Episode 06: Valuations Post-COVID – Presented by Senwell Senior Investment Advisors

On this episode of The Investment Opportunity Podcast, we welcome Dan Schneider (Senior Vice President) with the Valuation and Group. The Valuation & Information Group (VIG) provides valuations and appraisal services to healthcare facility operators, lenders and their advisors.

In this episode, we cover the following topics:

1. How COVID has impacted valuations
2. Price concessions due to COVID outbreaks
3. States offering additional reimbursements
4. Offsetting losses
5. Most important factors to consider if thinking about selling

You can contact Dan at dschneider@valinfo.com. To learn more about the Valuation and Information Group, please visit their website: www.valinfo.com.

The Investment Opportunity Podcast is presented by Senwell Senior Investment Advisors, a mergers and acquisitions advisory firm specializing in skilled nursing and seniors housing. The show is hosted by Ben Bohland and Brandon Bohland.

Want to watch the show? Visit our website: www.senwelladvisors.com/podcast.

If you have suggestions on topics or guests that to invite on the show, questions or comments, please contact us. You can get in touch with us the following ways:

• Website: senwelladvisors.com/podcast
• Email: info@senwelladvisors.com
• Linkedin: Senwell Senior Investment Advisors – https://www.linkedin.com/company/26199139
• Facebook: Senwell Senior Investment Advisors – https://www.facebook.com/Senwell-Senior-Investment-Advisors-105891937461351/
• Twitter: @SenwellAdvisors – https://twitter.com/SenwellAdvisors
• Instagram: @SenwellAdvisors – https://www.instagram.com/senwelladvisors/

Contact Senwell Senior Investment Advisors for mergers, acquisitions and dispositions. Senwell specializes in working with owners and operators of skilled nursing (short-term rehabilitation and long-term care) facilities, assisted living and memory care facilities, independent living facilities, continuing care retirement communities and owners of bed licenses in Certificate of Need (CON) states or states with a moratorium on bed licenses.

Thank you for listening to The Investment Opportunity Podcast!

Mr. Schneider has been in the healthcare industry since 1997 and in the appraisal and consulting profession since 1998. His appraisal experience has been concentrated in the valuation of both tangible and intangible assets of various healthcare properties including medical office buildings, assisted living, skilled nursing, congregate and continuing care facilities. His appraisals have been used for financing, litigation, merger and acquisitions and re-capitalization purposes. Mr. Schneider researched various issues related to the senior living industry. His efforts have been concentrated in Medicare’s prospective payment methodology and its effect on skilled nursing facilities. In addition, he has developed numerous financial models for the valuation of healthcare and multifamily properties. Prior to joining the Valuation & Information Group,

Mr. Schneider was employed with several financial service firms as an appraiser specializing in valuations and market research of senior housing and multifamily properties. He was also employed with a regional accounting firm specializing in Medicare auditing and has assisted in auditing hospitals, nursing homes and home health agencies throughout the United States.

Episode 06: Valuations Post-COVID – Presented by Senwell Senior Investment Advisors

Ben: [00:00:00] On this episode of the Investment Opportunity Podcast, we talk with Dan Schneider from the Valuation and Information Group about COVID valuations.

Intro/Outro: [00:00:10] Welcome to the Investment Opportunity podcast. We’ll educate you on the latest investment trends happening in one of the hottest real estate classes, skilled nursing and seniors housing. We’ll point out the risks so you can reap the rewards of investing in this growing and complex industry. And now your hosts, Ben Bohland and Brandon Bohland.

Brandon: [00:00:34] Welcome to the Investment Opportunity podcast presented by Senwell Senior Investment Advisors. I am Brandon Bohland, joined by my co-host, Ben Bohland. We are twin brothers, so if you hear the same voice, we apologize ahead of time. But you can always catch us on video. We have this podcast that you can download anywhere where you listen to your podcast. You can also find the podcast at Senwelladvisers.com Senwell Advisors is a skilled nursing and seniors housing mergers and acquisitions advisory firm. And today we have with us on the show Dan Schneider. Dan is the senior vice president of the Valuation and Information Group. And VIG, or VIG, provides valuations and appraisal services to health care facility operators, lenders, and their advisors. Dan, welcome to the show.

