Building and maintaining trust between capital providers and operators in the skilled nursing industry can prove critical to the success and longevity of businesses in the sector, and it’s especially important these days for navigating the ongoing challenges and uncertainties faced by the sector.
Whether it means assistance on rent or lending, business partnerships should prioritize long term relationships over short term financial gains in the SNF space because quality care demands this deeper association, executives at the Skill Nursing News’ RETHINK conference in Chicago said last week.
Liz Pagliarini, chief financial officer of Summit Healthcare REIT, emphasized the significance of strong relationships between capital providers and operators through unique financial arrangements.
“We are still, for some of our operators, providing some rent deferrals,” she said. “We’ve also done some other creative type things with a few of our operators in order to help them get through this, you know, unprecedented time in our industry. But, I mean, it is all about relationships.”
Ari Adlerstein, managing director at Meridian Capital Group, echoed the importance of relationships, especially in the lending space. He discussed the strains that lenders are facing, particularly in the context of rising interest rates and changing economic conditions. Adlerstein noted that communication between borrowers and lenders becomes crucial during turbulent times.
“The national players have effectively been on the sidelines for a long time,” he said. “So the regional players are the ones that have really kept us afloat, our clients afloat. And those guys need deposits, and they’re not shy about it.”
Adlerstein also shed light on the evolving dynamics of lender-borrower relationships. He explained that many lenders have started requiring substantial cash deposits, often up to 15% or 20% of a loan, to consider deals. This reflects the challenges lenders are encountering in the current market, driven by a scarcity of capital and increased banking regulations.
Derek Prince, CEO of HMG Healthcare, provided the operator’s perspective on building and maintaining relationships with capital partners.
“I think that lenders have been very patient, for the most part, lenders that understand the business. Lenders that don’t understand the business have panicked,” he said. “Panic doesn’t do anyone any good.”
He emphasized that open and effective communication is key.
“In my experience, if we’re not communicating effectively, we start getting our wires crossed,” he said. “It becomes miscommunication and all hell breaks loose at that point.”
How lenders evaluate operators
Pagliarini touched upon the process of evaluating operators and determining whether they are suitable for long-term relationships. She emphasized the importance of assessing an operator’s culture and commitment to quality care, land ooking beyond financial metrics.
“When we tour a facility that they already operate, you can tell by the way the employees interact with each other and with the residents, the activities that are going on, what’s scheduled, how the facility looks,” Pagliarini said.
Pagliarini discussed a challenging scenario wherein an operator had entered receivership without consulting Summit.
She stressed the vital role of clear communication in the operator-REIT relationship.
“I wish he would have called me, we absolutely would have worked something out,” she said. “So I’ve learned more about receiverships than I ever want to know, but a couple of [important] lessons came out of that.”
She went on to emphasize the significance of understanding certain legalese related to loan agreements. Operators, she noted, sometimes rely too heavily on their attorneys and neglect the critical details present in these documents. This oversight can lead to complications down the road, making it essential for operators to be well-informed about their loan agreements.
Market insights and buyer dynamics
Adlerstein pointed out that major REITs had shown limited activity in the SNF sector, primarily due to prevailing capital market conditions. Instead, the buyer pool had witnessed a transformation, with experienced A-level buyers taking center stage.
This shift had created challenges for smaller operators who faced difficulties in securing deals due to their limited financial capacity. Given this change, Adlerstein highlighted the importance of evaluating equity partners based on character, not just their business acumen.
Drawing from a recent example, he explained how an equity partner prioritized gaining insights into an operator’s character by seeking input from non-business contacts.
“When you’re thinking about who your equity partner is going to be, you guys are partners, you’re going to be in bed together, through good times, but also through some hard times,” he said. “And you want to enjoy working with the people that you’re working with.”
Utilization of data
Regarding the utilization of data in the industry, Prince shed light on the divergent perspectives of operators and financial partners.
Operators tend to focus on data from an operational standpoint, he said, whereas financial and REIT partners adopt a broader perspective, he said. Understanding how data trends differ or align between regions is crucial for making informed decisions that align with market dynamics.
“I think from an operator standpoint, you’re always going to be looking at data,” he said. “And you’ve really got to look at it to say, because the data is the data, but the operations are not always linear. So what you’re going to do in this particular market, or this particular facility is going to be a little bit different.”
Prince said that data interpretation – and regional variation of factors – plays a pivotal role in the financial success, allowing stakeholders to align their strategies with evolving market conditions. Therefore, operators should look beyond their borders for trends in other markets.
“In Texas and Kansas, where we operate, we’re looking at our partners from a national standpoint, [and asking] are those trends ahead or behind of what we’re looking at now?” he said. “Because sometimes stuff that’s going on the East Coast hasn’t hit over here yet. So it’s not always just the data. It’s the interpretation of that data.”
