SNF Prices Fall From 2010’s Record, M&A Market Strong
After three years of suffering through distressed sale after distressed sale, not to mention skittish lenders, the seniors housing market certainly came alive in 2011. In most bull markets, it is quality that drives the buying interest, and that pushes the average values up. So because of three years spent working through troubled and non-stabilized properties and portfolios, much of which was focused on one company, when the better properties became available for sale, the buyers lined up at the bidding gate.
The increases in the average prices paid, for the overall seniors housing market as well as for the separate assisted living and independent living markets, were unprecedented, both on a dollar basis and on a percentage basis. In a different environment, that would be cause for concern and represent a potential over-heating of the acquisition market. But because the market was so starved for quality for three years, the surge in average prices across the board (except skilled nursing) really represented pent-up demand fed by the pent-up supply of potential sellers who were waiting on the sidelines. In addition, though the per-unit pricing may seem like it became overly aggressive, when the market is broken down further, it did not compare with the froth of the 2006 to 2007 period. While all the relevant statistics (including new ones) will be in our annual Senior Care Acquisition Report, coming out later this month, we will delve into a few of them so you can get a sense of what happened.
When looking at the overall seniors housing market (IL and AL combined), the average price per unit in 2011 increased by 44% over 2010’s level to $162,400 per unit. Although not a record, it was very close to the $164,500 per unit record in 2007. When breaking out the two components of the seniors housing market, both sub-sectors obviously rose by significant amounts. The average price per unit for assisted living communities soared by nearly 52% in 2011 to $156,900 per unit. This too was just below the record set in 2007 of $159,100 per unit. It must be remembered, however, that the average price per unit in 2010 was the lowest since 2004, so as a benchmark it may not be the best point in time for comparison purposes. As readers know, throughout 2011 we reported on a fairly continuous stream of higher-end properties and small portfolios which often attracted up to a dozen qualified bidders for each sale. This obviously did not go unnoticed in the market, especially at a time when most everyone was touting the need-driven benefits of assisted living compared with independent living, which in many markets suffered from greater occupancy weakness than assisted living, but not everywhere and not with all communities. So as owners (potential sellers) saw this market change, it made sense to test the market with their properties.
On the independent living side of the business, the market also strengthened, but it had never fallen to the depths of the assisted living market so it did not have as far to rise. Prior to 2011, there were just so many distressed assisted living properties on the market that it overwhelmed the market psyche. In contrast, there are always fewer independent living communities on the market, and while there are always underperforming properties sold, they don’t usually dominate a market like assisted living did for three years. The average price per unit for IL communities in 2011 was $171,000, representing a 23% increase over 2010 and like assisted living, just under the record of $174,500 per unit set in 2007. The dollar volume of independent living sales in 2011 almost matched the $1.1 billion in sales that occurred in 2007, so there were many similarities between the two years, including cap rate (more on that later). It was a little surprising that this sector of the market performed so well in 2011 given all the negative commentary that it wasn’t need driven, but just like assisted living, the quality of what was sold improved and it is likely that buyers believed that they had seen the worst of the market in terms of census and rate increases and that both had nowhere to go but up, especially in attractive markets.
Moving on to cap rates, for the overall seniors housing market (AL and IL combined), the average cap rate declined in 2011 by 60 basis points to 8.8%…Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today