Dan Schneider: [00:01:28] Hi. Thanks for having me.

Ben: [00:01:29] For those of you who can’t see Dan. Dan, grew out a really nice COVID beard. He’s looking fresh. We’d like you to appreciate that. Hey, Dan. For those of those out there that don’t know anything about the valuation and information group, can you, I guess, provide an introduction to us about you and what you’re doing over there?

Dan Schneider: [00:01:55] Yeah, my name is Dan Schneider. I’ve been with Valuation and Information Group since 2006. We’ve been in business for a total of about 21 years. We provide valuation and other advisory services for senior housing, skilled nursing industry. We also provide some publication information. We provide a publication for the skilled nursing industry where we go state by state providing different regulations for skilled nursing facilities, including reimbursement and Medicaid related information. You know, right now with COVID going on, we are researching quite a bit and finding out the different programs in the different states are providing additional funding during this pandemic.

Ben: [00:02:57] Yeah, I’m sure it’s changing on a daily basis to keep up with each state is extremely time consuming, but you’re probably getting a lot of phone calls right now. So when somebody is calling you right now, what’s that the number one question that you’re getting and how are you responding?

Dan Schneider: [00:03:19] It’s probably the number one question we get all the time. What’s the value? As soon as this was declared a pandemic or closely after the NIC conference and in March, we were getting the phone calls. What’s going to happen to valuation? Right. Where is valuation for senior housing and skilled nursing facilities? And, for a couple of weeks, I think, not just from a senior housing standpoint, but a real estate in general. I think the appraisers became therapists for a lot of the lenders out there trying to calm the storm of where valuation going. In terms of that number one question, where is value, we’ve been we try to in terms of appraisals, we’re trying to mimic the market and what the market is doing right now. We’ve been on the phone researching and doing as much as we can, talking to brokers, investors, operators, as many people as we can to get understanding from them what their feeling is. Right now, there’s not a whole lot of transactions going on. There’s some transactions that were there about a year ago or less than a year ago that are closing and getting done right now. But a lot of new transactions are just being put on hold until the dust settles a little bit. So in terms of cap rates, and trying to figure out exactly what the impact to valuation is right now is very difficult.

Brandon: [00:05:03] And I’m sorry to interrupt. But those deals that you are seeing closed, it seems like there hasn’t been any kind of origination of deals over the past few months. But those laggers that maybe they initiated the deal prior to COVID and we’re starting to see those come through. On those are you seeing any price adjustments because of COVID or are you seeing anyone, for example, any sellers give any concessions because maybe their occupancy was lower?

Dan Schneider: [00:05:35] We have heard of price concessions on some deals, and those deals are deals that had COVID outbreaks. But business deals that haven’t had COVID outbreaks, we haven’t seen price concessions. So there are deals getting done that have no price concessions because of the pandemic itself. But those buildings, it did have an outbreak. Yeah, we are seeing some of those be. We negotiated.

Brandon: [00:06:08] And so when you’re I guess when you’re evaluating deals that are coming to you and you have to sit there and kind of stare at. I would imagine it’s almost a not necessarily a blank piece of paper, but this is new territory for everyone. So what are some new factors that you’re looking at when you’re going through an appraisal, whether that be short term occupancy issues or any kind of long term physical plant issues where you might have seen semiprivate could have been OK in some markets and it may not necessarily be OK in other markets going forward. What are you seeing there?

Dan Schneider: [00:06:47] Right. And how we’re dealing with it internally in terms of valuation. I mean, right now, there’s no evidence that, you know, cap rates have changed in valuation. Methodologies have changed for senior housing or skilled nursing again, there hasn’t there hasn’t been any transactions to really support any kind of evidence of changing cap rates in terms of the skilled nursing industry. There are.

Dan Schneider: [00:07:19] NOI disruptions in terms of increased hazard pay, increased PPE cost and other related costs. But the federal government has put a lot of different programs, including Cares Act and several other programs that try to offset some of those increased expenses and disruption to the skilled nursing facilities. Going back to the appraisal methodology, I’d like to remind everybody is that valuation, the definition of value is future economic benefits. While this is a disruption in the business, we do expect this to stabilize at some point. The federal government seems to be providing the funding for this disruption in business.

