The landscape of health care financing, particularly for skilled nursing facilities, has been undergoing significant changes in recent years, but growth prospects have improved and approvals of government-backed loans are expected to increase in the coming months.
The Department of Housing and Urban Development (HUD) offers lower-risk loans in the skilled nursing sector, requiring facilities to meet certain standards and striking a delicate balance between regulatory changes, financial stability and the need for quality care. One of the key indicators of the industry’s financial health is HUD loan volume, which is expected to increase in 2024. Experts say all this means operators are coping well with current challenges and the industry appears poised for growth and opportunity.
Steven W. Kennedy Jr., executive managing director at VIUM Capital, and Brad Annis, director of real estate finance at Walker & Dunlop, explain the current state of the HUD lending industry and its impact on skilled nursing staff.
Medicaid Rates and Financial Stability
Kennedy explained that Medicaid rates, which are set at the state level, are constantly changing based on costs incurred by nursing homes. Over the past six to 12 months, states have re-evaluated these costs, taking into account factors such as increased expenses during the COVID-19 pandemic, labor inflation and rising interest rates. The Medicaid rate adjustment, while not generating excess cash flow, is intended to make nursing home operations financially viable.
He said the increased financial stability brought about by these rate changes could make the nursing home business more attractive for M&A deals or permanent financing.
In addition, M&A activity over the next 12 to 18 months may also be driven by changes in interest rates, Kennedy said.
In addition, HUD Senior Living Financing Program loan volume also provides a measure of a facility’s financial health. He expects volumes to increase in fiscal 2024, potentially reaching pre-pandemic levels, which could indicate improved financial stability for nursing homes.
“Over the past two HUD fiscal years, transaction volume for HUD 232 health care plans has been relatively stable, with annual transaction volume of approximately $2.9 billion,” he said. “Last year, HUD actually took out more new health care loans than the year before, as rising interest rates sharply reduced the number of refinancings of existing HUD loans.”
However, these changes have wider implications. Annis stressed that the increased financial stability brought about by these rate adjustments could make the nursing home business more attractive for M&A transactions or permanent financing.
HUD loans could reach pre-pandemic levels. This forecast is based on factors such as Medicaid rate rescaling and a relative lack of alternative permanent financing options.
Annis provides additional insight into the current state of HUD lending. He noted that despite challenges such as rising interest rates, state reimbursement and staffing issues, the HUD 232 loan program continues to be an important source for the skilled nursing industry. The number of applications submitted has increased, and Annis expects HUD applications to continue to grow in fiscal year 2024.
“As of January 24, 2024, the HUD queue has increased. The number of refinance loan applications in the queue is 70,” Annis said.
HUD Loan Process and Timeline
Both Kennedy and Annis acknowledged that the HUD loan process takes time and borrowers should plan for that. The process from participation to loan closing typically takes approximately 8 to 9 months. Timelines include third-party report completion, application completion and submission, queue waiting periods, and HUD review, approval, and loan closing.
“Times can be significantly impacted based on HUD queues, facility performance, borrower responsiveness and HUD review during the application process,” Annis said.
While the industry is still awaiting approval of the updated HUD Manual, the outlook for HUD lending to skilled nursing facilities appears to be positive. Both Kennedy and Annis expect transaction volume and activity to increase in the coming years, driven by factors such as Medicaid rate adjustment benchmarks and the need for financial stability following the COVID-19 pandemic.
“I think the number of HUD programs is a good barometer of the relative financial health of skilled nursing facilities,” Kennedy said. “Again, you have to be able to pay your bills in order to repay the HUD debt because it’s not a high-risk lender. HUD Suitable for relatively stable projects.”