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WINNERS & LOSERS: SENIOR LIVING PROVIDERS ACQUIRE DISTRESSED DEALS

The <a href=”https://www.shepjch.com” target=”_blank”>acquisition of bankrupt or distressed deals</a> provides an opportunity for Senior Living Providers to grow and increase their presence in today’s competitive market.   Sweeping changes in the Healthcare industry as a whole and the recession has caused serious problems for many Assisted Living, Skilled Nursing and Continuing Care Retirement Communities often resulting in bankruptcies.  The <a href=”http://www.hhs.gov/healthcare/rights/” target=”_blank”>affordable Care Act</a> and the evolution of health care technologies are contributing factors.  Continuing care retirement communities in particular continue to face financial distress and challenges, which they’ve encountered ever since the economic crisis made it difficult for prospective residents to tap into their home equity.  Skilled Nursing facilities face performance challenges as they try to adapt to a post –Affordable Care Act and Culture Change world.<!–mep-nl–><!–mep-nl–>Providers of small, medium or large portfolios have suffered and either declared bankruptcy or have been forced to sell at below the market rate per bed and unit.  The losers, unfortunately for them, fall by the wayside, but their loss is a gain for those strong providers that have survived the downturn and are actively seeking growth in the present competitive and soaring Healthcare market. Providers that can adapt to the changes in the industry are emerging as winners.  <a href=”https://www.shepjch.com/Bankruptcy.html” target=”_blank”>Chapter 11 bankruptcy</a> is always an acquisition opportunity.   These properties are particularly attractive to smaller and mid-sized operators and owners that cannot compete with large-cap REIT’s.  The current soaring per unit prices of Facilities virtually eliminate acquisition by the small and mid-sized providers.<!–mep-nl–><!–mep-nl–>The acquisition of a bankrupt or distressed facility presents a challenge and demands due diligence on the part of the new owner or operator.  The all-cash deal, quick due diligence period, correction of all the problems that have caused the bankruptcy and the amount of capital expenditure to make the facility competitive in the market place are monumental considerations faced by a new owner/operator.<!–mep-nl–><!–mep-nl–>The turnaround from a distressed deal to a successful deal with an attractive EBITDA takes hard work, knowledge, capital and time.  For example, a facility purchased for five million, two million in capital improvements, rate increases, change is payor mix and new market branding can result in a fresh concept and energy  brought to the market.  In three to five years the “winner” could be the proud owner of a twelve million dollar facility which becomes attractive for a REIT acquisition.  In such a case it is evident that the result makes the acquisition of the distressed facility worthwhile.<!–mep-nl–><!–mep-nl–>New capital, demographics, technology and a culture change in the industry have accelerated the pace of the market.  In this rapidly changing, competitive and demanding Healthcare market the prudent Senior Living provider must take advantage of all growth opportunities.  The winners who have taken the opportunity to grow in number and deliver a higher quality of service to the increasing senior population makes the entire Healthcare Industry stronger.

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.