A potential upset exists for skilled nursing

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.

There obviously weren’t many individuals that were going to answer ‘yes’ to Sullivan’s query. But shouldn’t it be troubling that a potential gatekeeper to seniors housing capital would even think this was a possibility?

Sullivan told the attendees that he spends about 5% of his professional life thinking about this industry, and that’s the reality: Investors need to be educated by seniors housing professionals that their business is not polluted with risk. If the industry can pull together and influence investors, thereby deflating the volume of perceived risks, then the future for SNFs could truly be special. But there is a lot of work to do in educating a group of people that has come forth as self-professed non-scholars of seniors housing.

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