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How the Lack of SNF Construction in 2016 Will Impact the Industry

According to a recent report from Integra Realty Resources (IRR), a successful real estate consulting firm, construction will be slow in the world of senior housing throughout the remainder of 2016. In the report, the firm indicates that skilled nursing facility (SNF) development will be “minimal” and that the facilities that are newly erected will likely focus on short-term, post-acute rehabilitation services. This should come as no surprise to those within the industry, as we are seeing more and more facilities close their doors and eventually reopen under new ownership. It is no secret that many existing SNFs have struggled over the last decade. Whether due to the recession or some other factor, we have seen numerous facilities file bankruptcy. So, what does this mean for senior housing – more specifically those interesting in investing in an SNF?

Depending on where you stand, the lack of SNF construction is viewed as a positive. As we continue to see troubled, older facilities close their doors, we expect to see a trend of interested investors swooping in and capitalizing on the situation. Under new ownership, many SNFs are able to get back on their feet and provide residents with high quality services. While we may not be seeing very much new construction in senior housing, the following is taking place:

  • More than 7,000 SNFs were under construction throughout the United States as of the third quarter of 2015
  • During the same quarter of 2014, only 3,600 were under construction

These numbers show that more and more facilities are being bought and renovated, instead of brand new nursing homes being constructed. In many instances, the older facilities are simply in need of an overhaul and specific interior renovations.

When looking at the impact this will have on the senior housing market, it is important to take all factors into consideration. We are not in need of new SNFs, we simply need to focus on how to make existing facilities better and more efficient. Again according to a survey conducted by IRR earlier this year, people in general are optimistic about the nursing home market. In fact, 39% of those surveyed believe the senior housing market has yet to reach its high point. This is yet another great sign for those thinking about getting into the industry and investing in a troubled nursing home or assisted living facility. 2016 will continue to be a year of transition and change for the senior housing industry, and that’s not a bad thing.

If investing in senior housing is something that is of interest to you, we encourage you to contact us. Shep Roylance and the entire JCH Senior Housing Group team have years of experience facilitating senior housing transactions and we would be happy to discuss your options with you today.

NEW CONCEPT FOR ASSISTED LIVING, INDEPENDENT LIVING, SKILLED NURSING & COMMUNITY CARE RETIREMENT COMMUNITIES

The current Baby Boomer generation reaching retirement feels younger, will live longer and demands meaningful activities and experiences in a Retirement Home as they leave their careers and active social life behind them. They are still healthy, but their physical stamina has changed and requires some assistance or service. There are currently 78 million Baby Boomers in the U.S. and 8000 turn 65 everyday. They expect better housing and amenities in their first entry into an Assisted Living or Independent Living facility, even though eventually they require the same medical care & services as generations before them.

ASSISTED LIVING, INDEPENDENT LIVING, SKILLED NURSING FACILITIES MEET BABY BOOMERS DEMAND

Owner/operators must meet the demands of this “back to the dorm” crowd and compete for their considerable buying power. Not only do they need to invest in technologies that insure life safety but also in technologies that insure life quality.  These new technologies will emphasize life style and wellness. Owner/operators must adapt also to the current aging generation’s demand for diversity.  When first entering retirement the Boomer generation does not want to co-mingle with just Seniors.  They prefer to live in a community of diverse ages, allowing them to co-mingle with all ages:  youth, middle age, and older. To meet this demand, Community Care Retirement Community Developers are building their Independent Living Facilities and 55+ communities close to developments, which incorporate all ages.

Whether building a new community or adding to an established one, retirement facilities feature

  •         Neighborhoods for 55 plus
  •         Neighborhoods for single families within blocks
  •         Apartment complexes in another sector
  •         Community areas for all ages  (Parks, stores, recreation areas etc.)

Assisted Living and Skilled Nursing facilities are often found in the neighboring location completing the Continuing Care Retirement Community concept.

RESTRUCTURING OF BANKRUPT FACILITIES TO MEET THE NEW “BOOMER” DEMAND

Purchasing a troubled facility that has declared Bankruptcy in Chapter 11 creates an opportunity for the owner to restructure the facility to meet the new demands of the culture and the demands of the emerging Boomer generation. Improving the physical plant, adding amenities, services and new technology must be addressed in the restructure with emphasis on life style and wellness.

For counsel, acquisition or disposition of a Healthcare Facility you please contact Shep Roylance of JCH Consulting Group and Roylance Senior Housing, whose expertise and knowledge will guide you through a successful transaction in or out of Bankruptcy.

Shep Roylance –  Roylance Senior Housing, JCH Consulting Group    
Direct 805-633-4649      Cell 818 515-0530         Fax 805 392-5171       Email Shepshep@shepjch.cch

Factors Leading to Skilled Nursing Facility Bankruptcies

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The skilled nursing facility industry has been dealt several successive blows in recent years, leaving many SNF owners with few options to keep struggling facilities afloat. As a result, SNF bankruptcy is becoming increasingly commonplace.

Financial Realities Lead to Tough Circumstances

The economic downturn seems to have impacted everyone, but a series of laws, amendments, and shifts in the market have been especially difficult for those in the skilled nursing industry. Here’s a brief list of what has occurred:

  • 1997 – Balanced Budget Amendment Act allows states to mandate managed care plans for individuals wanting Medicaid coverage for nursing home services, resulting in extremely low negotiated reimbursement rates
  • 1999 – Health Care Financing Administration changes Medicare reimbursement, almost immediately triggering a round of SNF bankruptcies
  • 2008 – Economic downturn and official “bursting” of the housing bubble guts many retirement savings accounts, negates home equity, and makes selling a home difficult for seniors
  • 2010 – Patient Protection and Affordable Care Act increases benefits for in-home care, reducing overall demand for SNFs and effectively ensuring that those who are in SNFs will be frailer and in need of more care
  • 2011 – Centers for Medicare & Medicaid Services announced an 11.1% reduction in reimbursement rates, which was twice as bad as what had been predicted
  • 2011 – As a direct result of this announcement, stock prices for publicly traded SNFs plummet
  • 2012 – Medicare Payment Advisory Commission recommended an additional 4% cut in reimbursement to SNFs that will go into effect in 2014 and recommended no cost of living adjustment for 2013

Debt and expenses remains high among SNFs. This is particularly difficult to manage as the majority of unpaid Medicare co-payments are owned by state governments, and states lack the financial resources and the will to reimburse SNFs for the money owed. Some nursing home brokerage firms have been able to help clients buy a skilled nursing facility when it’s in distress, saving their clients money and helping the previous owners avoid a messy financial conclusion.

The Bankruptcy Process

When a skilled nursing facility is no longer financially solvent, bankruptcy may be the only route. Working with financial and legal experts, the SNF will choose between two types of bankruptcy: Chapter 7 (liquidation) and Chapter 11 (reorganization). With a Chapter 7 bankruptcy, a trustee is appointed to assess the company’s debts and assets and to collect and reduce property to raise cash, which is then distributed to those who are owed money. A trustee is also appointed to ensure patients are responsibly transferred before the SNF closes. In Chapter 11, the owner acts in lieu of a trustee, and works with a committee of creditors. They find ways to work with vendors and pay employees while continuing to operate, with the ultimate goal being to regain firm financial footing – usually by restructuring the business and selling off some of the company’s property.

Bankruptcy can provide an opportunity for those who plan to buy nursing homes. They may find a SNF for sale at a substantially reduced price, which can enable them to make improvements or operate in the black that much more quickly.