Skilled Nursing Poised for Renaissance of Small Operators

Skilled nursing facilities have not been a particularly hot product type in the past, but a renewed interest from some deep-pocketed investors has the sector poised for a renaissance, especially among smaller operators.

Although sizeable investors like public and privately-held real estate investment trusts (REITs) remain the most active buyers of senior housing properties in terms of total investments, a number of drivers point to heightened transaction activity this year from skilled nursing providers, particularly those operating less than 100 beds.

Last year was colored by several high profile transactions in the skilled nursing space, the most noteworthy of which included the Aviv-Omega merger that created a $11 billion skilled nursing REIT powerhouse and Extendicare selling nearly all of its U.S. senior care business to Formation Capital for $870 million.

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The consolidation activity in 2014 contributed to the 38% increase in transaction velocity compared with the prior year, which also saw a 40% increase in the average price per bed to $95,100, according to a recent Marcus & Millichap 205 Senior Housing Research Report.

“Conventional wisdom will tell you consolidation is bad, but we’re seeing the reverse of that,” says Joshua Jandris, a Chicago-based senior director at Institutional Property Advisors, a Marcus & Millichap company.

As institutions owning larger portfolios ranging anywhere between 50-250 properties spin off non-core assets, they’re selling to smaller, regional operators who have boots on the ground and can be more aggressive to produce better outcomes than a 300- to 400-property operator, Jandris added.

In the senior housing sector, the irrefutable key to success is having a strong operations team in place. That being said, these larger investors aren’t spinning off assets to just anybody, says Jandris.

“We’re seeing a former administrators that worked for large operators branching off and starting their own management firms,” says Morris Lalezarian, associate with Marcus & Millichap’s National Senior Housing Group.

These owners have been able to enter the market now and start their own entries into the business for a number of reasons. For one, they may have easier access to capital due to their reputations and experience.

“There are really a number of drivers; including clarity in reimbursements, inexpensive financing, pent-up demand, baby boomer owners ready to retire and sell—while smaller operators who have become more seasoned and are experienced are willing to step in and acquire both the real estate and/or operations or enter into triple-net leases with an option to buy or a ROFR [right of first refusal,”Lalezarian says.

Smaller operators can also benefit from being more nimble and flexible in considering leasing facilities with an option to buy them.

“They’re [smaller operators] happy to take on that type of opportunity as well, and that also works out well for current owner-operators and for retiring sellers,” Lalezarian says. “It’s an alternative way for current owner-operators to effectively defer potential capital gains tax concerns from a sale, while it alleviates much of the day-to-day management and operational responsibility and simultaneously.

Additionally, this approach simultaneously affords retiring owners a period to earn a good revenue stream during retirement, he adds.

When selling regional portfolios or even large standalone SNFs, Marcus & Millichap is seeing more regional and first-time buyers pairing up with deep-pocketed private wealth investors.

Unlike private equity, which is more institutional, private wealth investors have holdings that may rival smaller REITs, but they are in fact private and not publicly- or privately-traded, Jandris says.

“[Private wealth investors] are starting to diversify into long-term care, because long-term care in the hands of a good operator can give you the best return on your investment,” he adds.

Over the past several years, investors owning two to five properties with fewer than 100 beds have largely sat on the sidelines.

“However, the number of beds per transaction has been declining each year since 2011, lending credence to the argument that risk aversion is dissipating,” says Lalezarian.

Furthermore, he adds, deal flow in the sub-100 bed facilities jumped 60% from 2013 to 2014, and a similar increase was observed in the sub-50 bed tranche.

“This is an emerging trend and we think all of the right pieces are in place,” says Lalezarian.

Written by Jason Oliva

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