Brandon: [00:08:09] So even though I guess what you’re saying is we’re seeing higher expenses be offset by maybe some one time stipends funded by the federal government. And so I guess the other question is, are those stipends enough to supplement the nursing home industry, the skilled nursing industry as a whole as we get through this?

Dan Schneider: [00:08:36] I think it’s going to overcompensate for certain facilities and it’s going to undercut the compensate for other facilities. I mean, the facilities in the Northeast I think were unfairly hit.

Dan Schneider: [00:08:49] In terms of the pandemic, so we’re seeing facilities in Northeast with significant cases of COVID ban of admissions significant mortality rates in those facilities are definitely gonna be more effected. And maybe those programs the federal and state programs to help offset those losses.

Dan Schneider: [00:09:14] Aren’t going to fully cover those.

Dan Schneider: [00:09:15] But that disruption in business. But there’s other facilities and states that haven’t been as affected like Maine or some Midwest states that haven’t been as affected as the Northeast. And some of these programs may even over compensate some of those facilities as well.

Ben: [00:09:42] Hey, Dan, you mentioned you have heard of people giving concessions if they’ve been COVID positive patients within the facility. Let’s just if we were to walk through an example, let’s just say there’s an owner operator, there is an outbreak in their facility and they were possibly thinking about taking their facility under the market. Do they have anything to be afraid of moving forward in terms of pricing? Because they had a positive COVID patient or possibly multiple patients moving forward on that side.

Dan Schneider: [00:10:20] That’s actually a really good question. I think most of the brokers would tell that seller hold on. It’s let the dust settle a bit. Don’t take a big price decrease today.

Dan Schneider: [00:10:32] lets wait a few months. And, as states reopen, especially the summer, as we’re seeing a lot of stay at home order is being lifted and states getting back to normal business or a different kind of business.

Dan Schneider: [00:10:50] I think as the dust settles here, the brokers are going to tell them wait a couple of months before they take it to market.

Ben: [00:10:56] Yes. And that, I guess, moving forward, too, I think. I think the building layout. Plays a huge factor in terms of the marketing aspect. And as well as especially in skilled, you have a lot of semiprivate rooms compared to a private room that’s obviously more desirable, especially given this market. So did you do the do the private rooms have, I guess. Do they have a higher value today than what they did yesterday?

Dan Schneider: [00:11:31] I mean, that’s hard to say, and I don’t know if there’s enough market evidence for that. I think from the start of the pandemic in March till now, the industry and operators have learned a lot in how to contain it, how to control it and how to how to reduce it even Genesis on their earnings call last week discussed they’re seeing a flattening in their buildings and in actually the number of positive tested patients and staff members are declining. So I think the industry has learned a lot and that’s going to help stabilize the industry as well in terms of what we’re talking about as far as pricing intended purpose, kind of probably saying, hold on, don’t take this big price cut today. Just wait a couple of months about it. Settle down a little bit. In terms of private semiprivate, I think it’s too early to say whether that’s going to be a big impact going forward. On the scale side. It’s still, you know, 70, 80 percent of most nursing homes are funded by Medicaid, the state Medicaid programs.

Dan Schneider: [00:12:43] And until they’re willing to provide funding for private units, I think you’re still going to see an overwhelming portion of semiprivate units in the market.

Ben: [00:13:04] Yeah, that’s a really good point.

Ben: [00:13:08] Obviously, every state’s going to be different here. So. On the revenue side. What are some states that you’re hearing about that are doing a really good job with additional reimbursements or grants, and what are some states that have been behind the ball?

Dan Schneider: [00:13:27] I don’t know if all the states, because we are working in a bunch of different states right now, we’re kind of taken as states that we’re working on. But Connecticut, which I know in terms of lending has always been with us. The states that everybody is kind of fearful of because everybody’s worried about Connecticut we’re trying to reduce the number of skilled nursing beds all the time. But they’ve increased funding on the Medicaid rate metric 15 percent to help offset some of those losses.

Dan Schneider: [00:14:06] I know it’s been extended to June 30th. I think they’re trying to extend that through the summertime and September 30th.

Dan Schneider: [00:14:13] Arkansas put out a program to help offset this disruption as well. Their funding program is more to provide additional payments to the staff. I’m not sure how it’s structured, but it’s structured to help pay for increased cost, hazard pay for the staff.

