Steve's Senior Care Blog

April 21, 2015. 60 Seconds with Steve Monroe. After the record-setting valuations in 2014, the skilled nursing acquisition market is already off to a strong start...

Skilled Nursing M&A In 2015

After the skilled nursing market hit a record for the average price per bed for the second year in a row last year, I wasn’t too sure what to expect for 2015. So far, I have not been disappointed, as buying interest continues to be relatively strong, especially at the higher price points. In 2014, there were 19 transactions with a price above $100,000 per bed. So far this year, there have been four sales with a range between $132,000 and $189,000 per bed. On the lower end of the scale, there have been just three transactions below $40,000 per bed, which either means the demand for these facilities is at a low, or lower quality nursing facilities are selling at higher prices because the demand in general has been strengthening. CMS has proposed a 1.4% net increase in Medicare payments to SNFs for fiscal year 2016, which is a little higher than some analysts expected. That is good news for providers, and buyers, and should provide some short-term stability, until managed care sinks its teeth in deeper.    

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April 14, 2015. 60 Seconds with Steve Monroe. Here are differing opinions as to what motivated Ventas to spin out most of its skilled nursing portfolio...

The Ventas Spin-off Has People Talking

There has been a lot of talk about the recent announcement by Ventas to spin out most of its skilled nursing properties into a new publicly traded REIT. In our April newsletter issue, we stated that it was a smart move for Ventas, and a great move for Ray Lewis, who will become CEO of the new spin out. But tongues have been wagging in terms of whether this was a defensive move on the part of Ventas, meaning that management has decided that the skilled nursing business is not something they want to focus on, at least not with small operators in their portfolio. Or, was it an offensive move, both to allow for faster growth in its remaining portfolio as well as giving shareholders more value in the spin-out than it may have been getting while residing in the large Ventas portfolio? The answer is, most likely both, as we don’t see Ventas doing a bunch of smallish SNF deals with local or regional operators. Also, we have to believe there are some not so great properties in the spin-out portfolio that Ventas picked up with its acquisition of Nationwide Health Properties for $7.4 billion in 2011. The discussion will continue.

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March 31, 2015. 60 Seconds with Steve Monroe. There appears to be a feeding frenzy on where cap rates should be, and the frenzy is only taking them lower...

Cap Rates And Reality

Did you read about the fully stabilized assisted living community that sold for a 3.5% cap rate on first year numbers? You didn’t? April fools, neither did I. But don’t be surprised if it happens given the way the market is going. Two months ago, while attending a seniors housing conference, we heard a rather matter-of-fact statement that cap rates for “A” properties were in the range of 5.5% to 6.0%, and “B” properties were in the broad 6% range. While our annual statistics do not bear this out, we do know that there are transactions done with cap rates between 5% and 6%, with a sub-5% deal once in a while. Nothing was said about the quality level of those properties that sold for 7% and higher cap rates. And there are still a lot of transactions that sell at 7% and 8% cap rates, with mixed quality levels. Still, it appears that the top deals, or the most talked about deals with the lowest cap rates, are setting the tone for where cap rate levels should be. This is great for sellers, and makes for a very competitive bidding process, but while at the NIC conference in San Diego this week, we are going to explore what is really going on, all off the record, of course.

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Join us every quarter for a light breakfast and coffee.

Meet, greet, network and explore opportunities with other SeniorCare Investor subscribers. Also, at each breakfast, our Editor, Steve Monroe, will sit down with an industry leader for a discussion on the pressing issues facing the senior care market today!

 

Here's a look at what happened at our most recent Breakfast:

 

Some Details:

  • Breakfast is held each quarter from 7:30AM to 9AM at the Princeton Club in New York City.
  • Attendance is strictly limited to the primary subscriber on a first come basis.  RSVPs are required.
  • All subscribers who don't attend will receive a video of the discussion between Steve and our guest speaker.

 

 

 

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March 24, 2015. 60 Seconds with Steve Monroe. Shareholders are taking it up a notch to raise the value of Brookdale Senior Living...

