REITs, Other ‘Well Funded’ Skilled Nursing Investors Rejoice Buyers’ Market Return

Lenders in the skilled nursing space are increasingly more selective with their financing, adopting stricter underwriting standards while regulatory uncertainties and reimbursement changes leave investors more reserved.

There is also a more defined shift toward a buyers’ market as well, as more transactions come back across the sector, according to analysts in the space. A lot of prospective deals were held up in the last year or so, with underwriters and capital providers needing extra guarantees before closing on a transaction.

“This is good news for well-funded buyers including [real estate investment trusts] to pivot from debt deals back to real estate,” Stifel analysts said in a note published on Monday. “We may finally see more deals underwritten based on current yield again.”

Stifel analysts heard from a broad range of skilled nursing and seniors housing stakeholders at the National Investment Center for Seniors Housing & Care (NIC) 2022 Fall Conference last week.

In spite of concerns over the ongoing challenges facing the skilled nursing sector, certain investors have not shied away from the industry.

Private buyers closed roughly $1 billion in skilled nursing transactions as of the second financial quarter of 2022, according to preliminary data from NIC MAP Vision.

Public REITs seem to be the sellers in the market currently, according to industry investors.

LTC Properties specifically has been “recycling capital” from a lot of the older skilled nursing properties in its portfolio, according to CIO and Co-President Clint Malin.

Still, Malin said REITs are “counter cyclical” and as the industry reaches a new environment with rising interest rates, it could make them more competitive in the market to acquire additional assets.

The overall mood in the space is “upbeat,” Stifel analysts said, as growth projections and return expectations are reshaped to a more realistic perspective – after more than a year of inflation and surging debt costs.

A reshaping view of the industry didn’t happen in 2021, Stifel analysts said.

Looking ahead to 2023, capital providers are expected to be more cautious while owners and operators will take a more pragmatic approach. Stifel analysts believe the new perspective will help “tighten the gap” between asset prices and fundamentals.

Operators, among other stakeholders in the space, believe a positive supply and demand backdrop will support occupancy growth at a faster pace than historical levels.

This is despite staffing still being a “pain point” for operators. Many believe the cost of labor growth has peaked while agency labor decreases and operators achieve more net hires, but there isn’t going to be “sharp improvement” any time soon, Stifel analysts said.

“Employee poaching continues to be a thorny issue for every operator. Work culture and incentives play an important role in workforce retention, but the caregivers and line workers are themselves the biggest victim of inflation and need higher pay to support their families,” analysts said. “Operators need to understand the needs and priorities of the current generation of workers better too.”

A scarcity of construction financing, why scaling operations matters more considering today’s “revenue whipsaw;” and a need for more robust data analytics and data sharing were also top of mind for operators.