The past few years have been challenging on debt markets in real estate, particularly in the senior living and care market, but a “boost in investor confidence” is occurring now, according to Jason Stroiman, founder and president of Evans Senior Investments. The investment banking firm specializes in selling skilled nursing and assisted living properties across the country.
Stroiman spoke at a Tuesday webinar hosted by ESI to help owners better understand the current landscape of skilled nursing mergers and acquisitions. ESI’s current pipeline of properties for which it is providing financing is approximately $2.2 billion in volume. Stoiman said the company has a 99% accuracy rate for estimating a property’s worth to a client compared with what the property sells for.
CEO Jeremy Stroiman noted that the Fed raised interest rates 11 times between March 2022 and July 2023, which he said has a direct correlation to activity in the senior care market. The good news, he added, is that the Fed is poised to lower interest rates sometime this year.
An online poll of webinar attendees revealed that 70% of the participants expect rates to come down during the second half of this year, although 6% see rate decreases coming in the first half of the year. Other attendees either expect rates to increase this year or decrease later on.
“For those of you that follow the stock market and just investor confidence, we’re certainly experiencing a boost in investor confidence globally, which is a good thing for macroeconomics for all of us,” Jason Stroiman said.
Staffing still a challenge
Staffing remains a major challenge for operators — a “much bigger problem than COVID was, in hindsight,” he said. On top of that, he noted, a proposed federal staffing mandate for nursing homes has the industry concerned.
Both LeadingAge and the American Health Care Association oppose the proposal, Jason Stroiman added. According to the former, he said, 90% of nonprofit nursing homes and 60% of for-profit nursing homes currently would fail to meet the requirements of the mandate if it were in place today. The government says it may take up to three years to finalize the rule.
With inflation coming down, it would seem to follow that costs also would come down, but that is not the case, according to Jeremy Stroiman. Staffing costs are “astronomical,” he said, adding that almost every company ESI works with still is using agency staff.
“So you put in the staffing mandate, coupled with not only minimum wage going through the roof, but just staffing costs with agency, I don’t know how the industry survives in the future years unless there’s some level of step up from the government on Medicaid rates,” he said.
“As the US inflation is coming down, interest rates hopefully will come back down, but we still have a staffing crisis in our country, and the government’s telling us to staff more, which we A, don’t have access to people and B, we can’t afford it,” he continued. “So something’s going to have to change in order for nursing homes to prevail.”
Positive headwinds
Some positive headwinds affect the industry, however, he said, including a 4% payment increase for Medicare Part A from the Centers for Medicare & Medicaid Services and increases in Medicaid reimbursements as states switch over to a provider network management model.
The skilled nursing industry has seen a large increase in valuation since 2020, according to ESI, and lenders still are willing to finance skilled nursing transactions. Investors are underwriting full pro-forma occupancy.
Senior living and care real estate investment trusts are making a comeback, Jason Stroiman noted.
The executives suggested that leasing a nursing home or portfolio to a third party might be a good move in the current market. Leasing, they said, offers relief from occupational constraints and provides passive income in the form of rent payments.
“In some scenarios, it’s more income than you’re currently getting, paying your mortgage and working 80 hours a week running a nursing home, where you can literally lease your buildings out to a reputable, really good operator and collect rent. This defers the capital gains tax,” Jeremy Stroiman said. “Where it’s really, really powerful is with owners that have little to no debt or owners that have long-term fixed debt at a low interest rate.”
This arrangement presents a short-term cash flow, and a purchase option can be negotiated when the market is favorable, he said.
