EXPERT OPINION: A Conversation with Alan Plush

July 10, 2012

In this “ Expert Opinion” interview, Alan Plush, MAI, Senior Partner, HealthTrust, LLC, discusses the bull market, transaction activity, reimbursement, RUGs, competition, and more.
 

Alan PlushWatch the video      Read the transcript

Mr. Plush specializes exclusively in Healthcare and Retirement valuation throughout the United States. He is currently President and Senior Partner of HealthTrust, LLC following its spin off from PricewaterhouseCoopers, where he was the national director of the Healthcare Valuation group for over three years.  Prior to this, Mr. Plush was the owner and president of Gulf/Atlantic Valuation Services, Inc., which was purchased by PricewaterhouseCoopers in August 1999.  HealthTrust operates from four locations in the U.S. (Sarasota, FL; Birmingham, AL; Boston, MA and Los Angeles, CA).  In 1986, Mr. Plush began specializing in the appraisal of a large number of healthcare properties. With a foundation in the appraisal of adult congregate living facilities and nursing homes, his specialized expertise has grown substantially. To date, he has directly or indirectly participated in the appraisal of approximately 6,000 nursing homes, 4,500 congregate care facilities, an additional 1,000 continuing care retirement centers, and over 200 hospitals throughout 48 states in the U.S.  HealthTrust appraises 1,200-1,400 properties annually.  

HealthTrust serves a variety of national clients in the industry, including the most noted lenders, operators and developers.  Mr. Plush is the founding member of NMMC (National Medicaid/Medicare Conference) which has since been gifted to the NIC. Mr. Plush is a regular speaker at conferences such as NIC (National Investment Center), ALFA (Assisted Living Federation), ASHA (American Seniors Housing Association) and other industry venues.  Mr. Plush sits on the executive board of ASHA and is active with numerous committees and industry trade groups.  Publications of note include the Assisted Living Absorption Study, the Annual Transaction Study with ASHA, the State of Seniors Housing with NIC and ASHA, and the 2005 CCRC Profile with AAHSA.

Contact Information:

Mr. Alan Plush
Senior Partner
HealthTrust, LLC
6801 Energy Court, Suite 200
Sarasota, FL  34240
941-363-7501
Alan.plush@healthtrust.com

 

Watch the video of the interview: 

 

Read the interview transcript:

Steve Monroe
The seniors housing industry has been changing. It’s been improving. The skilled nursing industry has been having its ups and downs with reimbursement. It’s hard to know where cap rates are, cash flow to value, and so I have here with me today Alan Plush, a senior partner at HealthTrust. He’s been doing this for slightly over 25 years, so he is definitely an expert in the valuation of all kinds of health care properties. Alan, the seniors housing market has really improved in the last 12 to 18 months. On the appraisal side, what have you seen in terms of financial and operational improvements? 

Alan Plush
You know, Steve, it’s been very interesting. Over the last couple of years we have seen—I kind of look back to 2011 as—obviously there was a lot of transaction activity, and we saw a large amount of the trends then were obviously the repurchases and influences that those had. We’ve seen an evolution, probably since August for us when it started. We went away from the larger transactions and back to more singles and doubles. We’re also seeing a different type of client enter the market now, being the commercial lender, and they’ve been slowly making their way back. So we’ve seen a number of changes in the last 12 months.

Steve Monroe
But from the operational side have you really seen improvements in cash flow, other than with skilled nursing and the cut in rates last October? 

Alan Plush
That’s correct. That was obviously a big impact on cash flow, and I think it was a relatively well-anticipated impact on cash flow, but nonetheless, on the nursing side, there has been a lot of activity surrounding those in the valuation sector. What we’ve seen on the senior housing side is steady improvement in occupancy, and I really like to characterize it as if you look at the two factors that in my mind, that influence risk and fear in the sector, it’s availability of capital and occupancy rates. If you had to just pick two issues to focus on, I look at those two on a regular basis. So we’re seeing improvement in occupancies and we’re seeing greater availability of capital. So from my standpoint I think the fear index is coming down, and that’s probably the biggest change we’re noting in the last, probably 9 to 12 months.