The Battle For Brookdale

In World War II we had the Battle of the Bulge, and in seniors housing, we now have the Battle for Brookdale. Sandell Management, which owns about 2 million Brookdale shares, has nominated three directors, including Tommy Sandell himself, to help the company maximize shareholder value, claiming current directors have little real estate expertise, and in one case seem in imply that one current director, who they want to replace, is too old by stating his age (77). Tell that to Jim Moore. Now, Glenview Capital Management, which has upped its ownership from 8.75 million shares three months ago to 11.59 million shares today, may have joined the fray, but their SEC filing claims they are passive investors. The goal is to enhance shareholder value by unlocking the real estate value as a result of today’s record-shattering valuations. Sandell believes that spinning off the owned real estate to a new REIT will increase the total share value to $49. Perhaps. But there are other ways to skin a cat. It just may take longer but will result in a healthier Brookdale in the long term.

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March 17, 2015. 60 Seconds with Steve Monroe. HCP plans to sell up to 50 HCR ManorCare SNFs, but will it really work?...

How HCP Will Deal With Its Largest Tenant

The REIT HCP announced in February that it will try to sell up to 50 of its HCR ManorCare skilled nursing facilities to try to improve on the property level lease coverage ratio that is below 1.0x. The way it is going to work is that HCP will credit the annual lease payments in an amount equal to 7.75% of the sales proceeds. Using an example of a current 0.80x lease coverage on a facility to be sold, if it sold at a market cap rate of 12% to 12.5%, there would be no improvement in lease coverage. In fact, the coverage would decline slightly, so HCP would really not be any better off. One equity analyst did the math and figured that the only way it could help the lease coverage would be for the facilities to sell at a cap rate below 7.75%. Given these would not be the best assets in the portfolio, this would seem to be highly unlikely. Even with a portfolio premium, that cap rate would maybe be in the 8% to 10% range, at best, unless there was real room for improvement. But if that’s the case, HCP should be all over management to improve operations. That’s the best way to fix the problem.

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March 16, 2015.  In this Expert Opinion, Doug Korey, President, Lancaster Pollard Finance, discusses financing options, bridge loans and balance sheet lending...

Read the Transcript

Doug KoreyDoug Korey is the president of Lancaster Pollard Finance Co., LLC, a finance company that offers balance sheet lending and investing to the seniors housing and health care industries. Prior to joining Lancaster Pollard, Korey was a co-founder, partner and managing director of Contemporary Healthcare Capital, LLC. There he was responsible for the day-to-day management and oversight of all activities, including the formation and management of seven health care funds and three licensed small business investment companies. He has over 25 years of structured finance experience and has financed over $1 billion of debt and equity to the senior housing and long-term care industry throughout his career.

 

 

Read the Interview Transcript:

Steve Monroe

Lancaster Pollard, as many people know, has been doing a lot of financing in senior's housing and care, and they have just formed very recently a new company, Lancaster Pollard Finance, which is going to be doing balance sheet financing, which they haven't done.  I'm here with Doug Korey.  He is the president of the new company.  So, we're going to talk about financing.

You've been lending to this industry for a long time.  Now you are basically president of a balance sheet lender.  What are your plans for this?  

Doug Korey

You know, it's an interesting time in the cycle of the overall industry.  We've been through how many together, and I think it's a terrific opportunity to bring this type of capital of leveraged financing to the small and mid-sized market, utilizing Lancaster Pollard's very unique origination platform.  I think it's still under-utilized today in terms of the types of products.  We see a lot of equity.  We see a lot of cheap bank debt.  But we just don't see the in-between size, particularly for the small company.  So, we plan to grow this event in a very controlled but large scale over the next several years.  

Steve Monroe

Yeah, how much do you think—on an annual basis, how much do you think you can grow it?  

Doug Korey

I think easily a couple hundred million dollars a year to a sizeable platform.  It's just without anybody in the market today.  

