October 8, 2019

Inside BM Eagle’s Skilled Nursing Strategy: Strong Operating Partners, Flexible Dealmaking

BM Eagle Holdings has emerged as a major owner of skilled nursing assets in the United States, picking off a pair of sizable portfolio deals in the last two years — with a specific focus on finding the right operator in the right market.

“In our business, what we’re looking for is investing in assets at the cross-section of an operating business and real estate,” Elliott Mandelbaum, managing partner at the firm, told Skilled Nursing News during an interview at the National Investment Center for Seniors Housing & Care’s (NIC) annual conference in Chicago last month.

So far, BM Eagle — a real-estate focused investment management firm whose investors include BlueMountain Capital and a prominent New York City-based family office — has found that intersection in multiple high-profile deals. Back in 2017, the firm made a serious splash in the post-acute and long-term care world when it emerged as the buyer in Kindred Healthcare’s $700 million deal to offload all of its standalone skilled nursing facilities.

Last December, the company picked up Sabra Health Care REIT’s (Nasdaq: SBRA) portfolio of properties operated by Senior Care Centers, the troubled Dallas-based operator that filed for Chapter 11 bankruptcy protection that same month, in a deal valued at around $282 million.

When approaching sellers of such large portfolios, Mandelbaum said, BM Eagle pitches its flexibility to maintain consistent operations and strike unique deals. The firm has its own in-house operating partner, Regency Integrated Healthcare Services, which currently runs about 65 nursing homes in Texas; Senior Care Centers had a significant presence in the Lone Star State, though the company can fill in gaps elsewhere when necessary, Mandelbaum said.

“They’ve operated in most of the states we traffic in, and so can step in for us — whether it’s pre-transaction closing, or whether there’s issues with certain deals,” he said.

The company has also explored hybrid solutions when looking to strategically trim its portfolio in certain markets, as it has since the Kindred transaction closed; for instance, BM Eagle offloaded former Kindred buildings to CareTrust REIT (Nasdaq: CTRE) in an ongoing partnership.

Mandelbaum also pointed to “creative” relationships with operators. One of those partnerships, with an unnamed operator in California, involved a kind of multi-step solution: Because the operator was also interested in real estate ownership, BM Eagle sold three of six facilities to the provider while continuing to lease the remaining three, with the potential for additional sales down the road when the investment player intends to exit.

“It’s all about thinking creatively and strategically on the portfolio,” he said.

Private investment interest in the skilled nursing space has intensified in recent years, driven by two parallel trends: Persistent Wall Street aversion to perceived headline and reimbursement risk, and growing investor awareness in the eventual long-term care needs of an aging baby boomer population.

In addition, some operators have noted the additional flexibility that private equity ownership can provide. Whereas a publicly owned SNF company could take months to run a new strategy up and down the corporate flagpole, private investors can quickly deploy capital to help facilities adapt to local market changes — while also not having to worry about turning an immediate quarterly profit to satisfy shareholders and analysts.

Mandelbaum acknowledged the regulatory and reputational risks inherent in skilled nursing investments in his interview with SNN — pitfalls that drive BM Eagle’s search for strong operating partners.

“There’s more to it than just the bottom line,” he said. “We’re not manufacturing paper, where it’s a commodity. We’re dealing with people’s lives, who don’t have any other advocates for them.”

In fact, that need for high-quality operators actually makes the skilled nursing industry an attractive space for investment, in Mandelbaum’s view: Unlike other real estate assets such as office buildings, which will typically generate returns within a certain fixed range in a given market, having strong SNF real estate paired with a solid operator brings the potential for significant upside over other local competitors.

“This is an operating business,” he said. “There happens to be a real estate component.”

That focus on quality operators can also help investors weather the ongoing shift to the Patient-Driven Payment Model (PDPM), which took effect last week. Because the new Medicare reimbursement system for nursing homes was designed to be revenue-neutral, any revenue winners must be offset by reimbursement losers, and those that have prepared — and invested accordingly — likely have a better shot at success.

“Everyone I speak to says: We’ve done the math. We’ve done these models. We have these algorithms, and it’s all going to be good,” he said. “And it just can’t all be good.”