Dan Schneider: [00:14:42] So we are seeing a number of states trying to assist the skilled nursing facilities and even Maine, Maine’s offering additional payments, even though they don’t have a whole lot of cases out there to both skilled nursing and to Medicaid waiver assisted living facilities.

Brandon: [00:15:05] So we’re seeing a lot of states like you just mentioned, but it sounds like a lot of those reimbursements are tied directly to increased expenses. So things like increased labor costs, whether that be through a I’m sorry, over time, increased agency cost or any kind of hazard pay or things like that. We’re also seeing increased PPE expenses. Have you seen any state come out and say because to what Ben alluded to before, we are seeing a lot of nursing home operators that need to convert from semiprivate to private. And sometimes that includes just dealing with the existing real estate asset that you have. And so you’d mentioned that you guys have been putting out a report that specializes in kind of taking a look at what each state is doing different and maybe looking at those increased reimbursements. But is anyone really factoring in the decline in occupancy? So if you have 100 bed nursing home, that’s all semiprivate. You now need to figure out a way to if you are going to keep COVID positive patients in that nursing home, you need to figure out a way to manage and care for these patients and somewhat isolate as best you can. Are you seeing any states really take that into account or is it just more directly related to the expense?

Dan Schneider: [00:16:37] Well, what if you are caring for patients with COVID, you can receive Medicare reimbursement for those. If you get tested positive for COVID you get increased funding from that. Yeah. We are also seeing that facilities take a wing or a unit and convert them to all private units. And if there are many residents still they’re putting them into quarantine for 14 days before they’re moved into the general population. So that’s affecting occupancies and facilities as well as short term surgeries at hospitals or. You know, I haven’t been going on for the last couple of months, and that’s affecting the activities in skilled nursing facilities so that, you know, we are seeing, you know, drops in occupancy. I think, you know, Genesis in their earnings reported that, you know, they’re seeing from decline from 87, 88 percent to around 76 percent. And they’re in their portfolio. But again, they’re saying it’s flat. You know, the curve is flattening and they’re hopeful that, you know, with short term surgeries and that the ban of emissions and, you know, a bunch of their facilities, that they’re hoping that, you know, during the summer months, they start increasing those occupancies once again. But I think to offset some of those losses the state offering increased funding like Connecticut, 15 percent and the Medicaid program, plus the other federal programs that are out there that are helping is offsetting some of those losses on occupancy and the increased expenses with PPE and wages. Again, it’s hard for us to tell whether that’s going to completely cover everything.

Dan Schneider: [00:18:43] But, you know.

Dan Schneider: [00:18:47] I think it’s one of those things we’ll have to wait and see what happens.

Ben: [00:18:57] Yeah, so, Dan, if I’m hearing you, it sounds like this is not a long term issue. It’s more of a short term.

Ben: [00:19:09] I guess. It’s a short term.

Dan Schneider: [00:19:13] Disruption in business. I think it’s about probably a good way to say is this is disruption in business. It’s causing losses in NOI.

Dan Schneider: [00:19:27] But to offset some of those losses in the skilled side, there’s been several federal programs and state programs to try to offset some of those losses. In terms of value, I mean, the best way we can look at value is.

Dan Schneider: [00:19:43] What is the stabilized NOI and try to figure out what the short term disruption of expenses are and subtract that from this more restabilized, NOI stabilized value.

Brandon: [00:19:59] And that’s the message, as Ben and I kind of go through our day to day is the message we get to sellers is we echo a lot of what you just said is that we let sellers know to try to hang on, if you can. But I guess one if you had one bottom line point to make in holding value, I have my opinion and I’m sure everyone has their own, and it’s probably close to the same thing. But if you were to talk to a seller and say if you have to sell this is the thing you should pay most attention to today.

Dan Schneider: [00:20:29] I think it depends on whether you’re a skilled nursing operator or or assisted living or senior housing operator on the skilled side. It’s you’re still looking at a skilled need, a skilled need driven basis. There’s still a need.

Dan Schneider: [00:20:54] Even though there’s been a disruption. Your occupancy may be down. You may have some COVID long term.