Steve Monroe

And all balance sheet, that you keep it on the balance sheet?  

Doug Korey

For the most part.  Where there's opportunities to sell off some pieces in senior capital because I think there's a considerable number of buyers for that type of product, we'll do that.  But we're really in the market and have an expertise in holding leverage, managing leverage, mezzanine, preferred equity and the types of products that aren't as readily financed across the board.  Skilled nursing in particular is under utilized today, under served.  Acute, assisted.  Anything that has a true health care expertise, almost from an investment banker perspective and operating perspective, can certainly use this type of walk through a facility and understand it.  

Steve Monroe

Now, Lancaster's been very active in the HUD market and Fannie, Freddie, tax-exempt bonds.  So, you're coming in as a balance sheet lender.  Are you almost going to be competing against your new colleagues at Lancaster Pollard?  

Doug Korey

No.  In fact, we took some time to walk through this opportunity together, and I came away with the fact that the bankers are already doing this type of structure in a lot of parts.  They treat each client individually through their full cycle of growth.  And so, agency certainly was the product that they are so well known for, but whenever there was a capital product that they needed, the banker would try and arrange that type of financing.  We did quite a bit of this.

In fact, the finance company, although it's relatively new to the market in terms of name, has been going on for about a year now, and they've done a few bridge financings that have been I think fairly creative.  And so, I'm here to raise that level of structure in terms of scope and types of products.  But the bankers already have a real head start on this.  

Steve Monroe

Is the focus going to be across the spectrum, SNFs, AL, IL, acquisition, refi, development financing, everything?  

Doug Korey

Yes.  

Steve Monroe

Anything you think you might—or where you see the greatest need?  

Doug Korey

Again, I think the acute side, or more the acuity side, has more need.  I think the skilled side for sure.  Probably Lancaster Pollard has financed—in terms of an overall portfolio has financed more skilled, but is I think very well balanced between assisted living, memory care and skilled.  And IL to the extent that we're part of a campus perspective.  

Steve Monroe

And now as a balance sheet lender with your risk, any concern about where values are going in the market with cap rates continuing to compress?  I heard today that people are expecting—a lot of people are expecting another 25, 50 basis points drop in 2015 in cap rates.  

Doug Korey

I think we always have a concern over value, but we're—in this type of cycle.  But I think we're more about creation of value, so we're not going to get into, other than on our true bridge and agency products, any sort of refinancing activity, something that's attained full value or close to full value.  So, not to take interest rate risk and cap rate compression.

Where we will excel and continue to excel is in value creation construction and turnaround financing and substantial renovation, things where operators actually have to put in some money to work and put their expertise to work.  I would expect that all of our products will get refinanced out as opposed to a sale, and I think it will feed directly into our agency and exit expertise quite nicely.

In fact, we've already closed since I've gotten here, and there are loans going directly into the agencies from customers who have never done this this way with Lancaster Pollard, but for the fact that this product now is drawing them to the platform.  

Steve Monroe

And what about on the development side?  Because as a balance sheet lender you can do construction financing, and I assume you will be doing some—

Doug Korey

I think it will be a good-sized component of what we do.  

Steve Monroe

Are you concerned about the uptick in development, really in the assisted living, memory care side of the business?  

Doug Korey

There are some markets we're concerned about, but I think overall from the small-, mid-sized operator perspective there are many markets that are still dating back to the '90s that haven't been touched in a substantial way.  So, I think that there's still a lot of opportunity out there.  Skilled certainly has a lot of upside for redevelopment, replacement facilities, new facilities in many states that we're still seeing a very aged component.

And we're going to be selective in the major metros that have seen a tad of over- building or approaching that.  

Steve Monroe

How about the skilled side?  I would think that now you've become a balance sheet lender, I'm sure you've got clients that are 30-, 40-year-old nursing homes, so you're putting $2, $3, $4 million into their market for pre-renovation capital which you do on balance sheet, and then once everything has kind of settled down, then your loan gets taken out with a refi.  Is that—do you think that would be in the plan?  

