Exploring New SNF Markets? Here Are 3 Things to Know
Industry insiders already know that skilled nursing facilities operate under highly regulated business conditions. While federal rules impact the SNF business, individual state requirements and practices are also highly influential on business practices. Evaluating investment opportunities — particularly in an unfamiliar market — requires a deep dive into local rules.
“As investors, we talk to state-level experts to get a flavor for which operators in the region provide the best care for residents,” says Frank Small, head of Greystone Healthcare Investments, which acquires the real estate associated with SNFs utilizing NNN-lease financing structures.
While investors should consider many factors before committing funds to skilled nursing investments, here are three prime areas on which to focus:
1. Regulatory Environment
While every state regulates skilled nursing facilities, some are more aggressive than others when it comes to applying those regulations, said Small. Facility surveys, which are an annual requirement by the federal government, can be a great source of information about SNF operators in each state, he said.
States have different rules about what is required to open a new skilled nursing facility, said Small. Some 38 states and the District of Columbia require a “certificate of need” — meaning the number of skilled nursing beds in the entire state or a particular market is restricted.
“States that require a certificate of need or restrict supply in other ways, such as a moratorium on building, tend to have considerably higher statewide occupancy rates,” said Small. “For example, Maryland is a certificate of need state and occupancy rates there are in the 90 percent range, compared to the mid-70 percent range in Texas, which doesn’t require a certificate of need.”
2. Demand and Supply Metrics
While statewide supply constraints can impact occupancy, “microlevels of demand” around specific assets should also be considered by investors.
“We go Zip code by Zip code around local hospitals to see if they’re well-run and well-occupied or if they have specialties such as traumatic brain injuries or stroke that require additional post-acute care, which can increase demand for a skilled nursing facility,” Small said.
Demographics in a state, such as the presence of a large population of older residents who may need additional care, can also influence the viability of a new investment in a skilled nursing facility. Sometimes, though, a strong local pocket of demand can override statewide demographics, according to Small.
“Even states that aren’t necessarily booming as a retiree destination can have a strong market for skilled nursing if local residents don’t tend to move away or because of limited supply,” he said.
3. Operator Environment
Among the most important elements to consider prior to an SNF investment are the state Medicare reimbursement rate, the local employment rate, any statewide minimum wage and the presence of unions.
“All of those factors can influence the skilled nursing facility market,” Small said. “Take note of states with a less competitive labor market or be mindful of where the Medicare reimbursement rate is a little lower.”
“We track any significant changes in reimbursements and try to anticipate which way the wind is blowing in each state to evaluate how the operating environment might change,” he said.
Looking at a mix of state and local metrics will provide a bigger picture around any potential investment in a skilled nursing facility.