Dan Schneider: [00:21:04] Operation shouldn’t stabilize back to pre-COVID. And, the landscape may change because of COVID how the government’s oversight of skilled nursing facilities, but also some of the reimbursements may have to change to in terms of Medicaid and Medicare and funding for these types of facilities. So while there may be increased expenses, there probably will be increased funding to deal with a lot of these issues going forward. On the senior housing side, it’s mainly private pay. So it’s a lot different. They’re not getting the same amount of additional funding from the federal government. It’s mainly that’s been for Medicare facilities, except Medicare. So they’re not getting the same type and they are dealing with decreased occupancy levels. And many of them don’t qualify for the Payroll Protection Act. because they are too large for that. So with skill, with assisted living memory care, it’s still a need driven business. So I expect that to stabilize again especially with pent-Up demand.

Dan Schneider: [00:22:24] And I think there’s a lot of people that either took their parent out of an assisted living facility or has been caring for that. Seeing their senior parent at home during this pandemic and realizing that they don’t have are not capable of really taking care of that other parent.

Dan Schneider: [00:22:50] And as the states start opening up and the facilities are allowed to take facility patients again or residents again. I think there’s some pent up demand that will go back to increased some of these offices, that some of these facilities, it will take some time. And that’s the biggest question. How long will it take to stabilize these facilities once we start to reopen?

Ben: [00:23:16] Time will tell. Yeah, yeah. The situation you just described, my next door neighbor actually did that same exact thing. He pulled his 96 year old father out of an assisted living facility and he’s living with him right now. So I just asked him yesterday when he plans on what the timeline looks like in terms of how long he’s going to be living with them? He’s not sure. I think just exactly what you just said. Time will tell. We’re not sure how this is going to play out.

Dan Schneider: [00:23:53] It’s hard on the senior to as being I know from personal experience, too, like you have my wife’s grandfather was all set to go into a senior housing project. They had to hold deposit down.

Dan Schneider: [00:24:05] And then there was a stay at home.

Dan Schneider: [00:24:10] Orders were issued. And why while they would still accept him, the family knew that they wouldn’t be able to visit him and help him while he was there. So they decided to hold him back and not put him in. But because of the stay at home order and everything else he sees only a couple of rooms today and a couple of people a day staying with his son. So it’s not good for the senior either because they’re not getting the interaction with other people. He’s very limited to where he can go and what he can do. So once they do open up and there’s, he can return to a facility. And, it will allow visitors. I think that’s when you’re going to see.

Dan Schneider: [00:25:05] You know, that pent up demand start returning back to the senior housing?

Ben: [00:25:11] I tend to agree with you. It’s going to come to a head. It’s just a matter of when. And I think people will eventually get comfortable with this situation again. Dan, last question. Are you going to keep the beard?

Dan Schneider: [00:25:27] Coming in a little grayer and I thought it would.

Brandon: [00:25:28] So hopefully we can go to a conference soon and see it live and in person. Hopefully that’s the case.

Dan Schneider: [00:25:35] It wasn’t going to shave it off my son. My son told me I looked a lot better with it. So I had to grow it back.

Ben: [00:25:51] Well, hey, Dan, thank you so much for joining us and sharing your knowledge with our listeners. We appreciate it. And what’s the best way for people to get a hold of you?

[00:26:02] The best way to get a hold of me is email my email’s, DSchnieder@valinfo.com. You can also I am in the office daily now, so you can call me at the office here at 610-566-3526.

Ben: [00:26:21] Great. Dan thank you so much for joining us. We appreciate it.

Dan Schneider: [00:26:26] Yes. Thank you, gentlemen. I appreciate being a part of this.

Ben: [00:26:34] Welcome to the What You Got segment of the show. Today’s offering is located in the Toledo, Ohio market, which is where we are located. This facility is a skilled nursing facility that is owned and operated by a non-profit. It’s currently losing quite a bit of money, but we do see a path to profitability and we can lay that all out in the OM if you are interested. There is roughly about 40 beds or so. But has the opportunity to add beds to the current facility, given that they all are private rooms with Jack and Jill bathroom. So if you are interested in this opportunity, feel free to contact me at Ben@senwelladvisors.com.

Intro/Outro: [00:27:20] Thank you for listening to the Investment Opportunity podcast. If you want to hear more about investing in the skilled nursing and seniors housing industry, head to our Web site at www.senwelladvisors.com/podcast.