EXPERT OPINION: A Conversation with Josh Jandris

June 23, 2014

In this "Expert Opinion" interview, Josh Jandris, Senior Director of the Institutional Property Advisory Group, Marcus & Millichap, discusses case studies, assets, capital, recent transactions, and more...........

 

Read the interview transcript:

 

Steve Monroe
Anyone who’s been reading The SeniorCare Investor in the last couple of years has noticed there’s been a big increase in sales of county-owned skilled nursing facilities. I’m here today with Joshua Jandris. He’s a Senior Director of the Institutional Property Advisory Group of Marcus & Millichap. Josh, when did you embark on the strategy to target county-owned nursing facilities that really should be prime candidates for sale?

Joshua Jandris
Steve, about back in 2010. One of my former colleagues, Isaac Dole, who had left the firm to go to Aviv REIT and is now heading up Birchwood Capital, a kind of private equity and private REIT, tenant-landlord type company in seniors’ housing kind of found the opportunity. He and my partner, Mark Myers, had seen it start to develop. Isaac had started to prepare a target list, as well as a national database. However, he had left shortly thereafter. It was kind of up for grabs as to who wanted to embark on this journey. 

So, back in 2010, I grabbed the torch and I’ll tell you, it’s been obviously rewarding. It’s been very time-consuming, but it’s been very interesting. So, before Isaac had left here, I think he had effectuated two transactions and since then, Mark and I have handled 28. I think more than half have closed, but we’ve had 28 county engagements of, I think, maybe 32 or 33 total in the whole country, half of those being principle-to-principle or county-to-principle and just a few being handled by other intermediaries, typically local intermediaries.

Steve Monroe
But how did you know which ones to target? Did you look up their financial statements on the county records to see who was losing the most money?

Josh Jandris
Certainly. As a broker, this is probably about half of what I focus on, so just like any other smarter strategic broker, you’re going to look for opportunities. What’s great about seniors’ housing and being an intermediary in this space is as long as there’s volatility, there’s always opportunity. If you’re just looking at non-county or government assets to broker, you would look at states that have a bed tax coming in or Medicare cuts across the board or Medicaid cuts across the board, similar to this space. 

So, what we did is we looked at things at a very high level, not only on the Federal level, but state level and then, all the way down to county government. So, if states were implementing hard property taxes, or if states were shifting more of the budgetary responsibilities from Fed to state to county, then we saw that as being an opportunity for us to help counties.

I’ll give you a really good case study. A few years ago, New York. Anybody that operates in New York or has sold things in New York, they’ve been going through this—they’ve had, I think, four or five or six different iterations of their Medicaid reimbursement programs since, I think 2010. In addition to that, when Federal dollars started to be taken away, I believe it was FMAT and it was  TARP, the Federal dollars to the states and then, kind of trickle down—I apologize.  I don’t have it in front of me, but what we saw was obviously a larger share of costs being shifted to county governments and at the same time, the state assembly had put in a hard property tax cap.

So, with the counties not being able to raise property taxes and their expenses growing, they had no choice but to monetize assets. All along while this was happening, that was just one ancillary or adjunct to a much larger issue. That larger issue was revenues staying stagnant and expenses going up because of whether it be collective bargaining agreements that were negotiated during the roaring years of ’04, ’05 and ’06. I can’t really say it’s one thing, but it’s been a number of things.

Steve Monroe
It seems like almost all of the county facilities you’ve sold are in the Northeast and half are in New York. Are there just not many county-owned facilities in Indiana and Kentucky and…?

Josh Jandris
That’s a great question. There’s actually quite a number of county-owned facilities in Indiana, but it’s because of the IGT program in Indiana. So, in Indiana, you have counties and county hospitals that partner with other operators and that system is flush with cash. States like Kentucky, I guess outside of the Northeast—

Steve Monroe
I was just picking those randomly.

Josh Jandris
I understand. So, outside of the Northeast, there really isn’t a critical mass. Obviously you have some sprinkling of homes in several states, but where you have the critical mass and you have a pretty proactive legislative bodies, you have that more in Pennsylvania, New Jersey, Maryland, New York.  I mean, we’ve handled transactions in Illinois, Wisconsin, and Arizona. We privatized the last county-owned home in Arizona a few years ago. But either there wasn’t that traditional or historical plan of that. I mean, a lot of these county homes started as alms houses back in the late 1800s or even the middle 1800s, so where you look at concentrations of population and history, that’s where the correlation is.

Steve Monroe
When you’re talking to these counties, what’s the most important factor in selling? Is it getting rid of that $2 million-a-year annual cash flow loss or is it raising the $5, $10, $20 million of new capital from the sale that can be deployed for other uses in the county? Is one a bigger factor than the other?

