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Disruption in a Marketplace Gets Rid of Hubris

Date: Dec 10, 2020 @ 07:00 AM
Filed Under: Skilled Nursing

The following article is part two in a series in which key thought leaders at MONTICELLOAM, LLC (“Monticello”) discuss their stance on the nursing home industry. Please refer to important disclosures at the end of this article.

As part of a continuing conversation on the topic, key thought leaders at Monticello discuss how they expect the continuing issues brought on by the coronavirus will impact the skilled nursing sector.

The business of skilled nursing is highly complex due to the varied government payor sources, regulations, and most importantly, the patients’ individual medical needs. While demand for the product may be there on a macro scale, picking the right borrowers and operators requires a deep understanding of how these assets operate, which becomes even more apparent during a pandemic.

“When times are good, people come out to the periphery where Monticello is because they think they can make a quick profit, but now they’re getting lost in the complexities of skilled nursing,” said Thomas Lally, co-founder of Monticello.

Alan Litt, co-founder of Monticello, shared that based on his recent experience, “Monticello’s thesis is that we’re going to see a large number of investors and lenders leaving the skilled nursing space. It’s too scary for people who don’t have the discipline.”

Matthew Downs went on to explain Monticello’s bullish stance on skilled nursing from his alternate perspective as the Managing Director for commercial real estate at Monticello. “Skilled nursing has barriers to entry. There are finite owner-operators that know what they are doing in upturns and downturns. In CRE, everyone thinks they’re a developer, but that’s just not the case.”

Mr. Litt and Mr. Lally shared that in talking to operators, they have found that COVID-19 has presented unique problems in getting adequate staffing and finding the right occupancy levels in a building to prevent further outbreaks. On the expense side, they are seeing increased nursing and maintenance expenses from operators quarantining patients and increasing cleaning and disinfecting initiatives to prevent future outbreaks. They’re also seeing added payroll expenses for increased sick pay for staff that has contracted COVID-19 or increased rates paid to nurses to compete with hospitals that are vying for the same limited number of nurses in an area. On the revenue side, facilities that were once at near full capacity are trying to keep occupancy low in order to provide space for quarantine wings and to allow for more private rooms.
Mr. Lally explained the importance of picking the right operators that understand the complexities of skilled nursing and can captain a facility through uncertainty. The key to strong underwriting can be summed up through the lens of sage advice he heard early in his career: “You can make a bad loan to a good borrower, and you’ll be okay, but you can make a good loan to a bad borrower, and you’ll be in trouble.” In Mr. Lally’s view, COVID-19 has made it apparent who the good and bad borrowers are.

Important Disclosures:

The information set forth herein and any opinions contained herein do not constitute an endorsement, implied or otherwise, of any securities, nor does it constitute an endorsement with respect to any investment area of vehicle.  This material is being provided to you for information purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any security, financial product or instrument discussed, or a representation that any security, financial product, or instrument discussed is suitable for you. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice or investment recommendations.  Investors are urged to speak with their own tax or legal advisers before entering into any investments.  This material is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Opinions, estimates and projections in this report constitute the current judgment of Monticello as of the date of this report and are subject to change without notice.  Monticello has no obligation to update, modify or amend this report or otherwise notify a reader hereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.  

Readers may also read Part 1 in this series: Need Versus Want

This article series was authored by various thought leaders from the MONTICELLOAM, LLC team. MONTICELLOAM, LLC is a specialized private real estate and asset-based lender, servicer and manager providing innovative capital solutions.
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