There is a lot of talk that the market for the sale of skilled nursing facilities is a sellers’ market. The market for the sale of skilled nursing facilities is so robust that when you read the headline “Record High Skilled Nursing Facility Sale Price Paid,” you shrug your shoulders; you are unimpressed. Indeed, skilled nursing facility per beds sale prices have reached highs for two years in a row. In 2014, the average sale price per skilled nursing facility bed was $76,500. However, that is the average skilled nursing facility sale price in the U.S. Sale prices for skilled nursing facilities vary by state. In Maryland, for example, the average sale price per skilled nursing bed has been about $100,000 to $115,000 in the last two years. So when we heard about Sabra REIT’s purchase of four Maryland-based skilled nursing facilities in a sale-leaseback transaction, priced at $345,133/bed, $234 million in total for 678 skilled nursing facility beds, we were shocked and that’s putting it mildly. Are you still unimpressed?
I’m no Pollyanna, I forecast and project upside scenarios regularly, but I don’t know how a skilled nursing facility per bed sale price of $345,133 is justified by any metric or comparable. Talk about data points, this price is in another universe. Standard deviation-wise, the data point is not even on the chart. In fact, we sold the tenant in this transaction one of the skilled nursing facilities that they sold to the REIT at price of about $120,000 a skilled nursing facility bed, just about a year ago. What concerns me is that in the near- and certainly in the long-term, payment models are evolving to more managed care and network integration, to unequivocally reduce payments to skilled nursing facility providers. Of course, there are winners and losers among the providers, but the skilled nursing facility Medicaid and Medicare reimbursement pie is not expanding dramatically.
To lock in a capital cost of $345,133/bed indicates a highly optimistic and rosy view of the future. Maybe California-based Sabra was hit by California Dreaming? This deal’s high fixed cost will make it very risky going forward, particularly when the skilled nursing facility reimbursement leaves are brown and the skies are gray. I concede that at least one of these skilled nursing facilities is off the charts with respect to the provision of high-acuity subacute and specialty care, which yield higher reimbursement dollars and result in higher margins. But the other skilled nursing facilities I suspect are very good, but are still within the upper range of say normal valuation limits. But $345,00 per skilled nursing facility bed sale price? That might be more than a hospital sale price per bed?
From the seller’s point of the view, they cashed out big time, although they will continue to operate the skilled nursing facilities at a fairly pricey annual rent escalator of 2.5% to 2.75%. So if there is a drop in rates or heavens forbid, a drop in patient census or heightened market competition for high-end rehabilitation and subacute patients, there won’t be enough revenue to pay lease payments. I have to believe that in any scenario, the cushion or coverage in this deal is very tight. One thing I learned in business school was the importance of computing and evaluating the break-even point. Without question, the financial break-even point of this deal is so astronomically high that the buyer’s assumptions about the present and the future were anything but conservative.
PS: The seller indicates that evaluating the deal based on per skilled nursing facility sale metrics only is flawed, which I agree with. It is true that the only true determinant of skilled nursing facility sales value is the margin and corresponding cash flow, although the per skilled nursing facility bed sold is a quick industry rule of thumb. They assert the deal prices out at a 13% Cap Rate.