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A potential upset exists for skilled nursing

March 11, 2010
by Kevin Kolus
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After talking with attendees of NIC’s inaugural National Skilled Nursing Investment Forum, the general feeling others and myself walked away with is that skilled nursing facilities are poised to do well in the coming years. The mantra of the Forum—a complementary addition to the Annual NIC Regional Symposium—Moving From Yesterday To Tomorrow” was certainly evoked in many of the upbeat presentations and panel discussions that were stressing the exciting future for SNFs.

Lender Panel

Taylor Pickett, CEO, Omega Healthcare Investors, Inc.

Jim Pieczynski, President-Healthcare Real Estate Group, CapitalSource

Kurt C. Read, Partner, Javelin Capital Partners

Jim Sullivan, Managing Director, Green Street Advisors

Moderated by Raymond Braun, Managing Members, Prospects Advisory Group LLC

The closing session to the Forum featured an incredibly interesting panel of five lenders sharing their feelings on the skilled nursing industry. It was a chance to hear from financiers what they like and dislike about the sector, and more importantly, what will move them to spend money.

At first, the consensus was looking pretty good. One panelist brought up that despite an average of 100 SNFs closing each year for the past decade, banks still view the industry favorably.

Another panelist said banks see SNFs as a stable asset class that has done well compared to other real estate. “I think capital is there, I think it is going to be available by the [Real Estate Investment Trusts] and the banks,” said Jim Pieczynski, president of the healthcare real estate group of CapitalSource.

The lenders discussed other attractive qualities about SNFs, saying the industry has: high barriers to entry, a low cost delivery, great regional operators that can dominate their markets, massive opportunity to update or upgrade older facilities, and the potential to offer quality services to customers.

So where’s the rub? As is implied in the title of this blog, not every opinion was positive.

Institutional investors, given voice by panelist Jim Sullivan, managing director at Green Street Advisors, are still not completely sold on healthcare—let alone SNFs.

Healthcare is viewed as “complicated” and “uncertain” by institutional investors, Sullivan said, despite such properties adding to portfolio diversity. Recent troubles with Sunrise Senior Living, for example, have rekindled some of the fears with seniors housing, and the fate of Medicaid/Medicare reimbursement is proving to be a “giant lingering concern.”

“SNFs are still efficient and low cost providers of care,” one panelist said. This does not mean much to investors, though, if there are still “high levels of perceived risk” that have driven up uncertainty and “make capital run away,” Sullivan said. He also posed an unexpected question to the biased audience: Are SNFs really the lowest cost provider? What about home care? He referenced an earlier point, wondering out loud how an industry that hemorrhages 100 facilities a year could still be a popular housing option to consumers.

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While SNF's may be poised to do well in the future, that future is not here yet. Access to capital is still difficult to come by, especially in the commercial funding markets. I agree that many financing sources view health care and especially long term care as a complex animal. Plus, there continues to be uncertainty regarding the funding of long term care. HUD seems the most popular financing alternative however, HUD is not that interested in funding new facilities as much as refinancing or updating existing facilities. Therefore, it seems that the contraction in the industry will continue until additional funding can open up doors for new beds to enter the market.

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Kevin Kolus

Kevin Kolus

@longtermliving

www.ltlmagazine.com/blog/kevin-kolus

Kevin Kolus wrote for Long-Term Living when he was an editor. He left the brand in 2012...