The SeniorCare Investor: SNF Bed Prices Hit Record--
Assisted Living Posts Small Decline In 2010
In many ways, 2010 was a transition year, as the economy began to gain some momentum, stock prices performed well, occupancy levels in seniors housing started to rise and skilled nursing providers began to get some clarity on Medicare reimbursement, at least for the time being. More money seemed to be flowing into the seniors housing and care sector, the mood was definitely brighter than in 2009 and there was a definite demand for quality in the acquisition markets. Admittedly, we were caught off guard with what happened in the skilled nursing sector, but we do not think we were alone.
In 2010, the average price paid for skilled nursing facilities jumped to a new record of $62,500 per bed, besting the previous record set in 2007 by 13% and surging by more than 31% over the average price paid in 2009. Does this make any sense? No, if it is looked at in a vacuum, and of course we need to dissect it further to see why this occurred in a year that nobody expected to set any records. We do this in our annual Senior Care Acquisition Report, and the 2011 Edition will be coming out later in March. It all comes down to quality, and after a few years of seeing little quality in the market across the senior care spectrum, when it appears, buyers will pay up for it. What is interesting is that when this happened in 2006 and 2007 in the assisted and independent living market, the higher prices were the result of both higher quality and surging demand that drove down average cap rates. In the skilled nursing market in 2010, by contrast, quality properties and portfolios were sold, but cap rates didn’t budge. It was just that the income that was “capped” was higher, and that drove the prices up.
When looking at the acquisition market over the past several years, there has always been a preponderance of sales of old, smaller, low occupancy, high Medicaid, low margin (and no margin) nursing facilities in secondary, rural or inner-city markets. The prices of these were often between $15,000 and $25,000 per bed, and the likelihood of increasing the private pay, let alone Medicare, census was always quite small. In 2010, these sales didn’t disappear, but their volume declined, and the best bet is that buyers didn’t want to take the risk with low quality Medicaid mills (sorry) that they might have in the past, and lenders, or those that were still around, only wanted strong nursing facilities that could survive a 10% state Medicaid reimbursement cut. On top of this, the average operating margin of skilled nursing facilities sold increased, as did the average EBITDA per bed (also a new record) and the average occupancy level (the highest since 2004). And while all of this was happening, the average cap rate increased by 30 basis points to 13.1%. That basically says that even though the quality may have increased, and the cash flow may have increased, largely because of Medicare, the risk of that cash flow did not change so the required return did not.
In the assisted living market, 2010 was not too different from 2009, as there was still a large number of transitioning properties that were on the market and sold. The average price per unit declined a little, from $113,200 in 2009 to $103,300 in 2010, but the median increased from $102,400 to $107,800. Even though there were not many portfolio sales in 2010, the average price per unit for these sales was much higher ($154,400) than for single-facility sales ($87,300). And, as in past years, those communities that had both assisted and independent living units sold for higher average prices ($139,00 per unit) than both stand-alone assisted living and stand-alone independent living combined ($107,000 per unit)...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today