The landscape of healthcare financing, especially for skilled nursing facilities, has been undergoing significant shifts in recent times, but the growth outlook has improved and approval of government-backed loans is expected to rise in the coming months.
The Department of Housing and Urban Development’s (HUD) lending in the skilled nursing space for less risky loans requires that facilities meet certain standards and achieve a delicate balance between regulatory changes, financial stability, and the demand for quality care. And one of the key indicators of the sector’s financial health are HUD lending volumes, which are expected to increase in 2024. All this means that operators are navigating through current challenges well, and the sector appears poised for growth and opportunities, experts said.
Steven W. Kennedy Jr., Executive Managing Director of VIUM Capital, and Brad Annis, Director of Real Estate Finance with Walker & Dunlop, shed light on the current state of HUD lending in the industry and its implications for skilled nursing operators.
Medicaid Rates and Financial Stability
Kennedy explained that Medicaid rates, which are determined at the state level, have been undergoing changes based on the costs incurred by nursing homes. Over the past six to 12 months, states have reevaluated these costs, and have taken into account factors like increased expenses during the COVID-19 pandemic, labor inflation, and rising interest rates. The adjustments in Medicaid rates, while not producing excess cash flow, aim to make nursing home operations financially viable.
He said that increased financial stability resulting from these rate changes could make nursing home operations more attractive for mergers and acquisitions transactions or permanent financing.
Moreover, Kennedy said that M&A activity in the next 12 to 18 months might also be driven by changing interest rates.
Also, a measure of the financial health of facilities is indicated by HUD Senior Living financing program lending volume. He anticipated an increase in volume in fiscal year 2024, potentially reaching pre-pandemic levels, which could indicate improved financial stability for nursing homes.
“Volume in the HUD 232 healthcare program has been relatively consistent over the last two HUD fiscal years, with an annual volume of approximately $2.9 billion,” he said. “Last year, there was actually more new HUD healthcare loans than the previous year, as the rise in interest rates drastically reduced the number of refinancings of existing HUD loans.”
These changes, however, have broader implications. Annis highlighted that increased financial stability resulting from these rate adjustments could make nursing home operations more attractive for M&A transactions or permanent financing.
The HUD lending could potentially reach pre-pandemic levels. This projection is based on factors such as the rebasing of Medicaid rates and a relative dearth of alternative permanent funding options.
Annis provided additional insights into the current state of HUD lending. He mentioned that despite challenges like rising interest rates, state reimbursements, and staffing issues, the HUD 232 lending program remains a significant source for the skilled nursing industry. The application submissions have seen an uptick, and Annis anticipates continued growth in volume for HUD in fiscal year 2024.
“The HUD queue has picked up and as of January 24, 2024. The queue is sitting at 70 loan applications for refinances,” Annis said.
HUD lending process and timelines
Both Kennedy and Annis acknowledged that the HUD loan process takes time, and borrowers should plan for it. The process, from engagement to loan closing, typically takes about 8 to 9 months. The timeline includes third-party report completion, application completion and submission, a waiting period in the queue, and HUD review, approval, and loan closing.
“Timing can be greatly affected based on the HUD queue, facility performance, borrower responsiveness, and HUD review during the application process,” Annis said.
While the industry is still awaiting the approval of the updated HUD handbook, the outlook for HUD lending in skilled nursing facilities seems positive. Both Kennedy and Annis project increased volume and activity in the coming years, driven by factors such as the rebasing of Medicaid rates and the need for financial stability in the wake of the COVID-19 pandemic.
“I think volume in the HUD program is a pretty good sort of barometer of the relative financial health of skilled nursing facilities,” Kennedy said. “Again, you have to be able to pay your bills to take out HUD debt, because it’s not a high risk lender. HUD is there for projects that are relatively stabilized.”