Doug Korey

It's a perfect opportunity for our bankers.  They get to touch the client through the entire cycle of capital process, from that initial creation of the value through the exit.  And I think that that's exactly what the customer wants.  They want the expertise.  They want people to take risk with them.  And I think that's what our specialty is.  

Steve Monroe

Well, I know you know risk because you've done a lot of high-leverage mezzanine financing in your previous life, so you are—over those years, you were very comfortable with that risk.  

Doug Korey

Very comfortable.  

Steve Monroe

You know how to measure it and how to price it.  

Doug Korey

That's right.  And I think that for operators today, they have a choice of taking on fairly—although less expensive today than years ago but still very dilutive equity from the outside, typically in small and mid-sized groups who don't have large private equity firms chasing them.  Or traditional refinancing coming in.  If you want to own a facility, the stack structure of using mezzanine and preferred is really a preferable way for many owners to obtain that.  Then within three to four years refinance through an agency or a long-term hold, that's a very cheap form of exit.  

Steve Monroe

Yeah.  Well, good luck.  I'm sure you're going to have—there's just so much going on.  I'm sure you're going to have one hell of a busy 2015.  

Doug Korey

We're really excited, Steve.  Thanks.  

Steve Monroe

All right.  Good.  Nice chatting with you.  

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March 10, 2015. 60 Seconds with Steve Monroe. Even with the threat of rising interest rates, there are long-term benefits to investing in health care REITs...

Looking for Yield in Health Care REITs

Last week, there was some noise from the Federal Reserve that they may start increasing interest rates a little sooner than most people expected. Well, that sent most health care REIT stocks tumbling, many by 4% to 5% that day. Yes, REITs have been riding high for a while, but where else can you find dependable yields in the 4.5% to 7.0% range? Is now a good time to invest in health care REITs? For a short-term investor, I would say no, because the interest rate risk is reasonably high for the remainder of the year. For long-term investors? The yield on your cost basis is only going to rise because the health care REITs almost uniformly increase their dividends once a year, and a few more frequently. So you are going to be locking in that current yield on your cost basis as a minimum, with it rising every year. So you could see your yield increase by 10 to 20 basis points a year. And, REITs rarely decrease or suspend their dividends, which is the kiss of death with investors. So if long-term yield is what you want, health care REITs deliver. Even if we are approaching a bubble.

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March 3, 2015. 60 Seconds with Steve Monroe. Webinar attendees voted by nearly 3 to 1 that we are approaching a valuation bubble...

Seniors Housing Bubble or Not?

More than 125 people joined us live last week for our webinar on the Seniors Housing Market: Bubble or No Bubble. Acquisition values across the spectrum all hit new records in 2014, and as you can guess, cap rates across the spectrum all declined, but not to record lows….yet. If we are approaching a bubble, most of the panelists believed that trouble would not begin until 2016 at the earliest and 2018 at the latest. And they also believed that it was more likely that an outside event would be the cause of a market decline, such as a big jump in interest rates or some economic calamity, rather than an industry-specific event, such as too much development sending the market into a tailspin. When the webinar attendees were polled live during the webinar, by a nearly 3 to 1 margin, they agreed that we are approaching a valuation bubble. But they also thought, by a 2 to 1 margin, that cap rates will continue to decline this year. That tells me they believe prices will keep on rising, but not for much longer. What do you think? Bubble or no bubble? 

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February 26, 2015.  In this Expert Opinion, Dan Bernstein, Equity Analyst, Stifel Nicolaus, discusses public equity markets, IPOs, and REITs.

Read the Transcript

Daniel BernsteinDaniel Bernstein joined Stifel in 2006. Based out of the Baltimore office, Mr. Bernstein is a Vice President in the Healthcare sector, covering Healthcare Providers and Healthcare Real Estate.

