A strong overall outlook for skilled nursing is behind the rising appeal for asset-based lending in the nursing home sector, but distressed properties remain common in an environment with harsher and higher material citations and fines, according to risk assessment experts.

After evaluating the quality of operator books, records, and management, advisors from health care financial consulting firm Breslin, Young & Slaughter – which assists banks, investors and operators with lending – said in a MonticelloAM webinar last week that demand for SNF assets has, nevertheless, gained momentum, and the market remains steady.

“Loan utilization in the last couple of years is up. Obviously, with Covid, with all the money that was there, everyone was having very low utilization on [asset-based lending] lines. But in two to three years, it’s risen,” said Brian Young, chief executive officer at Breslin, Young & Slaughter. “In the last 12 months, I’d say, from what we’re seeing, it’s fairly stable.”

One of the firm’s goals in assisting lenders is to validate and value accounts receivables (AR) to determine loan value. And, Young shared what operators, who are aiming to get loans or sell assets, need to practice in order to have demonstrate good financial health.

The financial firm provides ongoing monitoring through reports that are akin to “field exams.” These reports help assess credit risk by evaluating AR, which drives loan value, he said. 

The firm’s reports also identify other risks – like cash flow issues, tax problems, or clinical concerns – that could affect loan repayment. These evaluations can help lenders determine risks or allow operators to seek improvement areas before proceeding with financing.

Quality of SNF assets

Overall, the health of the SNF market is strong, as fundamentals are improving, although the spectrum is broad, with both large and small operators displaying varying levels of sophistication.

“The long-term outlook for the industry seems to be very strong, and so that makes it more attractive both for operators and, in turn, for lenders at a high level,” Young said.

Post-pandemic recovery trends have been positive. Census levels have improved, staffing concerns have eased somewhat, and Medicaid rate increases in multiple states such as, Missouri, Montana, Nebraska, Illinois, Ohio, North Carolina, Wyoming and Washington, to name some states, have boosted revenue outlooks, Young said.

“From an operator’s perspective things have definitely improved post Covid. We’ve seen the census come back. Staffing issues don’t seem to be as severe – some of the mandates around staffing seem to not be going forward (along with) rate increases, etc.,” he said.

And in terms of how common it is to find issues with a facility’s quality of books, records, or management, allowing advisors to flag deals as unworkable or highlight areas lenders can address with clients, the situation is all over the map.

When Young’s firm evaluates a transaction it acts as a “book bill collector,” he explained.

“We look at the revenue cycle, the back office as well as all the things that drive into … the collectibility of the AR, the bad debt expense,” Young said.

An assessment of staffing, including quality, skill-set and appropriateness of the workforce, is made during this stage, Young said. And right now, there is a wide range of performance from those SNFs that are struggling to those that are excelling, regardless of size.

“We see single SNFs and then up to 100-plus SNF organizations. And we’ve seen good, bad and ugly, both on the large operators and small operators,” Young said. “It becomes pretty evident with the kind of dive that we take, a lot of times, how someone’s running their business … there’s a lot of just metrics that we’ll see in our work that give that feel of, is it a well-run back office, a well-run business?”

Lender competition, new players

There is certainly increased lender competition currently, with new players entering the space. Some lenders are now loosening credit terms, offering “ABL-lite” structures with less frequent reporting and limited cash transactions. Still, the market remains cyclical – if lenders overextend, credit conditions may tighten again.

“There’s probably more competition in the space than we’ve seen for a little while,” Young said. “We’re seeing [the credit belt] loosened a little bit by some lenders, whether it’s trying to get a deal or trying to accommodate some stronger borrowers. You might see lenders stretching to give a little more availability on something that they hadn’t in the past.”

Young noted that more transactions that are less asset-based are emerging for strong borrowers, though he added that such trends are also typically cyclical.

Finally, he said that distressed properties still abound.

“And then we do see a lot of the deals that get ABL lines or acquisitions or maybe struggling turnaround-type situations. So we still see a fair number of those kinds of highly leveraged transactions that require a significantly higher touch, more management, more monitoring.”

As for the regulatory and reimbursement environment’s impact on lending, it remains a concern, Young said.

Cuts at HHS and budget tightening at the federal and state levels could potentially delay payments or impact provider programs, he said. Meanwhile, trends show annual surveys are becoming slightly more frequent but also harsher, with increased material citations and fines, the changes reflecting post-pandemic scrutiny rather than regulatory overhaul.