SNF Outlook: REITs to Play Offense as Private Buyers ‘Partially Sidelined,’ Operating Trends Improve

Skilled nursing operators are sitting on capital reserves and are poised to pursue deals in the sector going forward – after being on the sidelines for much of last year with private equity buyers outbidding them.

Now, these same private equity buyers are beginning to fade from the scene, and real estate investment trusts (REITs) are particularly in a good position to put some of the capital they’ve accumulated to work, with plans to raise even more funds underway, to acquire more aggressively.

Wall Street analysts are forecasting more deal making in the long-term care industry in the next year or so.


In other words, organizations are “turning to offense,” as occupancy and labor continue to improve, and reimbursement increases have translated to better rent coverage, investment analysts noted.

In looking at SNF sector dynamics, BMO Capital Markets analysts anticipate that the minimum staffing mandate will not be a drag on the near-term earnings of publicly-traded REITs in their portfolio.

“Industry sources don’t expect [minimum] staffing regulation will be announced until 4Q with a delayed phase and good faith provisions likely,” BMO analysts said.


Meanwhile, analysts with Stifel said the delayed minimum staffing announcement is likely due to additional negotiations taking place, which could mitigate its impact.

That said, while second quarter earnings overall had a few “hiccups,” BMO analysts said, needs-based demand for SNFs is growing, with aging demographics and limited supply being the main drivers. In fact, analysts see the reimbursement environment as useful for industry recovery, with less risk of future rent cuts or deferrals among REITs.

Stifel analysts echoed similar sentiments, saying that the SNF sector is on the mend while noting that health care overall as a business is less dependent than others on the economy or direction of interest rates.

“People get sick and age no matter what,” Stifel analysts said. “While higher or longer rates have a dampening effect on all real estate valuations, the operating environment for many healthcare REIT tenants is recovering or stable.”

Competition from private capital

And so, growing acquisitions have re-emerged, with private buyers “partially sidelined” as REITs enjoy a solid cost of capital and growing pipeline of opportunities.

Private capital competition has been diminished as capital market conditions continue to be a challenge, BMO analysts said, particularly when it comes to bridge to HUD lending.

Stifel analysts are also seeing increasing acquisition opportunities as capital tightens for acquirers. Acquisition volumes and earnings could increase in the next year-and-a-half.

Two other beneficial trends for REITs are specific to the skilled nursing industry. One, an improved operating cycle as occupancy slowly ticks back up and reimbursement rates improve for both states and Medicare.

“Operators should benefit from the recently announced 4.0% 2024 Medicare rate increase and certain state Medicaid increases,” Stifel analysts said.

Another benefit for REITs – many previous SNF buyers are “hamstrung” by higher debt costs and decreased availability of capital, Stifel analysts noted.

“We see REITs as more likely to buy value-added real estate instead of distressed properties, given that there is so much money raised for the latter,” according to the Stifel analysts. This trend is expected to continue at least for the next year.

The only hamper to this forecast for future deal making: analysts point to intensifying investment competition and new tenant issues as potential challenges down the road, along with Medicare and Medicaid reimbursement levels being less supportive as the industry recovers.

SNF regulatory risk might re-emerge too, with minimum staffing mandate implementation. And stroke-of-the-pen risk will be hard to underwrite, analysts said.

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