Walker & Dunlop real estate brokers Josh Jandris and Mark Myers presented the trends in the skilled nursing industry they are currently seeing, highlighting an ongoing frenzy of transactions – with publicly traded real estate investment trusts being the sellers and the big private companies as buyers.
Healthcare systems are also divesting their skilled nursing facilities, the brokers said, preferring to partner with SNF operators.
The Bethesda, Md., Brokerage firm was Fannie Mae’s No.1 lender last year and is one of the top HUDs [Department of Housing and Urban Development] lenders in the skilled nursing space. Walker Dunlop has traded over $ 3 billion in the SNF space alone.
This interview has been edited for length and clarity.
What kinds of trends do you see in the skilled nursing home space, when it comes to real estate?
Jandris: What we’ve seen over the past 18 months is that skilled nursing has actually supported the senior housing industry as a whole. On the transaction side, skills [nursing] continued to treat, despite issues related to COVID.
I think, on the one hand, this is due to the amount of aid. You know the [Payment Protection Program] and the grants that skilled nursing providers and homeowners received during the pandemicâ¦ these buildings were losing 20 to 50 percent of their occupancy.
It would have been extremely problematic from an investment perspective, but I think it’s important to take a step back and realize that [SNFs] stay extremely needs-oriented, don’t you, you kind of have to be there. Residents need to be there because they need to receive this care 24 hours a day, and then I think secondarily, if you look at the amount of help they have received, it has weathered the storm pretty well. .
What does the future of mergers and acquisitions look like in this space?
Myers: The buying community for the qualified has a healthy, I dare say maybe even voracious appetite in some cases, depending on the types of installations in the markets.
There is no doubt that the buying community wants to create platforms. Many of them have ancillary businesses and management platforms that they wish to develop. We believe that they will continue to develop in a thoughtful manner, that they will try to develop, that they will try to establish themselves at the regional level.
It is a very regional industry, it really helps to know about doctors, hospitals, health systems, so it is better to grow in one region and grow in various regions.
Are there other factors at play for mergers and acquisitions in the industry?
Myers: Some states have experienced legal issues or challenges from certain law firms. They tend to prey on nursing home owners – many buyers will shy away from these states, they don’t want to run the risk of being sued.
One frivolous lawsuit after another, it becomes difficult to obtain insurance to cover such losses and the loss of energy of having to deal with such things, it is a distraction for the operation of the business.
There are states that have very strong unions, especially in the North East, which can be a deterrent to some buyers who don’t want to have to negotiate or sometimes even fight with unions.
Other M&A trends?
Jandris: What I would say is that there aren’t many transactions where one nonprofit seller sells to another nonprofit seller. The best opportunity when buying an asset is, as a private buyer, to buy from a non-profit seller, because the momentum is in your favor.
You have a very high occupancy rate, you generally have a very good reputation, you have a high income – you know where the opportunity is, because this is all what everyone wants.
Myers: It’s forked. You’ve got a good chunk of the (nonprofit) industry that’s not following trends and it’s not high tech and they don’t look at costs and that sort of thing and so they make a great opportunity for a private company to intervene and create synergies.
What transactions are you currently working on?
Myers: We are in the process of closing a very creative and creatively structured transaction in the Midwest that allows for some tax deferral for the seller, as well as an eventual real estate buyout and refinancing of the underlying debt. . This is going to be a great deal for half a dozen qualified nursing facilities, a great deal for the seller and the buyer.
In the Northeast, we have a family business that we represent and we sell their nursing homes. We are working on a valuation with them, and have collected some offers.
And then in the South East, we are working with a health system on creative ways to treat [its SNFs]. It’s going to be a big thing in the future too, healthcare systems are seeing, and they’ve been finding out for years that it’s really hard to be a hospital in the nursing home space.
So hospitals are looking to get rid of their skilled nursing assets?
Myers: Hospitals are going out of business in many ways, in many states. We help [this health system] identify a partner who will substantially renovate or rebuild three skilled nursing facilities, either on or near the hospital campus, and create an environment in which the hospital feels comfortable as a referral source to these facilities, a place where hospital staff can supervise the residents and where residents can go close to the hospital and receive rehabilitation, either following surgery or for more acute needs .
What real estate investing trends do you see right now?
Jandris: It’s really a bit offbeat. There has been this influx of capital from the institutions, and a lot of consolidations – it’s almost done at 180, so these institutions as well as the smaller regional players have given up other skilled nursing holdings, to revert to more owners. -operators, or some sort of owner-operator.
Myers: There have been mostly mom-and-pop owners for decades, and then there was this mom-and-pop movement with one, two, maybe three installations to big owners and investors. There has been, from Josh’s perspective, a resurgence of comeback, not so much among moms and dads, but moving from public REITs to these private investors. And I think a lot of it has to do with the risks of skilled nursing for a public company and one giant’s attempt to manage a portfolio of skilled nursing, with various operators in various regions.
So are private investors better placed to take over qualified nursing facilities now?
Myers: The big challenge with RNs has been regulatory challenges and fluctuations in cash flow. It’s really hard for a public company not to have constantly growing cash flow. A private business is a much better vehicle because you have a longer view, you don’t have to report to shareholders. It does not surprise us that the great private [companies] take over in the specialized space for these reasons.
How Walker & Dunlop Works in these trends, the current climate?
Myers: We have the capacity to deal for the customers on the sales side, we can help them with the financing and at the same time we can refinance for them. We have relationships with some of the biggest bridge lenders in this space. So, you know, we love the space, and we think we add a lot of value to the process, because we know the buyers, and we know how to underwrite the facilities and how to value them.