Despite COVID-19 deaths, the nursing home space presents opportunities for owners

by Clay Jarvis27 May 2020

An alarming percentage of America’s 100,000-plus COVID-19 deaths are being tied to the country’s long-term care homes. These facilities, whose elderly residents are highly susceptible to the disease, were deemed high-risk areas back in February, when the first COVID-19 outbreak in a U.S. nursing home was reported in Kirkland, Washington.

As of May 22, 43 percent of all COVID-19 deaths have occurred in nursing homes and assisted living facilities.

It’s a sad state of affairs; one, according to LSG Lending Advisors’ co-founder Andrew LaSalla, that is likely to force smaller owner-operators to sell their facilities to their more established and better capitalized counterparts. For an industry that’s no stranger to bad press, it’s an opportunity to raise the quality of care being administered.

“There’s going to be openings for owners and operators who are experienced to come in and acquire assets that are underperforming,” LaSalla says, adding that he has already been contacted by clients hoping to purchase multiple facilities. “I know COVID-19’s affecting them right now, but if you look at the long-term demand and undersupply of healthcare, there’s going to be an increased need for nursing home and assisted living facilities.”

Individuals will be coming to the space to capitalize on that increased demand, some of them with little to no experience in running long-term care facilities. That lack of experience puts up a significant roadblock. While lenders tend to look somewhat favorably at owners who come from the multi-family space, that kind of experience alone won’t cut it when it comes to getting approved.

“They would have to align themselves with someone who’s experienced,” says LaSalla. “You’d have to go in with somebody who has experience on the ownership or the operator side.”

Once a potential investor has aligned himself with the proper owner or operator, the loan approval process becomes relatively conventional: Are the owners well capitalized? What does their REO schedule look like? Of critical importance will be the facility’s debt-service coverage ratio, which must be 1.45 for lenders to be confident in an owner’s ability to cover his obligations in case occupancy drops.

Once an owner has a facility up and running, the risks only multiply. Facilities that lose numerous occupants in a short period of time – the exact situation facing many nursing homes in the U.S. today – may have difficulty securing favorable refinancing terms. Those that are found to be mismanaged or criminally liable for unintended patient outcomes could face more dire consequences.

Fannie Mae, Freddie Mac and HUD, who provide mortgage insurance for such facilities, typically strike non-recourse agreements that limit an owner’s liability if a project fails. But if a borrower gets a nursing home deal funded by a private bank, LaSalla says they will be much more at risk of having their other assets used to make up for any failures they’ve been deemed responsible for.

In light of COVID-19’s ugly, destructive arrival in America’s long-term care homes, owners who have survived with their occupancy rates intact will still be under enormous pressure to upgrade their facilities and invest in both new technology and new staff. Those increased costs will undoubtedly spell the end of some projects, making way for new blood in an industry that will require oceans of it to meet the demand that’s coming in the next decade.

“These people need somewhere to go,” says LaSalla.