The selling and buying of skilled nursing facilities is a hyperactive-market. By all indications, it is a seller’s market. There are more buyers than sellers. The buyers are either REITs, national chains, regional companies or fledging start-ups. Regarding the start-ups, it seems that everybody wants to be in the nursing home, skilled nursing home or skilled nursing facility business. There are many young hungry operators with cash-flush investors, in the hunt for their first or second nursing home. It was not always this way. What are the factors driving this demand?
First, the industry has attracted capital from lending institutions and equity from various sources. The industry is awash in capital.
Second, the cost of capital is historically low and portends to remain that way for the future according to Federal Reserve watchers.
Third, real estate is an inseparable part of the economic and investment calculation: With real estate, lenders can collateralize the hard assets and borrowers can obtain debt leverage, meaning that buyers have to come with a small amount of equity, or in the case of REIT purchases, no equity at all. Even the potential working capital shortages can be financed.
Fourth, although we have all heard this repeatedly, and citing it seems superfluous, the underlying demographics and demand continue to be strong, compelling and robust. The number of seniors aged 85+, the highest users of skilled nursing facility care, continue to rise rapidly and as a percentage of the total U.S. population. Industry observers were worried that the growth of assisted living supply would hurt the nursing home fundamentals, particularly the low acuity private pay market segment. However, nursing homes have turned to providing a higher level subacute care focusing on intensive rehabilitation and hospital-like post-acute care services at lower cost. Higher-margin subacute Medicare and managed care patients have replaced private pay patients. Moreover, with the aging baby boomers the demand will continue to rise without interruption. By 2050, the US population over 65 will double to 88.5 million persons.
Fourth, government hugely subsidizes the industry via Medicare and Medicaid reimbursement of patient care and through below-market, no personal recourse, HUD loans for facility refinancings or major capital improvements. Medicare and Medicaid expenditures for skilled nursing facilities are expected to grow by 84% from 2011 to 2021. This is an important government subsidized industry similar to national defense. Of course, this comes with some strings, but that is a discussion for another blogpost.
Fifth, the supply of nursing homes is limited. In many states, Certificate of Need laws control the construction of new facilities and the addition of beds to existing facilities. In these states existing nursing home providers have a valuable franchise. Moreover, states without Certificate of Need laws, usually they have some form of control the number of additional Medicaid-reimbursable beds, such as in Texas. States want to control the supply of skilled nursing facility beds one way or the other because increases in the supply result in higher, budget-busting Medicaid expenditures.
Fifth, consolidation is inevitable. Given the heightened current compliance, clinical capabilities and IT requirements, it is hard to survive as an individual owner/operator of one or two nursing homes. It is too difficult to recruit and retain the talent and too costly to install the infrastructure to run today’s higher acuity skilled nursing facilities. The industry is scalable. The purchase of additional skilled nursing homes leads to economies of scale, resulting in operating efficiencies and synergies. As the number of owned and operated skilled nursing facilities increases, general and administrative (G&A) overhead expense declines. Larger companies can attract and pay the kind of best and brightest, high-caliber talent to improve operations, open new markets and take the company to the next level.
For all of the reasons above, there are more nursing home buyers than sellers, resulting in historically high per bed average sale prices and historically low Cap Rates. In 2013, the average sale price per skilled nursing facility bed was $73,300, a 27% increase over 2012. The average sale Cap Rate was 12.2%. If you are a nursing home owner and considering an exit strategy, the time is right to sell. The message is clear: Sell Your Nursing Home. This is a prime time to reap the rewards. However, all that being said, buyers still require a due diligence and the numbers have to make some economic sense. This is not the tech world where astronomical prices are paid for potential. Thus, I’d like to conclude by reminding potential sellers of the old Wall Street adage: “Bulls make money, bears make money, pigs get slaughtered.”