The skilled nursing M&A market has continued to surprise us. Despite numerous headwinds, especially involving the rising cost and scarcity of labor as well as the declining lengths of stay and census across the industry, buyers are still flocking to the sector. And as a result, they have kept values steady at just below $80,000 per bed. In the last four quarters ended September 30, skilled nursing facilities sold on average for $78,500 per bed, just slightly higher than the $77,500 per bed average price for 2018, according to The Skilled Nursing Acquisition & Investment Report. We should note this is a preliminary figure, as deals will inevitably float to the surface as the year goes on. But nonetheless, the stability of SNF values in the last couple of years, since the sector’s jump to nearly $100,000 per bed sold in 2016, has been remarkable.
Why is that? Number one is probably investors’ search for yield. Where else can you find a spread like there is in skilled nursing, where cap rates average around 12% (11.8% in the latest four-quarter period), and the 10-year Treasury rate is as low as it is? With the drive towards cost management in the health care space certainly not stopping any time soon (or ever), and skilled nursing facilities as low-cost providers of care, the future looks reasonably bright for the sector too. Of course, there are many variables (labor, drastic reimbursement changes, aging inventory across the industry, etc.), but the regional operators and private equity groups, who have been the most active buyers in the space, clearly have confidence that with the right amount of scale, investment in the properties and payor mix, healthy returns should be generated.
One trend that may persist, in terms of values, may be the bifurcation of the market between older, traditional SNFs and the newer transitional care facilities. The older facilities, many of which were built 40 or 50 years ago, will require much more capex to keep the business viable and to compete for referrals. However, they will have to make these changes with a mostly-Medicaid census, which does not leave much room for error. The newer facilities, which can take on higher acuity and more complex patients, will likely benefit more from the PDPM change in reimbursement with their higher Medicare and private pay census. These facilities will then be able to both attract the best staff, the higher paying patients and be much more likely to generate good profits. That seems like a vicious cycle for those older facilities.