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 What To Look For In A Turnaround Property

Failure can be turned into success if one finds a property that’s the perfect fit.

 

Turnaround properties in the seniors housing market can offer plenty of opportunities for success. After all, the facility is already in place and has an existing customer base and staff. In some cases, an infusion of funds and more efficient business practices could lead to profits relatively quickly. But, in other cases, low-performing properties may have serious, underlying issues that could be difficult to overcome.
Success is not just about investing in a turnaround and pulling a profit; it’s also about avoiding a bad investment in the first place. Here are some things to keep an eye on when getting involved in a turnaround property.

Assess Expertise

The most important thing for borrowers to understand is their own expertise and strengths. Turning around properties isn’t a hobby, and it isn’t easy. If an investor has a particular expertise and can apply this skill set to a struggling business, he or she often can turn failure into success.

Expertise in the seniors housing market comes in many forms. Some investors are well-versed in creating new clinical programs, or are experts in the overall operations of such facilities. Others may have access to capital to invest in the aging infrastructure of a property. Whatever one’s expertise is, know it, and keep it front and center when evaluating the investment.

Identify The Problem, Check Compatibility

Properties in need of a turnaround are faltering for reasons that can vary dramatically from property to property. A facility may suffer from a bad reputation, or it may be outdated and seem unappealing. Other properties may be too expensive or in an undesirable location. In some cases, the property could be inefficiently managed.

Banks will conduct extensive due diligence on the target property before providing funding. But smart borrowers should do their own due diligence and research to identify specifically why a property needs a turnaround.

Once a property’s strengths and weaknesses have been evaluated, an honest assessment is needed to see if the property and investor make a match.

For example, if an investor is experienced and highly knowledgeable about the latest clinical programs, a property that’s poorly managed or has a bad clinical reputation might be a good fit if the investor is able to partner with local hospital systems or physicians and offer new and innovative therapy programs. However, if a facility has a lot of deferred maintenance or is in a state of disrepair, then bringing therapies and services without an infusion of capital to upgrade the infrastructure may not be a good match.
Remember: Discovering that an investment is not the right one is, in and of itself, a success.

Present The Plan

As previously noted, good lenders will do their own due diligence. However, even if research indicates the investor’s target has good potential, lenders will want to see that the borrower has done his or her homework as well with a coherent, thorough presentation.

It’s important to work with a lender and show how one plans to get from point A to point B. Tell the lender about your expertise. Tell them what you believe is currently impeding the property’s success. Explain how your company is uniquely equipped to address those current impediments. And, finally, lay out your strategy for making the property a success.

Red Flags

Many turnaround properties can be made into viable, successful facilities by the right investor with the right plan. However, some red flags make lenders (and perhaps even investors) think twice about investing:

■ Major deferred maintenance. Construction time and costs can be notoriously difficult to project. Keep in mind that construction will often disrupt normal operations. For instance, if a wing needs to be rebuilt, then all of the patients in that wing will need to be relocated or discharged. This could result in added costs and a loss of revenue. In order to succeed, make sure that the company has capital set aside for those leaner cash flow times created by the construction schedule. 

■ A poor clinical reputation. Unlike many investment factors, reputation cannot be easily measured, predicted, or controlled.

Some low-performing properties suffer from bad reputations that may have been caused by poor quality of services over a long period of time. Whatever the cause, once a facility has developed a bad reputation it can be extremely difficult to change the opinions of prospective clients. Rebranding efforts, such as name and logo changes, may be ineffective.

Most business is generated locally for health care facilities such as these, and a name change, new tagline or logo, or a fresh coat of paint won’t make prospective clients forget a bad reputation. Partner up with local hospital systems and prominent physicians in the local market before undertaking a turnaround of this kind.

■ Valuation exceeds cost of a new build. The cost of a new build is not a complicated formula, but it is a critically important one. There is rarely ever a reason to buy a turnaround property at a valuation that would actually exceed the cost of building a new facility (provided land is available and a borrower doesn’t need a Certificate of Need for the project). Most patients will opt for a newer facility over an older one.

An investor who pays more for an existing facility than the cost of a new build will have to demand higher prices than the market is willing to pay. If an investor is offering something unique in the marketplace such as urban location or amenities that would be hard to duplicate, then it might be a good fit.

There are certainly exceptions to every rule, and many turnaround properties can be revived and made into healthy businesses. Success will happen when an investor spots a property that is the right match.

Imran Javaid is managing director of Healthcare Real Estate at Capital One Bank. He can be reached at imran.javaid@capitalone.com or (301) 280-0212.
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