Nursing operators, especially those who own their own facilities, are facing financial strain caused by high interest rates as they attempt to restructure existing loans.

While HUD loans and loans financed through real estate investment trust (REITs) are safe from interest rate fluctuations, other forms of financing are facing higher interest rates when converting debt to more permanent options, adding hundreds of thousands of dollars to annual costs.

Variable-rate debt has been a hidden contributor to financial challenges for the industry.

Operators are facing situations where they secured bridge loans with floating-rate debt at 3% or 4% in 2019, which are now maturing, and they are being offered an interest rate close to 7% or 8% in a good-case scenario, David Young, managing director at real estate finance and investment company Greystone, told Skilled Nursing News.

And in today’s high interest rate environment, a doubled interest rate is considered a good deal in this scenario, Young said.

“All these loans are starting to mature. In other commercial real estate news, experts are talking about this wall of maturities in commercial real estate debt … this is very similar to what I’m talking about here,” said Young. “Maturing short-term bridge loans are all floating rate. When they mature, even if you fixed it right when they mature, you’re subject to the market interest rates now.”

A lot of these bridge loans were made between 2020 and 2022 and on shorter time frames, Young said, but they’ve come due and haven’t met their budget projections.

“These bridge loans were done with the expectation to go to HUD, and they haven’t necessarily met the parameters to go to HUD, right? And so these loans are having to be recut, redone, or the community is simply sold to an operator who can meet a budget,” said Young.

Hank Fuller with ESI said the real anomaly happened about 12 years ago when interest rates were at a record low. The sector has since seen a return to a comparatively normal interest rate environment.

Making deals amid uncertain interest rates

While there’s talk of the U.S. Federal Reserve lowering interest rates again, those in the market aren’t sure when that will happen.

“Where we are today is close to where we’ll be long term,” Fuller told SNN. “This is somewhat of the new normal for a lot of folks and for groups out there who have to restructure or refinance with their loans coming due. There’s not a lot of great options, unless you’re a candidate for HUD.”

That’s the goal for most operators, he said, since many look to be in the industry for the long haul. Many want that stable loan and the certainty of a locked-in interest rate, which right now is around 6% for nursing home HUD loans, Young said.

A lot of operators have had to sell since interest rates were anywhere between 8% and 10% in the current rate environment. While high rates are a significant hurdle, Fuller added that the availability of financing is out there for operators with healthy margins and the ability to finance or grow through acquisitions.

But lenders are pricing their deals based on risk associated with the loan.

Steven Munn, managing director with VIUM Capital in an email to SNN that deals that are less stable, or those requiring a bigger turnaround, are priced for higher interest rates than standard acquisitions or recapitalizations of stabilized assets and portfolios.

Sponsor strength and competition in the market are important factors in dealmaking right now as well, Munn said, with many lenders starting to come back into the sector after drawing back during the pandemic.

For Fuller, the lenders are out there, but only if operators have the right margins and resources to meet today’s interest rates.

“It certainly puts some strain on the financing, refinancing abilities. However, access to capital has never been more in our industry. The amount of capital that is willing to lend to the industry is way, way up,” said Fuller.

Advice for curbing high interest rates

Fuller’s advice for operators facing high interest rates: lease out operations for their business, and set up a business model where they are the landlord, and then put in a more sophisticated operator who can perhaps pay more in rent.

“Now that landlord is getting 9% or 10% in returns and has the ability to finance at today’s high rates,” said Fuller. This is especially true if it doesn’t make sense to sell, for tax reasons.

Munn said a lot of nursing home projects meet debt coverage requirements due to the higher cap rates these facilities usually trade at and are therefore valued at.

“Some of the ways our sponsors manage higher rates in today’s market are through interest rate caps, swaps, or even lower leverage financing which allows lenders to get skinnier on rates,” said Munn.

Finance leaders say nursing homes have it easier compared to other post-acute care settings in terms of the interest rate environment. This is mostly because nursing homes trade at 12% cap rates. When debt is still at 9% or 10%, the financing ability still works, Fuller said.

“You don’t have the effect of negative leverage,” Fuller noted. “Other health care asset classes and traditional real estate asset classes have gone through a period where there was negative leverage over the past 12 to 18 months, and as a result, cap rates have gone up.”

Nursing homes, by comparison, haven’t seen a change in taxes for a couple decades. The 12% cap rate has been around for that amount of time, considering the risks of the industry, Fuller added.

Munn said borrowing costs are higher across all industries right now, and until more rate cuts are seen, borrowing is going to be tougher. Increased competition and return to the “new normal” for many providers has made financing easier and more accessible than it was one to two years ago.

But, macroeconomics may shift how business is done, and finance leaders in the nursing home space don’t expect the current environment to last forever. Buyers and sellers will continue to find creative ways to make deals happen despite any headwinds coming their way, from tariffs to Medicaid policy changes.

“Even from the buy side, groups have found ways to do a lot of work with the REITs. The REITs are doing a lot of debt now for some of these buyers … it’s another way for people to get more creative,” said Brendan DeSilvia, director of mergers and acquisitions for ESI.