According to the most recent release of the Dealmakers Forum published by Irving Levin Associates, July witnessed a sizable increase in transaction volume across the long-term care sector. As I noted in my last post on Assisted Living and Senior Housing, we have begun to see some volume pick-up in these segments although modest in comparison to prior years. What we have yet to see, and confirmed by Levin Associates, is stabilized deal pricing and closings involving traditional lending channels.
The SNF deals that were closed in July demonstrated to us, only a modest rebound within the segment and principally driven by a couple of one-off deals and the continued shedding by Golden Living (f/k/a Beverly) of certain groups of facilities that are either marginal performers or facility sales driven by financial statement and balance sheet needs on behalf of Golden Living. The interesting factors in these deals are the demographics of the facilities and the metrics of the deals.
Consistently, the facility sales that are occurring show low occupancies (60% to 85%), high Medicaid census and are in markets that tend to be more rural to suburban than urban. In some cases, the deals are structured around facilities that have financial troubles or have been in default or close to default. Not too surprising, the pricing has reflected the sub-par conditions of these properties, significantly below 1x revenue. In summary, these transactions still support a low pricing period for facility sales; below the typical industry norms.
Is the market back? The answer is simple – nowhere near. There are factors on the horizon that support some additional volume movement such as buyers gaining access to the HUD Lean program for financing, slightly loosening lending provisions, and suppressed prices sufficient to stir buyer interests. Across the broader market, concerns remain however for the immediate industry future. Chief among these concerns is Medicare with an initial payment reduction certainty looming (see post on SNF Update) and the prospect of additional cuts arising out of the healthcare reform proposals pending in the House and the Senate. Secondary in concern is the financial woes of state Medicaid programs. Many states have bolstered their programs temporarily via Federal stimulus funds but without a source for additional, long-term funding beyond the stimulus dollars, the deficits in these programs foretell certain fiscal woes in the Medicaid program. In short, the revenue side of the industry looks rather dreary in the near future and of course, this dread will continue to fuel lender caution.
For buyers, this may be an excellent time to bargain shop provided they are well capitalized and capable of securing funding for the acquisitions. While there likely will not be a plentiful source of “A” properties or for that matter, “B plus” properties, there will be sites available and likely, more forthcoming. The prices should remain on the better side of a bargain (below traditional norms) and most properties should have more up-side potential than down-side. The key for buyers however is to have a solid turn-around strategy and an ability to drive a more diverse and deeper payer mix than likely exists in the facility that is being acquired. It also should be noted that buyers that can quickly integrate additional product or service lines such as in-house rehab services and specialized care services such as ventilator or dialysis have a better chance of success than buyers deploying a traditional SNF/Medicare improvement strategy.