SNF M&A Landscape Favors Sellers – But Operators Looking to Exit Should Act Now

The skilled nursing scene is increasingly a sellers market, brokers say, as buyers that adopted a cautious approach during the pandemic have changed tack to pursue transactions.

Investment interest is more wide-ranging too, with operators and owners, public and private players ready to bid. As a result, prices in the space have climbed and are expected to keep climbing as aggressive bidding takes center stage.

Skilled Nursing News broke down the current market climate with Blueprint broker Michael Segal, senior managing director at the Chicago-based firm. Segal is the company’s go-to expert on skilled nursing facilities; the firm specializes in health care real estate transactions.


What real estate moves are happening right now in the skilled nursing space?

A lot of lenders are back, actively and aggressively underwriting deals. Census and operational performance trends continue to rebound relatively steadily, and those aggressive lending terms are leading to higher and more aggressive prices for skilled nursing properties across the country.

There was some trepidation by certain buyers that might have been looking to acquire buildings during COVID. As a result of some tightening of the capital markets, some were trying to take the wait-and-see approach to how we were going to come out of the pandemic. That has loosened up in a big way.


Is there a fair amount of distress in the market too?

Since the onset of the pandemic, there were several different opportunistic investors that were seeking those distress opportunities, and thinking it’s just a matter of time for when those distressed opportunities would hit the market.

Thanks to a lot of federal and state financial support, and then also support from [the Centers for Medicare & Medicaid Services], the industry hasn’t really seen as much distress as some of these opportunistic investors were hoping for and anticipated. But there are distressed deals, distress facilities, distressed operators, that, without the support that has been continuing more or less up till now, may be looking for the exits.

So more sales once government funding is depleted?

We are starting to see more lender pressure for borrowers that are in default, to seek and exit and to get the lenders out, whether that be through a sale or a refinance. I think that trend is going to continue, certainly through the end of the year.

We anticipate deal flow to increase dramatically. Owners and operators have been holding on and have been staying afloat as a result of the various stimulus and grant programs that have propped up operations. If those investors and operators haven’t adjusted their approach to this business, they are going to be in a situation where they’re going to be forced to recapitalize or sell.

While we’re starting to see some of that now, the dam has not yet broken. And we do anticipate more of that to come in the third and fourth quarter of this year.

Will this be more standalone facilities selling, or smaller operators?

I don’t think the distress is going to be limited to a geographic region, to a specific type of borrower or operator. That disruption, that distress is going to come in several forms. It may just be a facility or two within a portfolio that are dragging down lease coverage with the landlord, or debt service coverage with a lender, that the lender or the landlord would look for or push for those particular facilities to be sold.

There are going to be other instances where entire portfolios that may be cross-collateralized with a lender, or are leased under a master lease structure with a landlord, are underperforming, to the point where the landlord and the operator come to an agreement that an exit is necessary; an entire portfolio may come to market.

We’re working on several of those different deals now, and we expect much more to come. But that ranges from a single facility or two all the way to larger regional portfolios that span multiple states.

How will the market react to this influx of sales?

The question is going to be: Does market demand and evaluation of pricing and value in the market, does that match up with sellers’ expectations? For lender-directed sales of private owner/operators, or larger firms that are looking to exit, is there going to be a delta between the bid and the ask? Or is pricing going to continue to climb as it has, with the capital influx, and as operations continue to rebound?

We are still seeing multiple offers on really every offering that we’re bringing to market, whether that’s single facilities or regional portfolios of facilities. Those competitive bidding environments with multiple offers are driving up pricing to the benefit of these sellers.

Do you have advice for owners/operators of SNFs in the market to sell?

It’s a good time now for owners and operators to be considering potential exits.

There’s so many buyers and so much money flowing into this space, targeting the skilled nursing market for its elevated returns compared to alternative real estate investment types, that cap rates are being bid down and price per bed continues to climb.

We don’t know for how much longer that’s going to continue.

What about those looking to grow?

They should be taking a very disciplined approach, knowing what their skill set is, where they do exceptionally well, where they may specialize, and focus on those areas — not overreach or expand past something that may stretch them or their operating teams too thin.

Disciplined, controlled growth will end up being the most successful over the near, mid and long-term.

Has COVID changed the way you market properties?

We’ve taken an approach as a collective team to really highlight where performance trends were going, and high watermarks that may have been hit prior to the onset of the pandemic.

We project out realistic and defendable trends of how certain facilities that may have been dramatically impacted by the pandemic can rebound and regain census and achieve those historical high watermarks or really exceed them.

I think we will be coming out of this pandemic stronger than we were prior. Not only are we selling on the uptrends, but we are also seeing it; the actual trends year to date in 2021 are, in general, positive. We’re continuing to market and sell on those sustainable trends going forward.

So you highlight pre-pandemic trends as an indicator for the future when you market a property?

We are firm believers that many operators are going to be able to push past and exceed pre-pandemic operating levels.

We’re taking into account elevated insurance costs and in certain instances, higher nursing PPDs [daily number of hours of care, per resident per day]. Labor is a challenge, there’s no doubt about it, but as we expect the federal unemployment support to end in September, we’re expecting a lot of the labor force to return.

There’s certainly going to be wage pressure, but there won’t be as much agency reliance as there has been over the course of the past 15 to16 months. Labor costs will normalize, supply costs will normalize.

We anticipate expense normalization and census rebounding across the entire payer mix; it’s going to boost revenues and overall cash flow across the skilled nursing industry.

Companies featured in this article: