Partly due to historical precedent, we have always presented our cap rate analysis on an unweighted average basis, meaning that the cap rate for a portfolio of facilities would carry the same weight as that of a single 80-bed facility. For those who believe that portfolios will usually command a lower cap rate, then a weighted average would be the most accurate method to determine what is really happening in the market. Even a 200-bed facility acquisition, because of the implied increase in investment risk, should in theory be treated differently from that of a 50-bed rural facility.
Consequently, a few years ago we went back and recalculated the cap rates to weight them based on the number of beds in each acquisition. Obviously, the large portfolios will have a much bigger impact on the weighted average. However, if these portfolio sales occur with cap rates much closer to historical norms, then they will produce weighted average cap rates closer to those norms. When comparing the weighted and unweighted cap rates, you will notice that there is not much difference between the two. The largest differential was in 2007 when the weighted average cap rate (11.1%) was 100 basis points lower than the unweighted average. In most years, there is just a 10 to 30 basis point difference. In 2016, the difference was only 10 basis points, with the weighted average cap rate coming in at 12.1%, which was 10 basis points higher than in 2015. But, the spread grew in the 12 months ended June 30, 2017 to 40 basis points, with an unweighted average for that period of 11.9% and a weighted average of 12.3%. Several of the largest SNF portfolio deals in the past 12 months featured cap rates above 12.0%, including Welltower’s sales of 64 facilities to Lindsay Goldberg LLC and 31 facilities to Omega Healthcare Investors. That helps explain why the bed-weighted cap rate is higher.
