The COVID era is drawing to a close, and as it does, the extraordinary measures that were put in place to support the economy and the healthcare industry in particular are winding down. Interest rates have risen sharply, but not fast enough to head off a bolt of inflation, especially wage inflation. For skilled nursing providers in particular, higher costs are impacting bottom lines and the conversation around financing has changed.
When navigating these challenging waters, it helps to understand what lenders are thinking and looking for in their industry deals. It’s a valuable step in building a collaboration with your financing partners. It’s times like these when a great relationship with your lender can be most helpful.
What has changed?
Many skilled nursing care providers and facilities are finding that the lending environment has retrenched or at least become more demanding, which is not that surprising. After years of economic stimulus to combat COVID disruptions, the economy has heated up and inflation is rising.
The Federal Reserve has “taken away the punch bowl” by significantly raising rates, but it will take some time for inflation to ease and interest rates to come back down. Within the skilled nursing industry, the result is a rising cost structure. Meanwhile, revenue trends are lagging. While Medicare and Medicaid has been lifting reimbursements to address rising costs, the pace of those increases has not always kept up.
In a report released earlier this year, consultant CliftonLarsonAllen captured the challenge succinctly.
- On average, nurses have seen a 17.3% increase in their hourly wages since 2019 and contract nurses from staffing agencies are even more expensive
- In 2023, increases in occupancy and enhanced Medicaid rates in some states may help improve median operating margins, but skilled nursing facilities may barely break even at 0.6%
In their words, “The added pressures of the COVID-19 pandemic have resulted in ongoing, increased costs and declines in occupancy.” The government’s public health emergency funds “have been exhausted by most providers and are no longer available. At the same time, workforce availability and wages, as well as general inflation, have continued to escalate.”1
The bottom line is that margins are at risk, while borrowing costs are going up.
Slower turnarounds require due diligence on both sides
From a lender’s perspective, it’s prudent to look carefully at the balance sheet at a time when margins are declining. Financing partners are becoming more rigorous and results-oriented, particularly in turnaround situations.
In the super-low interest rate climate of a few years ago, targeted financing could help a skilled nursing facility return to profitability very quickly. Money was cheap and costs were low. But in today’s environment, turnarounds are likely to take longer and lenders need to be prepared for longer-term relationships with borrowers and higher overall risks. Patient capital requires a realistic approach. Their aim is to determine the right levels of capital, liquidity and reserves needed to reach break-even.
In most cases, these new financial realities mean that more capital may be required from borrowers and more liquidity support may be needed from lenders. Revenue projections will be examined closely. Each borrower’s specific rate will reflect the risk in their situation, as well as their capital availability.
But the due diligence isn’t necessarily all one-sided. In a higher rate environment, skilled nursing operators need to consider closely how much they are willing to pay to complete a deal and which lenders can offer them the best terms, as well as the long-term support needed to achieve the system’s goals.
Two heads are better than one
While the loan process is more demanding, it doesn’t mean that funding isn’t available. Lenders aren’t so much stepping away as they are stepping more carefully. This is one reason why we advocate that borrowers put focus on building constructive, long-term relationships with their lenders.
The value of those relationships becomes most evident at times like these when risks are higher and lenders need to be prepared for longer commitments with borrowers. By engaging with your lender, you can:
- Examine the fundamentals of your business together and determine what financing your lender can support
- Evaluate your projections to ensure they are suitable for the type of financing you seek
- Think creatively about affordable financing options that will address your priorities
In our experience, the best deals are those built between lenders and borrowers with a strong base of trust. It’s always worth your time to reach out to your lenders and loop them in on your operational realities as well as your financing goals.
