Down but not out… everybody loves a good comeback story!
By Pam McDonald
Shep Roylance, Senior Vice President of JCH Consulting Group, a Senior Housing Forum partner, says that the acquisition of bankrupt or distressed facilities provides an opportunity for senior living providers to grow and increase their presence in today’s competitive market. JCH is a full service real estate brokerage focusing on the entire spectrum of the senior housing industry: assisted and independent living, memory and long-term care.
Over the past several years, as Shep notes, there have been numerous factors that contributed to operational and financial distress in the senior living industry. While each situation is fact-specific, he cites the following overall causes:
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The economic and housing crisis (or the Great Recession of 2007-2009), which, among other devastating effects, made it difficult for seniors (prospective residents) to tap into their home equity to pay for long-term care; and
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Sweeping changes in the healthcare industry, including the evolution of new technologies and the need to adapt to the Affordable Care Act with its accompanying culture shift as consumers increase their engagement and management of costs.
Winners and Losers
These and other contributing factors caused serious problems for many assisted living communities and skilled nursing facilities, often resulting in bankruptcies. Shep notes that continuing care retirement communities, in particular, continue to face financial distress and challenges.
He says 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.
Who is Coming Out On Top?
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. Shep says, “Providers that can adapt to the changes in the industry are emerging as winners.
“Chapter 11 bankruptcy is always an acquisition opportunity. These properties are particularly attractive to smaller and mid-sized operators and owners that cannot compete with large-cap REITs. The current soaring per unit prices of facilities virtually eliminate acquisition by the small and mid-sized providers.”
However, he warns that acquisition of a bankrupt or distressed facility presents a challenge and demands due diligence on the part of the new owner or operator. Shep says, “The all-cash transaction, quick due diligence period, correction of all the problems that have caused the bankruptcy, as well as the amount of capital expenditure to make the facility competitive in the market place, are monumental considerations faced by a new owner/operator.”
Comeback Possibilities
According to Shep, “The turnaround from a distressed facility to a successful one with an attractive EBITDA takes hard work, knowledge, capital, and time, but it can reap substantial rewards.
“For example, a facility purchased for five million that then requires two million in capital improvement, and new marketing and 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 12 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. New capital, demographics, technology, and a culture change in the industry have accelerated the pace of the market.
Shep concludes, “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 this occasion to grow in number and deliver a higher quality of service to the increasing senior population makes the entire healthcare industry stronger.”
For more information or inquiries about services, call Shep at 805-633-4649 or visit http://shepjch.com.
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