Steve Monroe
How about lender attitudes? As the economy improves, are the lenders getting a little bit more liberal in their lending parameters and underwriting criteria? 

Alan Plush
Yes Steve. One of the interesting things is recently, in fact on my way here this morning, I ran into an old friend who is a lender and has a position at what I would call a regional bank now and they’re doing construction loans in the senior housing space. I think, whereas, say, 9 to 12 months ago I don’t know if there was anybody actively engaged in construction lending, other than HUD, and that’s very problematic, it’s very time consuming to get through that process. There were a handful of small groups that would do it, but there was very little available. Now, my feeling is that we’re seeing the needle kind of change, real-time. There’s a fund I’m familiar with, a senior debt and equity fund that’s doing construction, and now here there’s a couple of other lenders that are doing new construction as well.

Steve Monroe
What comes across your desk more frequently on the appraisal side? Is it acquisitions or is it refinancing? 

Alan Plush
That’s that evolution I talked about. I think a year ago it was acquisitions, a lot of acquisitions. The market, it’s a choppy market; there are a handful of acquisitions we’re working on right now. At the same time, when I talk with brokers active in the space, there are a lot of near misses on the acquisition side. So mainly what we’re seeing now are refinances. Supposedly late this year and on into 2013, a large amount of the agency debt that used to finance some of the asset pools that were picked up by the REITs, a large amount of that debt is up for renewal, and I think you’re going to see either a wave of refinancing at that point, or a wave of just pay-downs and balance sheet shrinkage on the part of Fannie and Freddie. But really most of what we do is lending-related, and not as much involved in acquisition right now.

Steve Monroe
Everyone’s talking about cap rate compression in seniors housing right now, but isn’t there a pretty decent spread in cap rates between the institutional A quality properties and the B properties?  Any idea what that spread might be?  And do you think that spread’s widening as more of the A properties come on?

Alan Plush
Certainly. Folks ask me all the time, of course, what’s the cap rate? I always tell them that’s easy, six-and-half to 10. This really leads into the fact that the bifurcation we’ve always seen, I think now is more pronounced. It’s more acute than it has ever been. Institutional-grade assets, of which there’s a dwindling number that are concentrated in a size to attract acquisitions by the top three REITS, we’ve seen most of those pools come through the system. A lot of what happens now is the second-tier assets.

Again, this is not a disparagement against the quality of the operations, or the physical end or anything, but for whatever reason, they’re not the A-quality, they’re not the A assets that a REIT would buy. So we’ve seen, probably, if you wanted to use a six-and-a-half to maybe eight range, maybe eight-and-a-half, and six-and-a-half being extremely rare, but maybe seven, seven-and-a-half up to eight, eight, eight-and-a-half. There’s probably a good range. And then there’s a gap, and then you’ll see second-tier assets starting at nine and going to 10. I’ve never seen a gap in there and we actually believe that there’s a little bit of one right now.

But the biggest challenge is explaining to somebody, like when we appraised the Holiday Retirement transaction a year ago, and trying to explain to a typical market participant that your independent living facility shouldn’t be valued at a 5.75 cap rate, just because of those transactions, and typical of REIT structured transactions, we could conclude they’ve cherry-picked and done a good job of picking off a lot of the good platforms and the good operators and pulling them into their fold. But I don’t think there’s a lot of that left.

Steve Monroe
How about on the skilled side?  It’s got to be pretty hard. You look at someone’s 2011 financials, and it has nine months with the pre-cut for Medicare, and then three months with the post-cut. And then, as everyone’s trying to figure out how to change their costs, how hard is it to do the pro formas because the historicals are irrelevant now? 

Alan Plush
I wouldn’t say they’re irrelevant. You just have to put it into context. What the methodology that we’ve been using is that the consistency is most likely going to be in the RUGs category, the utilizational category. So we will model financials going forward with historic utilization and current rates that mitigates that change. Now, that being said, you step back a step, most sophisticated operators that we dealt with assumed there were going to be cuts, and I’m talking about before they just felt that the rates were too fat. There was just this sense, even before it became apparent there were going to be cuts, there was a sense that this can’t last, because that’s how the system works. There was an anticipation of a compression on those rates, and the more proactive operators were prepared.