His past awards include FT/Starmine and Wall Street Journal's Best on the Street Awards for stock picking in the healthcare services sector.
Before joining Stifel, Mr. Bernstein was an analyst with real estate developer Recycland as well as a financial reporter and editor with Dow Jones & Co. and Bondlink News, where he wrote on homebuilders, REITs, high-yield bonds, and convertible bonds.

Mr. Bernstein is a graduate of the University of Miami, earned an M.B.A. from the University of Maryland, Robert H. Smith School, and holds the Chartered Financial Analyst designation.

 

Read the Interview Transcript:

Steve Monroe

Well, I'm sitting here with Dan Bernstein.  He's an equity analyst at Stifel Nicolaus.  He's been covering the senior housing business for nine years, I guess?  

Dan Bernstein

Nine years.

Steve Monroe

Nine years.  So, let's talk about the state of the public equity markets for senior housing.  If you look at supply and demand, there's basically very little supply, so with that imbalance we would expect there to be huge demand with the public equity stocks.  What's going on?  

Dan Bernstein

You're talking about in supply, the public equity?  

Steve Monroe

Yes.  Yes.  

Dan Bernstein

We have decreasing ten-year interest rates and just interest rates in general, which is I think that's creating demand for yield heavy stocks, whether it be REITs or other dividend yielding stocks.  But also, there's this increasing confidence I think in investors in equity REITs.  They've performed very consistently over the last ten years, increasing their earnings in dividends roughly 7 to 10 percent a year.  And that creates some of its—a little—their own momentum.  

Steve Monroe

But on the provider side, we were—20 years ago, there were 45 publicly traded provider stocks.  Now on the private-based senior housing side, there are three.  So, there's no—public equity investors have nothing to invest in, so why isn't there just such strong demand for the three remaining ones. 

Dan Bernstein

I think it comes down to the real estate value.  If you look at the actual growth of the private paying senior housing operator it hasn’t been terribly consistent.  Some of that might be the recession, a little bit of over supply that we saw in construction going into the recession.  And so, the earnings haven't been particularly consistent.  There's a little bit of economic sensitivity that people continue to be concerned about.  

They're highly levered.  Unlike the REITs, the leverage, the effect of leverage, with operating leases of private-pay senior housing operators is somewhere between eight, nine times, maybe even a little higher.  And that, to the public investor that's just a big red flag.  Maybe to the real estate investor that kind of leverage is not an issue, 70, 75 percent loan-to-value.  That's not an issue.  But for the public investor and company, whether it be real estate or an operator, that becomes a red flag.  

Steve Monroe

So, what's the public investor looking for in the private-pay senior housing companies?  

Dan Bernstein

Well, aside from consistency in the earnings, which could help the share prices if you get that, particularly from Brookdale or Capital Senior Living where they're had a little bit of inconsistency in the earnings over the last I'd say six to 12 months, for a variety of reasons, I think most of the investors I speak to have some kind of real estate angle looking at those companies.  Brookdale may own somewhere between we estimate $8 to $10 billion of real estate based on current cap rates.  Capital Senior Living may own about $1 billion of real estate.  We think the implied value of the companies based on that real estate alone is much higher than current stock prices.

And so, a lot of investors on the buy side, institutional side, have come up to the same similar conclusions and then made investments in those companies for the real estate value and not necessarily for the operational growth.  

Steve Monroe

And let's talk about something that we haven't seen much of at all, the IPO market in senior housing.  Is there any chance in 2015, 2016, we'll see someone wanting to take that plunge?  Or is it just too difficult?  

Dan Bernstein

I really don't see that, Steve.  Not that there—there may not be enough large portfolios out there in the senior housing space of quality anymore.  We've seen the health care REITs over the last five or six years really buy up most of the assets of the super regionals, which probably would be the most likely candidate to become public.  You could see potentially some of the—maybe more the B quality portfolios that are looking for capital come to the public markets.

