The following is part three 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.
In their continuing conversation on the topic, key thought leaders at Monticello have discussed how the coronavirus has impacted the skilled nursing space. In this episode, the pandemic’s effects on asset pricing was the main topic of conversation.
Thomas Lally, co-founder at Monticello, explained that due to the shock coronavirus has caused to the capital markets, some deals might not happen if current cash flows require repricing assets and buyers and sellers can’t come to an agreement. With that said, Mr. Lally also expects opportunities could emerge as overleveraged borrowers and operators are put in tight situations brought on by an unprecedented health risk coupled with a pullback in asset pricing.
Monticello believes one can be bullish on the industry and optimistic about the long term, but in the short to mid-term you might not know where cash flows are going to be. Until you can see occupancy and cash flows normalize, there might be some retractions. Monticello is seeing deals being executed at lower loan-to values with more credit enhancements as people try to navigate uncertainties. Certain things will need to be resolved in order for values to get back to where they once were.
These retractions provide opportunities for those that have remained disciplined and made well-structured loans throughout the market rallies of the past decade. Without any underperforming loans sitting on their balance sheets affecting their thinking, this repricing of assets allows for new opportunities that might not have been attractive at previous values.
Jonathan Litt, co-founder of Monticello explained, “Discipline comes from two things: fear and experience.” Before starting Monticello with Thomas Lally, Jonathan and Alan Litt were nursing home owners and operators. Jonathan relayed how Alan and his experience managing facilities through the swine flu epidemic changed how they operated their facilities and how markets viewed nursing homes. While many operators suffered from the impact it had on their facilities, strong operators were able to adapt and refocus their staff and protocols to limit further outbreaks. In doing so, Jonathan and Alan Litt believe that their experience operating during the swine flu outbreak made them better operators, and they expect the current pandemic to similarly weed out the strong operators from the weak.
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