Sales of Skilled Nursing Facilities and Musical Chairs

Sales of skilled nursing facilities is marked by intense activity and competition.  The market is highly robust.  Nursing home buyers outnumber nursing home sellers by a huge margin.  Sales of skilled nursing facilities happen after a couple of weeks or even days on the market before buyers make preemptive or compelling bids. Longtime owners and operators for whom even thought of selling has been unthinkable are now strongly considering divesting underperforming or non-desirable skilled nursing facilities, and maybe perhaps their desirable and profitable facilities too.  This is in response to the huge demand for skilled nursing facilities to acquire.  This has bid up the sales of skilled nursing facilities per bed prices to unprecedented heights and the Cap Rates to unprecedented lows, now routinely closer to 12% than ever before.

According to Irvin Levin Associates, in 2014, sales of skilled nursing facilities fetched $76,500 per bed from $73,300 in 2013 or a 4.4% annual increase.   Irvin Levin Associates also recorded the Cap Rate for sales of skilled nursing facilities in 2014 to be 12.4%, a net decline of 0.60% from 2013 results.  As a result, the demand for purchasing nursing home beds is coaxing new sellers into the market to capitalize on record pricing.  As interest rates remain historically low, banks are still financing acquisitions of skilled nursing facilities nonstop.  Capital for nursing home acquisitions is in abundant supply.   All kinds of investment vehicles, large and small, are jumping into the sales of skilled nursing facilities market.

This makes total sense.  Skilled nursing facility supply is fixed, constrained by state Certificate of Need or Medicaid-license regulations or market-based factors such as land availability or construction costs.  With a fixed supply of nursing homes buttressed by increasing demand by end-users, that is, the patients, and a heightened demand by investors and operators who want to own and operate nursing homes, respectively, prices are inevitably rising.  All kinds of conventional real estate owners are now contemplating buying into the nursing home sector as lessors and effectively serving as private real estate investment trusts.  Suddenly, the flower is in bloom and nursing homes have come of age to traditional real estate investors, who customarily limit themselves to office buildings, shopping centers and residual housing.

However, knowing that the supply of nursing homes is finite and a limited number of nursing home sellers are in the market at any given moment, is causing a major “scarcity mentality” among certain buyers; meaning that they are seeking to buy any skilled nursing facility on the market, good or bad, before the music stops and when there will be nothing left to buy.  It is a version of the old game of musical chairs and nobody wants to be left without a chair when the music stops.  This is not just a bubble where buyers bid up prices confident that they can sell it at a higher price in the future. No, this is all about limited supply.  Skilled nursing facilities that have been on the selling shelf for years or have outmoded physical plants or in poor locations are getting sold.

First, much consolidation has already occurred at the individual and middle-market levels; the nursing home industry is significantly less fragmented than it used to be and thus there is truly a lot less available to buy.  Second, I do not anticipate any major sales of skilled nursing facilities from the REITs,  which represent an increasingly market share of skilled nursing facilities available.  Third, at current skilled nursing facility price levels, recalcitrant independent owners, who have been staunchly averse to selling, are now being drawn into the market as sellers.  Obviously, market forces are convincing them out to sell by the upward shift in pricing.  But I also think that they believe we have realized the price peak and it is time to exit; because once we attain the top of the nursing sale market, the only place is down.  Moreover, these perennial grisly veterans of the skilled nursing facility industry look into the future and see storm clouds on the horizon:  Reimbursement reductions and dramatic changes to the payment models from a volume-based system to an episode of care paradigm that will wipe out those unprepared, untutored and unable to adapt to the new model.

However, the buyer’s gamble is that these doomsday fears are unwarranted and things will remain unchanged for the future.  So they will keep buying skilled nursing facilities and sales of skilled nursing facilities will continue till the music stops…they will shop till they drop…either the supply totally dries up or reimbursement undergoes a revolution in payment models, at which time all bets are off.

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