At first blush, expanding any business in a time of declining numbers of customers and sagging construction starts seems illogical. But it’s exactly what may help skilled nursing facilities thrive and prosper in the turbulent years ahead.
Some are finding success with asset repurposing. Others are resurrecting with an age-old real estate strategy: mixed use.
“Stand-alone nursing homes are falling out of favor. Investors and consumers want property that has several tiers of senior living, including memory care, assisted living and nursing homes,” explained NIC Senior Principal Bill Kauffman in the National Real Estate Investor.
Earlier this year, Health Dimensions Group issued a report that supports Kauffman’s point. The firm said it believes that “more SNFs will convert to senior housing alternatives, such as low-income or market rental apartments, specialized units like traumatic brain injury or mental health units, assisted living, or memory care assisted living, all of which have experienced increasing consumer demand.” Cantata Health reported similar coming trends in its late 2018 industry forecast, stating it expects many nursing home companies to explore more profitable specialty ventures in areas such as diabetes, obesity, mental health and opioid addiction.
Michael Davis, senior vice president at Walker & Dunlop, believes diversification is the future.
“The SNF industry continues to face headwinds with shorter lengths of stays, lower reimbursed managed care contracts, and increased alternatives to SNF care,” he says. “So these additional services should help attract additional residents and income.”
Spreading the wealth
Owners are looking for ways to expand their capabilities and thereby diversify revenues and maintain strong quality of payors, says Matt Huber, market manager, healthcare for People’s United Bank.
“If the SNF is able to do this, then it will capture those higher reimbursements and ultimately, greater net operating income,” he adds.
That said, those owners who endeavor to bring their facilities into a mixed-use environment should choose neighbors wisely.
Kevin Giusti, managing director at Walker & Dunlop, says he has seen more SNFs with a component of memory care or assisted living “lease up well.” While teaming with a standalone dialysis provider may be a recipe for success, Giusti and others caution that combining some services might send a mixed message.
That is why some financial experts say mixed-use developments should provide a very visible delineation, and if at all possible, be in separate, stand-alone buildings, particularly with drug rehab and substance abuse units.
“Given the uncertain reimbursement climate, adding private pay memory care as an option with high-acuity residents should be successful,” says Cindy Hazzard, a broker with JCH Senior Housing Investment Brokerage. “Is it wise or even possible to mix drug rehab or mental health with conventional skilled nursing or memory care without distinct barriers separating residents? The physical plant issues as well as staffing and fingerprinting, would be considerable. If these can be managed, it could be quite profitable.”
Not all owners are jumping into the mixed-use pool. After all, it is a quantum leap outside many of their comfort zones of conventional long-term care.
“Incorporating higher-acuity facilities into mixed-used developments can be a challenge for developers for several reasons,” Conner Girdley, vice president of Lancaster Pollard, noted in a Lancaster Pollard blog. “SNF residents don’t consume the same retail services that residents of a market-rate development would. Moreover, the higher costs associated with constructing and operating senior living facilities can be an obstacle for senior living developers competing with market rate developers.”
Giusti asserts that rehab residents don’t stay long enough. That fact and the acuity of longer-stay residents make both poor candidates for certain mixed-use developments.
“If a developer can find a good site and still make the construction numbers work for a project of this nature, I think that could be a positive,” he says. “If the location was very desirable, however, that could drive up costs and this approach is not as viable.”
Girdley believes pairing skilled nursing care with other forms of care, especially memory and behavioral, has had mixed results.
“The challenge is that each product offering necessitates specialized care and staffing needs,” he says. “Most successes in these pairings have come in the form of building natural referral networks and improved visibility, while running each product offering as an independent unit, even if services are provided next door or within the same facility.”
“Obvious winners are facilities that partner with universities, hospitals and faith-based organizations,” Girdley tells McKnight’s. “Close alignment with hospitals provides a consistent referral network, while universities and faith-based organizations provide commonality and a supportive culture.”
But mixed use projects anchored by a skilled nursing facility can and do work.
“Many skilled nursing facilities have utilized intergenerational strategies, such as a pre-school on site, to both enhance the quality of life for their residents who enjoy looking out at the playgrounds, as well as drive additional foot traffic through their facilities,” observes Dan Revie, managing director at Ziegler.
Among the biggest success factors for SNFs: locating near large hospitals, outpatient centers, emergency care and other mainstream medical care services.
“In general, we have seen good success with a specialized program that brings hospital level care to the SNFs,” says Imran Javaid, managing director at BMO Harris Bank. “This includes advanced cardiology care or strategic relationships with orthopedics and even some cancer care specialities. Transportation offices and proximity to physician offices are also important.”
There are several ways developers can make a proposed SNF project as attractive as possible to lenders, investors and others.
“Diversity in core and ancillary services and proximity to feeder sources such as assisted living and hospitals,” says Hazzard. “An important component in assessing risk is presenting a well-structured business plan that includes evaluation of potential market share and what unique factors would potentially influence competitive positioning.”
Come prepared to the lending table with choices, says Neal Raburn, managing director, seniors housing lending for Greystone.
“Instead of a one-size-fits-all approach, developers could offer two to three different brands under one corporate umbrella, each targeting a different price point, similar to what is common in the hospitality industry,” Raburn notes.
Several experts strongly advise owners and developers to build replacement facilities rather than completely, “from the ground up” new ones.
“This reduces the fill-up risk as a large percentage of residents at the older, existing SNF will be moved to the newly built SNF,” observes Giusti. Alternatively, he suggests building in a CON state or an area that will have limited new supply, something that would “provide comfort for lenders and investors.”
Girdley cautions owners to understand that it can be difficult to secure available land and obtaining zoning approvals in any commercial development.
“Enlist mixed-use master developers that have already secured land and obtained zoning approvals for development,” Girdley notes.
While the inclusion of a senior housing component can help in obtaining approvals for most mixed-use projects, restrictions and regulatory obstacles for senior living facilities “make it more difficult for developers to expand in cities,” he adds. “Combining multiple uses into a vertical mixed-use building helps to overcome this obstacle.”
Javaid says his experience at BMO working exclusively on new SNF construction demonstrates there is no substitute for a proven track record of operating facilities that have a higher Medicare census and shorter-stay residents.At the end of the day, lenders are looking for experienced operators focused on quality.
“There is always a temptation for developers to chase higher yields that can be found in senior housing relative to other real estate types. However, the importance of a quality operator cannot be overemphasized,” notes Revie. “Having an experienced operator that can successfully navigate the current and future operational challenges, including a changing reimbursement environment, staffing pressures, and advances in technology, is critical to success.”
Adds Jeff Binder, managing director at Senior Living Investment Brokerage, “Without question, the first thing you should be prepared to discuss with lenders and/or investors is the depth, and strength, of your operator.”