We have written several times in recent years that reports of the “death of the skilled nursing facility” have been greatly exaggerated. That is clearly evident in the record-high prices we have recorded in the sector, soaring to an average of $99,200 per bed in 2016 (up from the previous record of $85,900 per bed in 2015) and to a median of $94,660 per unit (from $66,500 per bed in 2015), according to the Senior Care Acquisition Report. But this pricing peak contradicts a normally reliable indicator of the market’s health. As we have always stated, it is the absolute level of net operating income (NOI, and interchangeable with EBITDA) that drives value in the market. From 2011 through 2015, the average NOI of skilled nursing facilities sold steadily rose each year, from $6,500 per bed in 2011 to $9,600 per bed in 2015, resulting in annual records set in average price per bed. Despite the significant jump in the average price per bed paid in 2016, the average NOI actually dropped.
While this is completely counterintuitive, there is a logical explanation. In the past, we did not weight the average and median NOI per bed sold, partly because of historical precedent, and partly because there did not seem to be a need to do so. However, as a result of the portfolio sales in 2016, and the high values of many of them, when the 2016 average is re-calculated based on the weighted average number of beds, a very different result emerges, and one that makes sense with the other statistics for the year. On a bed-weighted basis, meaning more weight given to larger facilities and portfolio sales in proportion to their number of beds, the average NOI per bed in 2016 was $12,100. That goes a long way in explaining the 15% jump in the average price per bed in 2016, which is weighted based on number of beds.