But at the same time, why come public?  If you look at the valuations of the public operators returning at implied cap rates of 7 or 8 percent maybe, a multiple, if you want to put a multiple on it, they're trading around 10 to 12 times EBITDA.  You can go ahead and sell your real estate to private equity.  You can sell your real estate to the REITs at something closer to six cap rate for a large portfolio, maybe lower nowadays.  

And if you don't want to go ahead and sell to a REIT, you can go ahead and refinance with Fannie Mae, Freddie Mac.  The insurance companies are starting to lend in the industry at 70 percent levered LTVs.  Take out most of your equity, pay yourself back, and why be beholden to a REIT, or sell to an operator.  

Steve Monroe

And not deal with all the requirements of being a public company and the extra cost.  What about the Skilled Healthcare-Genesis reverse merger?  Is that going to put a little more fizz into the skilled nursing market, the public equity skilled nursing market?  

Dan Bernstein

Well, at the very least it brings back a sizeable company to keep track of within the industry.  If you look at—if we don't look at the other post-acute operators like HealthSouth or Kindred and just purely more at the skilled nursing operators, you're looking at market caps below $1 billion.  Genesis-Skilled Healthcare is going to be quite larger than that.  Genesis is obviously one of the largest—if not the largest skilled nursing operator in the US.  

And so, it puts a very good mark to keep track of the industry, trends in the industry.  It brings some excitement back.  We haven't seen that sizeable of an operator in quite a long time.  

Steve Monroe

And you bring up Kindred.  What don't investors get about Kindred Healthcare right now?  Shouldn't they be kind of clicking on all cylinders with their own post-acute ACO model that they've been working on?  What's going on there?  

Dan Bernstein

Well, it's a complicated company.  I think the easiest way to say it is they actually run multiple business lines.  It's all post acute, skilled nursing, in-patient rehab, long-term acute care hospitals.  Those are really all different businesses.  They have different regulatory dynamics behind them.  That might change, and I think that's why Kindred has built the company the way they have.  They expect to see more site neutral payments, more paying for quality.  They're able to build more relationships with hospitals and insurance systems to reduce re-hospitalizations.

But I think all that works out over a long period of time.  We're only starting to see now the proposals for site neutral payments.  We're really only first seeing the dynamics changing, perhaps in their favor.  It's a company really built for several years from now rather than a company that's built for today's regulatory reimbursements.  

Steve Monroe

Well, that's what I don't understand because the price seems so low so if that's true, buy now and then ride it out, whether it's one, two or three years from now.  But who knows?  

So, let's look at with REITs, with their low cost of capital—their really low cost of capital—their diversification in property type, diversification in geography, in everything, pretty much.  What's going to keep the REIT train from rolling on?  Is this just going to keep on going forever?  

Dan Bernstein

Well, it can't keep going on forever or you end up with a lack of quality in assets.  But we estimate the total real estate market, which would include seniors housing, medical office buildings, life science assets, skilled nursing, all the different hospital classes, perhaps $1 to $1.2 trillion, investable maybe something a little bit smaller than that, $800 billion, somewhere in there.  They only own 10 percent of that or so.  So, they actually have a lot of assets—and that's just in the United States.  They're obviously expanding now internationally, the UK, Canada, mainland Europe and Germany.  We could even see some investments in Australia at some point.

So, there's a lot of assets for them to buy.  The key for them will be continuing low cost of capital, interest rates, the 10-year Treasury at 2 percent, a little bit below that.  As long as there's not a rapid rise in interest rates, their cost of capital will stay very low and they'll continue to be aggressive buyers.  

Steve Monroe

Well, we'll see what happens.  With that record year in 2014 in terms of the acquisition market and the values, we'll see what happens in 2015.  I don't know about you, but I'm just assuming it's going to be a repeat or even more.  

Dan Bernstein

We expect a repeat.  

Steve Monroe

You expect that?  Okay.  All right, well, keep up your good work, and look forward to reading reports.  

Dan Bernstein

Thank you.  

Steve Monroe

Okay.  Thanks.

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