The SeniorCare Investor: SNF Per-Bed Prices Begin Slide--
Reimbursement Uncertainty Clouding M&A Market
After the shellacking skilled nursing stocks took in April that followed the unusual announcement from the Centers for Medicare and Medicaid Services that skilled nursing Medicare rates could be cut by 11.3% later this year, or possibly not, it is not a surprise that buyers and sellers of nursing facilities, as well as entire companies, would feel the impact. Even though some of the skilled nursing publicly traded stocks have recovered somewhat from April’s drop, the uncertainty is causing some problems in the market.
Take the case of Skilled Healthcare Group (NYSE: SKH). Rumors have been circulating that because of the Medicare uncertainty, the company and its advisors may put on hold a potential sale of the company or a recapitalization of its owned real estate. There have also been rumors that the transfer to another operator of the operations of five skilled nursing facilities that were the center of the company’s absurd judgment last year (later negotiated downward but still too high for the “violation”), may be in jeopardy because of California’s fiscal woes as well as the Medicare uncertainty. It was thought this transfer had to take place before any potential buyers would even consider making a bid for the company. The company has made no public statement, so as far as we are concerned nothing has been decided, but we are sure they would not want to enter into any discussions from a position of weakness. Consequently, the process, if not on hold, has certainly slowed until there is more clarity. The stock price is already down 30% from its April 6 high, and with the general weakness in the overall stock market, it continues to slide.
Clarity is something all skilled nursing providers would like to have, but that will not be coming for at least several months. And even if it does on the Medicare side of the business, which is where everyone wants to be, the reality is that 70% of the patients are still funded by Medicaid, and with the economy still slumping with no end in sight, it is not presenting a pretty picture right now. That may be why there were so many small, mostly underperforming skilled nursing sales this month, as sellers decide it is finally time to get out and buyers figure that at a low capital cost, they can weather the reimbursement and economic storm. We have seen that movie before, and there have definitely been some winners in the past who have played that game. This time may be different if the economy takes several more years to finally gain some traction. But it is more than likely that the budget deficit situation will remain for several years, and that will not help reimbursement from any source.
After the wave of high-profile, high-priced skilled nursing transactions, the acquisition market seems to be returning to the smaller, low-priced deals where the seller wants out and the buyers think they can make improvements. After setting a record in calendar year 2010 at $62,500 per bed, for the 12 months ended March 31, 2011 the average price per bed has dropped by 3% to $60,500 per bed, while the average cap rate also declined from 13.1% in calendar 2010 to 12.8% in the 12-month period ended March 31, 2011. We suspect that without some high-priced transactions in 2011 there will be a significant drop in the average price per bed for the full year 2011, especially because of the uncertainty over Medicare reimbursement and the inability to project cash flow without knowing how severe a cut may be coming...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today