Skilled Nursing M&A Expected to Hinge on Mom & Pops in 2014



Skilled nursing mergers and acquisitions in 2014 are likely to be fueled by ongoing regulatory and reimbursement uncertainty and its impact on small operators, brokers and investors agree. "Our pipeline is deeper on the nursing home side because of the uncertainties," says Jeremy Stroiman, CEO of brokerage firm Evans Senior Investments. The 2014 M&A opportunity lies with mom and pops sellers, he says, adding that his firm is working with around 40 owners right now who are considering whether they want to stay in the business.

While sellers can often get relatively low cap rates for the average assisted living community with upside, it's challenging to do so for a skilled nursing facility because it has so many moving parts with healthcare reform initiatives and economic and budgetary issues that affect reimbursements, brokers say.

"With increased regulatory burdens and compression in Medicaid and potentially Medicare rates going forward, if you're not running really efficiently, it'll continue to be a very difficult operating environment," says Bradley Clousing, managing director at Senior Living Investment Brokerage.

States with major budgetary issues—Illinois included—that are slow to pay Medicaid reimbursements will likely be a continued challenge in 2014, especially if rising interest rates make the cost of capital increase for accounts receivable borrowing that a lot of skilled nursing operators are forced to do, says Clousing.

"The Medicaid market in so many states is a roller coaster. Mom and pop nursing home owners fill up their beds with Medicaid and they don't know how to market Medicare, or don't have physical plants that can attract Medicare," says Stroiman. "The regional groups are great at obtaining Medicare residents. Our pitch to mom and pops: ‘Do you want to stay on the roller coaster?'"

Stroiman says its likely the field will split even further into two distinct categories in 2014: long-term stay nursing homes populated mainly by Medicaid beneficiaries, and short-term stay, rehab-focused facilities with a heavy Medicare census, which typically get higher payment rates and thus higher margins compared to Medicaid.

"Once you get out of the major metro markets, there are a significant amount of moms and pops still in the nursing home business, and they're getting hurt [by the current operating environment]," he says. "To own one 100-bed nursing home is extremely challenging."

Most of the investments private investment firm Formation Capital makes on the skilled nursing side are through big operators the firm already owns and serve to add scale.

"When we do those [types of deals] we feel pretty good about the levels of synergies and cash flow we'll be able to generate from those properties," says Brian Beckwith, CEO of private investment firm Formation Capital. "No doubt, there will continue to be reimbursement issues; not necessarily Medicare cuts, but there's an increasing managed care component in a lot of what we're seeing, and it's rather negative from a reimbursement perspective."

Still, he says, Formation is very invested in the skilled nursing sector and will continue to transact in the space.

It helps that interest rate risks for the skilled nursing sector aren't as pronounced as in the senior housing sector, according to Beckwith. "There's such a big spread between cap rates in skilled nursing and assisted living, and skilled nursing is a little less sensitive to interest rate risk. It's kind of a positive."

Written by Alyssa Gerace