Investors Chasing Yield Are Drawn to Skilled Nursing

Private equity is among most aggressive players in this segment, says InterFace panel.

By Matt Valley

Despite the many challenges facing skilled nursing operators — ranging from changes in reimbursement policies to rising labor costs to weak occupancy rates — there remains a ton of investor capital looking for the extra yield this segment of seniors housing provides. That’s one of the key takeaways at InterFace Seniors Housing Midwest, which took place at the Marriott Marquis Chicago on June 11. 

The average cap rate in the nursing care sector for the 12-month period that ended Dec. 31, 2018 was 11.4 percent, according to data compiled by Real Capital Analytics in collaboration with NIC. By comparison, the average cap rate in the seniors housing sector (which includes independent living and assisted living) was 7.1 percent for the same period.

While some diversified REITs have spun off their skilled nursing portfolios in recent years, other investors have jumped at the chance to become opportunistic buyers. 

“What’s certainly kept KeyBank busy is the influx of private equity coming in as buyers of skilled nursing assets and utilizing bridge financing to then get to a HUD permanent takeout,” said Lee Delaveris, vice president and senior mortgage banker with KeyBank Real Estate Capital. “On the bank side too, you see some banks that avoid that headline and reimbursement risk around skilled nursing versus others who are all in.”

Brian Robinson, managing director of healthcare with Fifth Third Bank, emphasized that skilled nursing is a need-based model. “At some point, there is still an inordinate amount of people who are going to end up in a nursing home. If there is still capital coming into skilled nursing after the last two years, which has been a pretty rough stretch, then I have to think that there will be capital coming in for a long time.”

The insights from Delaveris and Robinson came during a capital markets panel discussion as part of the one-day InterFace conference, which covered trends in seniors housing development, operations, finance and technology and provided networking opportunities. The event attracted 285 professionals from a cross-section of disciplines.

Moderated by Marcus Van Ameringen, vice president of seniors housing investment sales with Colliers International, other panel participants included Ari Adlerstein, managing director, Meridian Capital Group; Mark Bultman, senior vice president, Capital One Healthcare; and Mike Mason, senior vice president, healthcare finance, First Midwest Bank.

Big-picture trends

In the private-pay segment of seniors housing, the bifurcation in pricing between core-plus, high-quality assets and the rest of the market has become more pronounced during the past six to 12 months, says Bultman of Capital One Healthcare. 

It’s a situation “where you have certain players and certain buyers out there who are well-institutionalized, well-heeled capital that are only going to compete in the core-plus, Class A markets with best-in-class facilities. Those guys don’t look to compete anywhere else.”

Long-term interest rates that have been persistently low have helped fuel the flood of capital into the seniors housing space, explained Delaveris. The 10-year Treasury yield, a benchmark for fixed-rate, long-term financing, stood at 2.03 percent and the end of June. That figure was down about 85 basis points from a year earlier. 

Conversely, the one-month LIBOR (London InterBank Offered Rate), a variable-rate financing benchmark, closed out June at 2.40 percent, up about 30 basis points from a year ago. 

“We do a lot of permanent financing with HUD, Fannie Mae and Freddie Mac,” said Delaveris. “If you are a borrower in that space doing long-term, fixed-rate financing today, you’ve seen your rates come down from a year ago. If you are doing short-term, floating-rate bank financing, you’ve seen your rates come up over that period of time. I think [that interest rate scenario] drives a lot of value to long-term, fixed-rate financing today, assuming that financing structure works for your business plan.”

Adlerstein, who raises debt and equity for his clients at Meridian Capital Group, said he continues to see some of the REITs and larger players exit the skilled nursing sector. “That’s turned into opportunities for some of our clients that have gobbled up larger and larger portfolios.” Three years ago it was a completely different story. That’s when REITs were aggressively acquiring portfolios before anyone else got a chance, he recalls.

Meridian will likely continue to encounter plenty of distressed situations in the skilled nursing arena resulting from borrowers who acquired properties in the hopes of turning them around, but for whatever reason their best-laid plans didn’t work out, said Adlerstein. “Some of our lender friends tend to be able to step up on the skilled nursing facilities side.”

On the assisted living front, Adlerstein noted that some developers are having trouble leasing up newly constructed facilities that he believes were built for way too much money. “Folks are having trouble stabilizing these properties because there are four other facilities that were built down the block. A lot of our smarter guys are refocusing on where they are building these facilities, and not just putting them up just because the market study says they should.”

“We’re also seeing a trend toward more interest in the independent living and independent living light space, both from multifamily investors as well as from sources that have traditionally focused on assisted living and memory care, given the concerns over overbuilding in that sector. The interest is both in regard to ground-up development and acquisitions,” concluded Adlerstein.

Knowledge is power

Mason of First Midwest Bank encourages out-of-state buyers seeking turnaround opportunities to partner up with proven local operators. That local knowledge is invaluable, he believes. For example, an investor from Massachusetts that is quite familiar with the skilled nursing market in that state may be unfamiliar with the dynamics of the labor force or the reimbursement model in Indiana because it has no ties to the
Hoosier State.

“You can still be an outside investor, you can still have experience in other real estate [asset classes], but partner up with a local operator and learn that market,” urged Mason. “So many times we hear someone coming from outside the market say, ‘Gee, all I have to do is increase census, improve payer mix and lower costs.’ Yeah, that’s great on paper. There is a reason that property languished for 20 years or 10 years. Do you mean to tell me that the locals didn’t know those same [issues]? So, somehow you have to bridge that gap. If you don’t have knowledge of that market, partner up and make it work.”