Walker & Dunlop real estate brokers Josh Jandris and Mark Myers laid out skilled nursing industry trends they’re seeing right now, pointing to a continued frenzy of transactions — with publicly traded real estate investment trusts being the sellers and large private companies as buyers.
Health care systems are divesting their skilled nursing facilities too, the brokers said, preferring to partner with SNF operators.
The Bethesda, Md.-based brokerage firm was the No. 1 Fannie Mae lender last year, and is one of the top HUD [Department of Housing and Urban Development] lenders in the skilled nursing space. Walker Dunlop has brokered more than $3 billion in the SNF space alone.
This interview has been edited for length and clarity.
What sorts of trends are you seeing in the skilled nursing facility space, as far as real estate is concerned?
Jandris: What we’ve seen over the last 18 months is, skilled nursing has actually buoyed the seniors housing industry as a whole. On the transaction side, skilled [nursing] has continued to transact, despite the COVID related issues.
I think, for one, that’s due to the amount of aid. You know the [Payment Protection Program] and grants that skilled nursing providers and owners received during the pandemic … those buildings were losing anywhere from 20 to 50 percent of their occupancy.
That would have been extremely problematic from an investment standpoint, but I think it’s important to take a step back and realize that [SNFs] remain extremely need-based, right, you kind of have to be there. Residents need to be there because they need to receive that around-the-clock care, and then I think secondarily, if you look at the amount of aid they received, it’s weathered the storm pretty well.
What does the future of mergers and acquisitions in this space look like?
Myers: The buying community for skilled has a healthy appetite, I daresay maybe even voracious in some cases, depending on the types of facilities in the marketplaces.
There’s no question that the buying community wants to build platforms. Many of them have ancillary businesses and management platforms they want to grow. We believe that they will still grow on a thoughtful basis, they’ll try to grow, try to bolt on regionally.
This is a very regionally based industry, it really helps to know the doctors, the hospitals, the health systems, so it’s best to grow in a region, and expand in various regions.
Any other factors at play for industry M&As?
Myers: There are states that have been fraught with legal troubles or challenges from some of the law firms out there. They tend to go after nursing home owners — there are many buyers that will shy away from those states, they don’t want the risk of being sued.
One frivolous lawsuit after another, it becomes difficult to obtain insurance to cover such losses and the drain on energy of having to face such things, it’s a distraction to operating the business.
There are some states that have very strong unions, particularly in the Northeast, that can be a deterrent to some buyers that don’t want to have to negotiate with or sometimes even fight with the unions.
Any other M&A trends?
Jandris: What I would say is, there’s not a lot of transactions where a not-for-profit seller is selling to another not-for-profit seller. The best opportunity when buying an asset is, being that private buyer, is buying from a not-for-profit seller, because the dynamics are in your favor.
You have really strong occupancy, you typically have a very good reputation, you have high revenue — you know where the opportunity lies, because all of those are what everybody wants.
Myers: It’s bifurcated. You have a good portion of the (not-for-profit) sector that isn’t keeping up with the trends and they’re not high tech and they’re not looking at costs and that sort of thing and so they make a great opportunity for a private company to come in and create some synergies.
What transactions are you working on currently?
Myers: We are in the process of closing on a very creative, creatively structured transaction in the Midwest that allows some tax deferral for the seller, along with an eventual buyout of the real estate and a refinancing of the underlying debt. That’s going to be a nice transaction for a half dozen skilled nursing facilities, a nice transaction for the seller and the buyer.
In the Northeast, we have a family operation that we’re representing, and we’re selling their nursing homes. We’re working on valuation with them, and collected some offers.
And then in the Southeast, we’re working with a health system on some creative ways to address [its SNFs]. This is going to be a big thing going forward too, health systems are finding, and they have been discovering for years that it’s really tough to be a hospital in the nursing home space.
So hospitals are looking to rid themselves of their skilled nursing assets?
Myers: Hospitals are getting out of the business in many ways, in many states. We’re helping [this health system] identify a partner that will either substantially renovate or rebuild three skilled nursing facilities, either on their hospital campuses or nearby, and create an environment where the hospital feels comfortable as a referral source to these facilities, a place where the hospital’s staff can can oversee the residents and where residents can go that’s close to the hospital and receive rehab, either from surgery or higher acuity needs.
What real estate investment trends do you see currently?
Jandris: It’s really kind of shifted. There was this influx of capital from institutions, and a lot of consolidation — it’s almost done a 180, so those institutions as well as smaller regional players have divested other skilled nursing holdings, back to kind of more owner-operators, or kind of regional owner-operators.
Myers: There were mostly mom-and-pop owners for decades, and then there was this movement from the mom-and-pops with one, two, maybe three facilities to large owners and investors. There’s been, to Josh’s point, a resurgence back, not so much to the mom-and-pops, but going from the public REITs to those private investors. And I think a lot of that has to do with the risks of skilled nursing for a public company, and trying to manage a behemoth of a portfolio in skilled nursing, with various operators in various regions.
So private investors are better positioned to take on skilled nursing facilities right now?
Myers: The big challenge with skilled nursing has been the regulatory challenges, and the fluctuations in cash flow. It’s really difficult for a public company to not have consistently growing cash flow. A private company is a much better vehicle, because you have a longer-term view, you don’t have to report to shareholders. It doesn’t surprise us that the private large [companies] are taking over in the skilled space for those reasons.
How does Walker & Dunlop fit into these trends, current climate?
Myers: We have the ability to transact for clients on the sales side, we can help them with the financing and at the same time we can refinance for them. We have relationships with some of the largest bridge lenders in this space. So, you know, we like the space, and we think we do add a lot of value to the process, because we know the buyers, and we know how to underwrite the facilities, and how to price them.