Bank and finance company executives have found skilled nursing facilities (SNFs) to not only be increasingly changing hands in the last year, but are also changing from a tax-exempt, not-for-profit status to a for-profit facility.
That’s according to commentary collected during an executive survey published by speciality investment bank Ziegler and the National Investment Center for Seniors Housing & Care (NIC).
Don Husi, managing director of the senior housing and care finance team at Ziegler, said the shift from not-for-profit to for-profit SNFs via transactions is a trend five years in the making, but like many industry trends was expedited by the pandemic.
“The driver of that is the inability to find workers as opposed to just occupancy drops. It’s so hard to find workers and the agency costs have just really skyrocketed – it’s hurting a lot of the not-for-profit providers,” he added.
What Husi calls “sponsorship transitions” have been happening for some time as well, when a not-for-profit sells to another not-for-profit entity, thus consolidating this part of the sector to begin with.
The survey also found nursing homes came in middle-of-the-pack in terms of active lending between the fourth financial quarters of 2020 and 2021, behind assisted living/memory care and independent living.
Continuing care retirement communities (CCRCs) and active adult apartment living sectors saw less lending activity than SNFs.
All sectors saw a drop in lending between Q4 2020 and Q4 2021, the survey found.
Still, lending in the long-term care space “picked up meaningfully” during the second half of 2021, executives said, as more banks feel comfortable enough to return to the market.
One respondent, who submitted anonymous comments along with their survey responses, noted a $100 million difference in deals done between 2021 and 2020, as the lending environment became more competitive.
Participants were able to leave anonymous comments as part of the survey.
“Our 2021 activity doubled over 2020 as market acceptance and knowledge of COVID impact stabilized,” another respondent said.
In terms of challenges within the lending environment, executives named inflation – as it relates to new builds – labor shortages, and rising interest rates across the long-term care continuum, among current concerns.
Greater scrutiny surrounding operating margins is likely in future as well, according to commentary, as occupancy continues on its path toward stabilization.
“We won’t know how these labor markets and [personal protective equipment, or PPE] costs and everything else are going to impact the stabilized margins for some time, until we see some of the data,” Husi said. “The various accounting rules, how and when they counted the PPE funds or care provider funds … not everyone’s done it the same way.”
It appears that lenders are looking at debt differently too, with different methods for underwriting COVID-19-related expenses and revenues, researchers said.
Lenders are either excluding all Covid-related expenses and revenues, excluding revenues but including expenses, or including all revenues and expenses tied to the pandemic.
“Covid-specific expenses are increasingly difficult to separate – things like PPE can be normalized, however side effects such as higher labor, supply and food costs are deemed to be potentially permanent and must be underwritten,” one respondent said.
It’s difficult for lenders to determine what stabilized expenses will be going forward, another participant said, when underwriting loans. “Little weight” is placed on such expenses, a respondent said, with more attention paid to how a facility performs with less Covid pressure compared to pre-Covid.
“One of the things that I found interesting is just the very different ways that people are underwriting Covid-related revenues and expenses and how that equates to evaluations; it seems to be a little bit all over the board,” Husi said.
Ziegler partnered with NIC to conduct an industry-wide study assessing the lending climate for providers across the long-term care continuum.
Respondents included major banks and finance companies lending to long-term care communities, including skilled nursing facilities (SNFs). Of the 131 lenders to respond, with the largest portion of participants being regional banks and finance companies.
The survey includes findings from the second half of 2021 compared to the fourth financial quarter of 2020; the most recent data was collected between Jan. 13 and 28 this year.
Despite most respondents being regional, more than half said they cover the national landscape. About 44% said they lend to private and tax-exempt sectors, another 44% only lent to private sector owners and operators, while 12% provided loans to tax-exempt sectors only.
For skilled nursing facilities (SNFs), loan-to-value (LTV) percentages were the highest between independent living, assisted living/memory care and new construction at 76% to 80%, according to the survey.
LTV is the maximum amount a bank is willing to fund based on appraised value and cost of a new construction project.
