MIAMI — The lending environment will likely heat up over the course of 2024, particularly for skilled nursing providers willing to explore new relationships when unable to tap traditional sources, a panel of experts said at the eCap Summit here Tuesday.
But certain operating conditions — including powerful unions, local workforce shortages and state-level policymaking — will continue to torpedo some deals that might have been easy to close amid the nation’s early post-pandemic financial recovery.
“We understand the space. We have consistently put money out in the space for the last 20 years. We have never not done it,” said Liz Butler, national head of healthcare lending at Valley Bank. “It’s not like we’re not lending any money. … But we can be more selective than we were even two years ago. I think that’s the difference.”
Butler was one of several lenders and investors who spoke about building relationships and finding ways forward in a tighter market, one that has found many skilled nursing providers considering an exit. Despite last year’s volatility, Valley has $3.5 billion in outstanding loans and doled out $600 million of that last year.
Butler sees an opportunity for more lending this year. With persistent inflation and still-elevated interest rates, more banks are notifying their customers they will need another option if they want to borrow new money when a current loan matures.
That’s where ongoing relationships with creative partners may be needed, panelists said. But they offered one key warning: The location of the properties involved and the operating conditions there matter more now than ever.
4 key criteria, strings attached
Todd Stern, principal at Enfield Capital Partners, uses four criteria to consider whether to make a deal in a given market. Those are the fiscal soundness of a given state, the presence of a certificate of need law, the state’s regulatory environment and its litigation battlefield.
“You kind of have to have the majority positive. You may not have four positives, but you need to have more than two,” Stern said. “We’ve seen some states that were one-star that we stopped buying in and they’ve graduated and now they’re two-plus.”
On the regulatory side, he predicts more states will be adding strings to rate increases in the near future, making continued scrutiny of specific staffing and care quality standards all the more important to lenders. Staffing standards, more difficult change of ownership processes that tie up cash for longer, and even an especially strong union presence seen to be influencing operators or policy makers could make a deal more difficult to finalize.
Frequently changing conditions, especially on the Medicaid payment side, are one reason panelists said there were no states they would absolutely refuse to consider.
“I think the last year or two has certainly been a more active carousel of states that are good or not good with Medicaid rate increases,” said James Callister, chief financial officer of CareTrust Real Estate Investment Trust. “We always feel skilled nursing has been a really hyper-local business and you have to understand the local conditions. But I don’t think there’s a state on the black list. To us, it’s way more important looking at urban vs. rural … and, really, labor costs. Each state has its different nuances.”
Non-traditional lenders increase activity
Callister outlined the REIT’s increased interest in loaning to skilled nursing owners, a strategy also highlighted during last week’s final 2023 earnings call. Callister said at eCap that becoming a limited lender has been a good way to build relationships with owner/operators that may eventually want to offer real estate to the REIT.
“We recognized that we could give our tenants some really good opportunities … by investing in them in terms that they could live with and helping them acquire new buildings and grow,” he said. “We had an opportunity to step in, where they might have gotten their own financing a year or two ago. … It strengthened our relationships with them. We’ll not only be your landlord, we’ll be a real component of growth for you.”
In some cases, the REIT may be able to make loans at rates below commercial banks. But for the REIT, there’s an upside besides income: Callister said just shy of $200 million in lending over the last two years had led to $300 million in real estate acquisitions.
Regardless of where they’re operating, well-positioned nursing homes will continue to attract loans, the panelists said. Callister and Butler both characterized their outlook on SNFs as bullish.
Moderator Ari Adlerstein, co-head of senior housing and healthcare for Meridian Capital Group, added that he remained negative on sinking capital into seniors housing while taking a positive view of SNF opportunities.
“Our industry just has tenacity. We manage to get through it and figure out a way,” Adlerstein said. “Most importantly, it’s needs-based, and we’ve got to keep it going because there’s no better option.”