We would look in terms of estimating gross revenues, but with a RUGs utilization and then a current rate per category to get the gross revenues, but then when you look at the margin, we appraise kind of on a static basis, an objective basis, and then we appraise to a margin. So, at the end of the day, we recognize that margins are going to remain relatively constant. However, different things are going to shift. So I believe that to accurately appraise a nursing home you have to look at both, and that gives us a cross-check. So, if we do the new math, and we end up with a margin that doesn’t make sense, then we know there’s going to be expense cuts to follow. Then we dig deeper and we see what’s logical in that regard.

Steve Monroe
Are lenders taking a very conservative approach on this?  Because I’m sure a lot of them don’t know that reimbursement detail very well. How are they looking at some of these pro formas?

Alan Plush
Sure. There are two types of lenders: There are the specialty lenders that have dedicated specialty groups, and really tuned in, and are making their assessments based on what they see. And then there are the folks that aren’t in the space often and don’t have a concentrated team. They’re the more cautious of the two, the latter. The former, I think, get it, and they understand the operators are going to make adjustments. They understand that in the immediate there’s an initial impact, and then you’ll see margins kind of correct back to a normalized level. The degree of caution obviously increases with the less familiarity you have with the space.

Steve Monroe
How is today’s market?  I would say we’re in the middle of a bull market, how does that differ in your mind from the 2005 to 2007 bull market? 

Alan Plush
Bull market for senior housing? 

Steve Monroe
Yes.

Alan Plush
One of my thoughts is whether or not we’re still in the bull market. If the bull market was started with the purchases of the operating platforms by the REITS, if there aren’t many of those left to buy. I think Ventas purchasing NHP is a perfect example of an acquisition, that makes sense I’m sure, but this is what you do when there’s not much else to buy. My feeling is that this year is going to be a relatively flat year for all of those reasons. I think it’s a singles and doubles year. I think we’re the tail end of a bull market, only because I think we lack product, that the current buyers, the profile for the buyer right now is typically a REIT, and I think that the type of stuff they want to buy is dwindling.

But when you look at the ’05 to ’06 period, I think there was a different backdrop to everything. We hadn’t lived through the Great Recession. There was the expectation that values would continue to rise, and therefore the purchase price. There was a frenzy to buy assets. There was a tremendous amount of liquidity, and values were going up. It’s almost like your single-family home. The psychology became whatever I spend on my house I know I’ll get back. So the more I spend, and I think we had that in our industry too. That psychology is not there. There are two portfolios I’m aware of, just in the last few weeks that were on the market and the sellers pulled them because they didn’t hit their pricing expectations. It’s just a different market right now.

Steve Monroe
Was the pricing on a per-unit basis or pricing on a cap rate basis? 

Alan Plush
It was on the aggregate dollar basis period. Here’s what we think they’re worth in multiple millions, and the offer came in less. The highest offer that we could get to was actually 3 percent, 2 percent less. We won’t do it. In one case it was maybe 5 or 7 percent. So again, it’s just feels different. I remember back to the days when I used the Holiday Retirement transaction as kind of a high water mark. It’s easier to mark in my mind. We have a national economy that’s fragile. We have a world economy that’s fragile. That psychology seeps everywhere. In the valuation industry we look at the objective facts, but if you don’t understand the psychology of it, you miss a lot of the dynamic that’s going on when you’re valuing properties. I just feel that the psychology, buyer and seller psychology, and investor psychology, is important.

Steve Monroe
Well, I know you told me you valued over 1,400 individual properties last year, I hope you can maybe max that or exceed that this year.

Alan Plush
I don’t know that we want to. I think it’s a different world. I mean, we at HealthTrust think we’ve prepared ourselves for the shifting in the economy, and if we do less than that we’re fine. We, like so many people in the industry, in the third party space, we just sit by the phone and wait to see what transpires.

Steve Monroe
I’m sure you’re just sitting by the phone. Thanks for sitting down with me and good luck this year.

Alan Plush
Yes, Steve, thank you very much. Always a pleasure.

-->

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.