How do you know as an operator, or as a lender, when to sign on the dotted line when it comes to acquiring or financing distressed properties, or when to back off and walk away? It’s the eternal question of opportunity vs. risk. What tips the scales in either direction?

That was one premise for a high-spirited session Tuesday at the LTC 100 Conference in Scottsdale, Ariz., where Steven Littlehale moderated a discussion with panelists Benjamin Kurland, CEO, Allaire Health Services, and James O’Brien, senior vice president, The Huntington National Bank.

Littlehale, chief innovation officer, Zimmet Healthcare Services Group, said the discussion would focus on clinical and regulatory aspects of buying distressed assets in putting out the first question about what concerns the provider-buyer most about a troubled facility.

Kurland said it is not necessarily the financials of the asset that will scare off his company, but rather the staffing and other fundamentals about providing care that “will set up this building for failure no matter how good your team is.”

The barometer for Allaire before it acquires a distressed building is whether the turnaround can be achieved within six months, and there are sometimes certain factors that may make that very tough to do.

“There are buildings that historically have changed hands. And you look at why they changed hands, and why have they struggled? So, if it's in an area which is over-bedded, it can be a tough draw. It could be the physical plant, where you're going to have things that are going wrong constantly. Or the patient population is such where it's heavily behavioral … So, these are things that are going to be impossible or extremely hard [to rectify],” he said.

Kurland stressed that staffing is a key area to consider when doing distressed deals, and even though the process of attracting employees is getting better when compared to a few years ago, there is tension on filling slots in certain locales, notably in rural areas.

“We have no problem taking over a rural building if it's stable,” but there can be concerns when the staff has to travel long distances to get to work, he said.

Deal Stoppers?

Littlehale asked about no-go areas for Kurland. The first was whether abuse tags for a distressed property would be a deal stopper. Kurland said no, and that deeper study has to be done in that specific area to judge if such tags are the norm for the regulatory program in the state where the building is or a consistent problem for just that building.

He said the general issue of how buildings are surveyed, put on the SFF candidate list, come on and off the SFF list …can be explained in part by the way in which state regulators operate. “There are some states that are tough,” Kurland said, but that means all the facilities in that geography are in the same boat.

The Banker’s View

O’Brien said when it comes to approving loans for distressed property deals, one of the leading factors is the Five-Star Rating of the building, and the specifics in the documentation.

“It's the simplest thing for people to try to understand,” he said, even if Five-Star is not the perfect system. On applications for SFF buildings, O’Brien said the bank will do a deep dive into the data and an assessment of say how long it would take to make a one-star into a two-star facility.

“We'll look at not only the subject that that we're financing, but kind of a portfolio of what the operator as a whole, then sort of bring it all together. This is the history, this is what they have done, this is what they're doing,” he said.

One-Star?

Personal relationships are the foundational factor, O’Brien noted. When asked if the bank would finance a one-star, he said “yes” based on the relationship with the sponsor, citing a recent example.

“It was a situation where we could dive deep into the data of a local market and see that pretty much everything around it is a one-star. And we know that this type of area is one where it's more urban, where it may be more difficult to staff and the type of cases that they're going to get may be more difficult to deal with in the type of patients that they serve,” O’Brien said.

“So, it's something where it was explainable, and also the sponsor was one that we are used to doing business with and done business with for years and years and we know that if there's a problem, they're going to do what it takes to make it right and stand behind it.”

Comments or questions? Contact Patrick Connole at pconnole@parkplacelive.com.