With contributions from Alex Zorn and Jordyn Reiland
Despite the challenges of the past two years, Blueprint Healthcare Real Estate Advisors managed to expand and diversify. Now the firm has reorganized its leadership ranks, admitted new partners and is eager to grow the practice as the senior housing and care industries move forward.
That growth will include skilled nursing transactions, given that Blueprint is seeing greater demand for SNFs than ever before, said Ben Firestone, Blueprint Co-Founder and newly named CEO.
Since its founding in 2013, the firm has completed more than 480 transactions valued at about $7.55 billion, across various healthcare sectors including skilled nursing, senior housing and medical office.
But there is no question that times have changed. The future of reimbursement remains uncertain, Blueprint Co-Founder and newly named Chief Vision Officer Jacob Gehl told SNN.
And Firestone is thinking differently about the definition of a stabilized SNF and is challenging conventional wisdom regarding cap rates.
Heady times
Some states saw record-setting per bed pricing for skilled nursing transactions in 2021, and while federal funding fueled transactional activity in the sector, Gehl thinks pricing may have peaked.
“I don’t think that the values are going to continue to appreciate at the rate that they did during Covid because that was really a function of increased reimbursement,” he said. “The real question is do they hold at this number or do they start to trickle back down.”
MedPAC recently proposed a 5% Medicare rate cut for SNFs, and Gehl does think it’s possible that reimbursement will take a hit.
“Other people feel like this is a new normal and it’s going to stay like this for a while. I don’t have a crystal ball so it’s hard for me to know exactly what the future of the reimbursement system is going to look like,” he said.
On the Medicaid side, the permanency of rate increases is something that Blueprint Partner and Executive Managing Director Michael Segal is seeing in underwriting for buyers and lenders alike, which is supporting elevated pricing.
“There are bullish expectations on the reimbursement side, especially on Medicaid reimbursement, depending on the state, of course,” he said.
Gehl called these “heady times” for the nursing home business,and noted that the most active acquirers continue to be private, high net worth buyers.
Of the $3.7 billion spent in total skilled nursing transactions in 2021, $3.3 billion, or roughly 89%, were deals involving private buyers, according to data from NIC MAP Vision.
“I would say that because the private client market has done so well with the reimbursement increases from COVID, these guys are sitting on unprecedented amounts of cash,” Gehl said. “And that newfound sort of windfall has created the opportunity for these guys to leverage their cash positions into even larger portfolios.”
Gehl described it as “impressive to watch” as many of these owners started off on the coasts but continue to gain traction in middle America and add new states to their footprints.
Segal expects even further increased activity on the transaction side in the skilled space in 2022.
“It’s going to be a very robust year in terms of transactional activity,” he said.
Redefining stabilization
The demand for SNFs comes as many investors buck conventional wisdom, which would dictate hitting the pause button in light of uncertainties and operational challenges, Firestone noted.
Now, he is advising Blueprint’s client base to consider a “new definition of stabilized,” he said.
“Maybe that nursing home that was running at an 18% margin and was focused on occupancy and a strong [quality] mix, even if their skilled mix is changed, the occupancy is not in the 90s anymore, and operating expenses are going up, we still might consider that stabilized,” he said.
And if such a community sells as a stabilized asset but has essentially unchanged revenue and lower occupancy than stabilized assets historically have had, it follows that cap rates on these deals — generally considered very static — will fall, perhaps to sub-10%.
A report released over the summer showed that cap rates for the most desirable facilities in core locations averaged around 10.9%.
“I think that’s a really interesting question to ask as a buyer, as a seller, as a lender, and see how HUD and the agencies react to that,” he said.
Looking ahead
Despite near-term uncertainties and challenges related to issues such as labor, Firestone remains “really bullish” on the long-term prospects for senior housing and care — and for Blueprint’s future, particularly in light of how the firm has performed during the most challenging periods of the pandemic.
“I think the best quote I tell my team is, ‘Adversity doesn’t build character, it reveals it,” he said.
Among Blueprint’s recent accomplishments, the firm launched a capital markets and medical office business. Going forward, behavioral health is an area of interest.
“We are looking forward to actually attacking the market,” Firestone said. ”And we didn’t even realize it, but we had already done quite a few deals that had a behavioral health element.”
For example, Blueprint has worked with real estate investment trusts (REITs) to transition behavioral health into functionally obsolescent senior care buildings in order to create value.
Commercial insurance and in some states Medicaid have been “doing a great job” providing coverage as demand grows for substance abuse treatment and other segments of behavioral health, he noted.
“We really think that a lot of our REIT customers are going into it, a lot of private equity clients are going into it, and I think we’ve got the skill set to be a resource and develop some of the underwriting standards so that we can move the market in that space, too, as we’ve done in skilled nursing centers,” he said.
Blueprint’s reorganization should help in this and other efforts, as the firm’s team is increasingly focused on their niches as new market dynamics take hold after the last two pandemic years.
“For the reorder, the timing was right as we continue to accelerate out of the pandemic,” Firestone said. “We’re really bullish on the industry and feel very fortunate to have been playing an active role as an intermediary and market maker amongst people that continue to invest and lend and operate buildings, and help people out there in need.”
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