced in seniors,” Wong-Hammond told SNN. “So we are very optimistic. We’re excited. And I think the market this year for M&A volume will strike new highs.”