While the skilled nursing sector has seen a seller’s market the past couple years, brokers believe the pendulum is swinging the other way, toward more of an equilibrium and normalization of prices.
Increased expenses tied to inflation, the ongoing staffing crisis and lackluster occupancy are all contributing to a less favorable market for sellers, while rising interest rates add another variable to the M&A landscape.
Indeed, operating pressures are compounding Covid-related financial woes to such an extent, industry organizations such as the American Health Care Association have warned that widespread nursing home closures could be coming.
Still, sales are being seen more often compared to closures at the moment as operators exhaust every avenue before making the decision to close their doors, according to Steve Kennedy, co-founder and executive managing director of VIUM Capital.
As a financier to the sector, VIUM is brought in to help clients make the decision of selling or closing, and on the buyer’s side, figuring out how the purchaser can finance an asset or group of assets.
“We see the revenue side getting back but the pressures on the expenses are just greater today than they were pre-pandemic,” said Kennedy. “That erodes margins.”
Market pressures
Dan Revie, managing director at specialty investment bank Ziegler, said a lot of assets involved in their transactions the past two years were either losing money or breaking even – the ones that have really struggled have been in rural market locations.
Of course, staffing has amplified losses for facilities, Revie said, causing a lot of stress for already struggling facilities.
“When folks ask for our help to sell a building, we now take a pretty hard look at [staffing], to figure out how much runway it has, whether it’s long-term viable or not,” said Revie.
More than 300 nursing homes have closed since 2020, according to a study published in April by the American Health Care Association (AHCA), with another 400 at risk of closure this year.
“We are seeing more of the closures and tracking more of those in some of the rural markets,” said Lisa McCracken, director of senior living research and development at Ziegler. Closure scenarios usually involve pressured rural market facilities, and those communities with “extremely dated” infrastructure that needs significant investment.
“The numbers just don’t work to invest in it, to get it to where it needs to be … those are tough sells,” added McCracken.
Long-term, Kennedy expects the magnitude of downward revenue pressures and upward expense pressures to lower the price per bed, or price per unit, especially with the cost of capital increasing.
Lenders may not fully press pause but are “tightening the box” on leverage, added Kennedy.
Another headwind comes in the form of occupancy, he said. Industry leaders and lenders expected lower occupancy levels to be a pandemic anomaly, but the staffing crisis has stymied growth to pre-pandemic numbers – operators have had to limit admissions due to lack of staff.
“Occupancy, it’s coming back but it’s about halfway between pre-pandemic occupancy levels and the low point during the pandemic; it’s not all the way where it needs to be,” said Kennedy. “We’re seeing that affects whether to sell or not, those are obviously headwinds.”
Kennedy is also seeing a lot of investors still looking for returns, adding there’s a lot of capital out there, but rising interest rates are causing both sides to play the waiting game.
“That’s a benefit for an owner-operator that’s contemplating, ‘Should I sell or not?’ They can hold on a little bit,” added Kennedy. “There should be plenty of capital for the foreseeable future that just believes in the long term of the industry and the demographics, and really the lack of alternatives for high acuity residents.”
In the short-term, states are rebasing Medicaid rates to account for some higher expenses tied to the pandemic – in turn, prospective sellers could hold onto their assets a bit more until they get that Medicaid bump, Kennedy said.
Who’s selling, who’s closing
VIUM’s transactions often involve acquisitions of assets that are still “performing,” as Kennedy puts it. Such facilities are still able to service proposed indebtedness based on recent operations, even as there’s opportunity for upside to add value in future.
Sellers are the obvious “mom and pop” operators that don’t have the economies of scale to deal with pandemic headwinds.
Regional operators with a bit more scale than the seller, and more longevity in their outlook with a commitment to the industry, are snatching up these facilities, he said.
Nonprofits are facing a crossroads at this point in the pandemic as well, Kennedy said, making up the second group of sellers he is seeing at VIUM.
Some are even making a difficult choice to sell to a for-profit operator in order to have continued care provided to their community, as expenses make operations unfeasible.
Kennedy said he has seen some “trepidation” from nonprofit boards facing this decision. Nonprofit leaders might be concerned that the shift to a for-profit owner would compromise care and damage reputations.
Board members representing independent nonprofit nursing homes are oftentimes “fiercely independent,” and these organizations sometimes have been providing skilled nursing in a market for a century and leaders have familial ties to the facility, added Cory Rutledge, managing director for CliftonLarsonAllen (CLA).
“There’s a lot of emotion to it, because this is the place where they’ve lived their whole life and raised their families. They recognize that this is a large employer in the community and so they think, well, we can’t close it. We have to figure out a way to make it work,” added Rutledge.
Board members might benefit from the CLAs and VIUMs of the world, according to Rutledge. Many are active community members with business backgrounds, but they may not have the skill to provide adequate governance while the industry faces increased federal scrutiny and regulations with little resources.
“It might be the right move to close, but you need to go through the process of evaluation,” added Kennedy.
McCracken, who deals mostly with the nonprofit side of the industry, said she’s seen more of a downsizing than a widespread exit from the industry from this group. This is because many nonprofits are part of a continuing care retirement community (CCRC).
“That is a pretty common narrative today,” McCracken said of nonprofit downsizing. “That’s often being done by conversion of semi-private to private rooms, and then we also see that through some shutting down of wings. Admittedly there are a number of them that said, ‘We probably should have downsized even before the pandemic … [the pandemic] really forced the conversation and picked up the pace.’”
The third group of sellers are regional operators that grew too fast during the pandemic. Generally, regional operators “had it best” the past three years, according to Kennedy. They were not spread too thin across the country, but they still had a diverse set of regional markets.
“Some of those regional operators we’ve seen have simply grown too fast too quickly with too much leverage,” added Kennedy. “When you do that, that can result not necessarily in closures, but sales.”
Such regional operators are not selling to get out of the business either, Kennedy said – they just don’t have the infrastructure to operate all the buildings they acquired during the pandemic.
“Rates are really rising for the first time in a long time, and not rising at 25 or 50 basis points, these are 200 basis point moves in six months,” said Kennedy. “That can provide, depending on the financial structure, a lot of stress on a regional operator that’s over leveraged themselves trying to grow too quickly.”
A last group of sellers are operators looking to get into more secure financing, often looking to get into more permanent HUD financing.
“Operators coming out of [the pandemic], but they’re not quite there yet. That’s where we as a bridge lender have to build flexibility into our loans to say this is ultimately a project that’s going to be a great project for HUD permanent financing, but we need to buy another six months and give them a little bit more runway,” explained Kennedy.
Companies featured in this article:
