The SeniorCare Investor: Acquisition Prices Stabilize in 2001, But Future Is Cloudy

In 2000, the average skilled nursing per-bed price plunged by 10% to its lowest level since 1994. By 2001, however, with higher Medicare rates helping profitability and bringing some stability back into the sector, almost one-half of that drop was recovered as the average price per bed nudged up by 4% to just over $38,000 per bed. The significance lies not in the small increase, but that the price deterioration has apparently abated.

It is also interesting to note that the median price of just over $33,000 per bed last year is almost identical to the median in 2000 and very close to the median in three of the previous four years. About one-third of nursing homes sold for prices between $30,000 per bed and $40,000 per bed last year, compared to just 18% in 2000. As is usually the case, the Northeast commanded the highest average price per bed, with the South Central region the lowest. The range in prices paid was also the widest ever, with a spread of well over $100,000 per bed.

In the assisted living market, which has seen rising average prices every year despite the turmoil associated with over-capacity and bankruptcies, the average price per unit rose again, but by just 3.5% to $85,500 per unit. One of the reasons for the increase is that nearly two-thirds of the properties sold were built in the past 10 years, many of which had occupancy rates of 90% or better. The median price per unit, which dropped sharply in 2000, jumped by more than 30% to over $79,000 per unit last year. This is most likely a reflection of the lack of liquidity in the capital markets, because if lenders are squeamish about lending to state-of-the-art facilities, they certainly will think twice before financing something that was built more than 15 years ago. Consequently, we have seen a drop in the sale of these older facilities.

In the independent living market, which has not experienced the financial turmoil of the skilled nursing and assisted living markets, the average price per unit rose by 1% to $97,400 per unit, but the median jumped by 30% to over $101,000 per unit. Almost all of these properties had occupancy rates of 90% or better and they were all built in the past 15 years. The average purchase price was almost $15 million per community, compared to just over $5 million per assisted living facility.

All of the facts and figures are to be found in our seventh edition of The Senior Care Acquisition Report, which is expected to be available early next month. While we know what happened last year, it is unclear what will happen in 2002 because so much uncertainty remains in the market. One by one, states are talking about Medicaid reimbursement cuts while Washington debates what to do about some "temporary" Medicare rate increases that are set to expire this October.

Meanwhile, more distressed assisted living facilities are expected to hit the market this year, and the pool of lenders has dwindled to levels not seen since the early 1990s, so pricing and leverage will be tight. The one certainty, however, is that there is no shortage of buyers; whether their partners will come to the party is quite another question.