Josh Jandris
It’s a number of factors. Not only do you have the capital event when you sell an asset, but you’re shifting liability. You’re adding property to the tax roles and obviously, you’re erasing, or getting rid of, a tax-subsidized asset that’s been there for—I don’t know if it’s always been a tax-subsidized asset, but at least for the last three-to-five, even 10 years, they’ve been having to allocate money in order to keep it going. Many other states soon, they just don’t think that it’s a long-term, it’s not viable to continue to hold the asset. 

Obviously there is a huge benefit to being able to have that capital event and then, again, allocate that money to things that are really more of their core principles. There’s definitely a little bit of disagreement on the part of some county governments where, “Is it our core competency? Is it not?” I think ultimately the ones that end up selling are either in a position where they say, “Listen. This is not in our charter. This is not what we’re supposed to be doing,” or, they say, “Listen. We’re losing so much money and our sales tax revenues are down. Our property tax revenues are frozen. We have to do something.” As you know, those are the two large revenue streams for a county, so if they have the opportunity and the necessity to monetize something besides an office building, which usually goes first, they’ll sell that off with the long-term lease.

Steve Monroe
How difficult is it when you’re selling these things? Some of these properties are losing $2 million even before debt service and then, you have to try to convince a buyer to pay $10 or $15 million for the property. How difficult is it basically to restate the income statement or are these buyers so sophisticated they just do it themselves and they don’t have to worry about your numbers?

Josh Jandris
A lot of it is proprietary, but what I can tell you is we’ve handled assets that were losing anywhere from $500,000—right now, we’re handling a property in Orange County, New York, with everything it’s losing about $30 million. On the books it’s losing about $18 million. We’re handling a transaction in Rockland County, New York, up in Muncie or Pomona. That facility was losing $16 million. It’s really a function of educating the buyers on how a county operates and then, having the wherewithal and the understanding of what they can do with what’s already there. So, when we underwrite an asset, we always underwrite current, but then, we use a proprietary formula to drive our proformas, thus driving valuation.

Steve Monroe
I know it can be difficult with the buyer. Have you ever done a post-sale audit a year later to see whether in fact, the costs did go down and they were able to change the census? That’d be a great story.

Josh Jandris
We’re actually doing quite a bit of that. One of our most recent transactions was Beaver County.  It was just featured in The SeniorCare Investor, as well as some other national publications.  That facility was losing about $16,000 a day.

Steve Monroe
Oh, I remember that one.

Josh Jandris
I believe $5-$6 million a year. Immediately following the sale, the buyer, which is a group called Comprehensive Healthcare. It’s a consortium out of New York and New Jersey. They are looking at an $8 million profit first year. That’s the byproduct of not only ramping up Medicare census between—during the escrow period when they took over management. They took the Medicare census in the span of three to four months from eight Medicare As, up to 42 Medicare As. They’re amazing operators. They’ve done an excellent job with that. In addition to that, what’s really important to always utilize is local counsel; somebody that is very adept with working, not working against, but working with the unions. In Pennsylvania, we work with a group called Capozzi Adler. I would say that they are the best union negotiators in that region. They’ve handled the union side of, I think, four of the last five Pennsylvania acquisitions that we’ve handled and they’ve produced great results for our clients.

Steve Monroe
Now, with the economy improving there is less pressure on Medicaid reimbursement, are you seeing any slowdown in counties wanting to sell or are they still having the financial problems and this is going to be going on for several more years?

Josh Jandris
They’re still having the financial problems. One of the big issues with the less pressure from Medicaid is the plan is already in place for managing Medicaid. The way that counties are structured versus for-profits or not-for-profits, in states where you have bed taxes or additional quality assurance fees, things like that, counties are under a totally different plan. So, in Pennsylvania, for instance, I believe they froze all counties’ Medicaid rates, I think from ’06 on, so while the for-profit providers were getting the case mix index adjustments, capital, everything like that, the counties don’t have that and they never will. So, that’s where you have pressure, for instance, in Pennsylvania itself. 

In states like New York, the economics in some situations are so dire that even if the economy comes roaring back, which I think we all know has been very incremental—it’s been encouraging, but incremental—they still have the pressing need. In a state like New Jersey, counties have a unique reimbursement where they get not only your typical nursing home Medicaid reimbursement, but they have an additional add-on to that reimbursement that goes towards community, public aid community care. It’s looking like that’s going to be wiped out once they go to managed Medicaid. So, again, volatility is volatility. 

Steve Monroe
I think you’ll be busy for the next several years and a lot of good business prospects. Joshua Jandris, thanks for the update on the county nursing home situation and I look forward to writing about a lot more of your sales.

Josh Jandris
Thank you so much, Steve. I really appreciate your time.

Steve Monroe
Take care.

 

 


 

 

 

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