Some investors are most concerned about skilled nursing recovery, out of a wide range of industries, including those outside of the health care space.
HilltopSecurities in a December survey found about 65% of its respondents named skilled nursing as a concerning sector for investments in 2022, with senior living just behind at 60%, followed by project finance, higher education, student housing, charter schools and health care.
Findings are surprising given the industry’s robust M&A market in 2021, but Hilltop Senior Managing Director Yaffa Rattner said investor perspectives change from the M&A market to the bond market – respondents were composed of the latter.
Outlooks don’t generally overlap between the bond market and M&A; participants have different drivers for their investment decisions, Yaffa said.
“The focus of the institutional bond investor is ensuring that stated principal and interest payments on bonds is made on time and in full and bond defaults are avoided,” Yaffa explained. “As a general rule, the bond investor does not want to own the asset and their analysis is often centered on net operating income and liquidity.”
M&A investors will look at the same opportunity with a “different lens,” Yaffa told Skilled Nursing News. The industry saw a significant bump in M&A – an October report from Irving Levin Associates found there were 107 deals in the third financial quarter, compared to only 60 during the same time period in 2020.
Participants in Hilltop’s survey are independent analysts, attorneys focused on high yield projects and other “market intelligence providers.” The Dallas, Texas-based investment banking firm is part of Hilltop Holdings (NYSE: HTH).
Coupled with concern regarding the skilled nursing industry, investors in the survey said they are less inclined to add SNF exposure to their portfolio, compared to more generalized health care settings and senior living.
“[SNFs] are particularly vulnerable to occupancy changes while they are simultaneously exposed to expense pressures associated with labor shortages, given their staff to resident ratios and other operating costs,” noted Yaffa.
Only 10% of participants named skilled nursing as an area of interest. More than 35% and 45% expressed interest in senior living and health care, respectively.
“Liquidity pressures” are more easily triggered in the SNF industry, he said, with reimbursements driven by governmental payers – revenues are received post-service. That’s on top of decreased occupancy and expenses tied to staffing.
Senior living, on the other hand, “typically” has higher margins and lower staffing ratios, added Yaffa: “SNFs have higher staffing ratios which means that they could be more affected by labor shortages and increases to staffing costs.”
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