The weight of the cap rate

In the last couple of years, we have started looking at cap rates based on the size of properties and portfolios acquired. In weighting cap rates by size, we avoid the issue of the cap rate for a 180-bed facility sale being weighted the same as the cap rate for a 60-bed facility sale. Some people believe that a weighted average cap rate is more reflective of a true cap rate average because the dollar value of the portfolios and larger facilities sold can dominate the overall market. But in the last 15 years (as long as we have been tracking it), there has largely been no significant difference between the weighted and un-weighted average cap rate, just that in peak value years, the weighted cap rate tends to be at its lowest levels compared to the un-weighted. In 2015, which was a record year for skilled nursing facility pricing, the average weighted cap rate was just 20 basis points lower (at 12.0%) than the un-weighted (12.2%). This compares to a 40 basis point spread and a 50 basis point spread in 2014 and 2013, respectively. But the weighted average cap rate actually remained identical at 12.0% from 2014 to 2015. Historically, what we have seen is when the market is peaking (or has peaked), the difference between the two cap rates narrows. That’s good news for those wanting to sell their large facility (or facilities) and capitalize on their value.



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