We have historically presented our cap rate analysis on an unweighted average basis, weighting the cap rate for a 60-bed skilled nursing facility and a portfolio of 20 facilities the same in our Skilled Nursing Acquisition & Investment Report (which you can still order here). Many buyers believe that a portfolio should command a lower cap rate than a single-asset sale, but that often depends on the quality of the portfolio and whether there are any stinkers in the portfolio. A weighted average cap rate thus removes this bias.
What this has shown is that over time since we started separating out these two averages is that there has been very little difference between the two cap rate calculations. Usually, the weighted average is lower, with the widest variance being in 2007 during the last peak in the SNF acquisition market of 100 basis points (11.1% for weighted versus 12.1% for unweighted) and a smaller difference in 2017 of 20 basis points (12.1% versus 12.3%), but that changed in 2018 in a significant way with the weighted average of 12.9% coming in 80 basis points above the unweighted average of 12.1%.
What caused this shift? There were an outsized number of older, traditional SNFs with low occupancies sold in 2018, and many of them came with more realistic, high cap rates. Clearly, the number of portfolio sales had an impact on this weighted-unweighted disparity, driven largely by the REIT dispositions of struggling SNFs from distressed tenants. This all makes the weighted average cap rate a more accurate representation of the skilled nursing facilities sold throughout the year.
