Over the last half-decade, there have been two consistent and opposing trends in the skilled nursing world: Occupancy keeps declining as seniors find other options for long-term care, but bed prices have kept steadily chugging upwards. And while there are solid reasons for those seemingly counterintuitive threads, there are questions in the operational and investment worlds about how long that mismatch can last.
“The aging demographic discussion has been talked about for decades, and you have that expectation built in,” Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care (NIC), said during his firm’s annual fall conference in Chicago on Wednesday. “But you also have higher acuity — higher cash flow per bed if higher acuity is coming into these properties. I think there’s a lot there to think about, and it’s a multitude of factors for sure.”
Nationwide skilled nursing occupancy fell to another record low of 81.7% in the second quarter of 2018, according to the most recent set of stats from NIC, while per-bed prices remain at relative cycle highs: Though Kauffman noted some recent declines, NIC’s figure of $84,200 for the second quarter still represents a substantial increase from the beginning of the decade, when SNFs sold for around $45,000 per bed.
Looking at a trailing fourth-quarter average, real estate advisory firm Marcus & Millichap pegged nursing bed prices at $92,500, citing a dearth of available inventory on the marketplace and regional pockets of strong occupancy numbers that don’t reflect the overall national trends.
“Skilled nursing facilities remain a viable option for select buyers,” the firm observed in its second-half 2018 analysis of the long-term care and senior housing landscape. “Those who understand the operational structure of this asset class, or who have partnered with a successful operator, will find a number of quality opportunities for investment.”
In this era of the “silver tsunami” — the almost mythical wave of aging baby boomers that will start to buoy the senior housing and care market sometime over the next decade or more, depending on whom you ask — speculation may also be driving the eye-popping prices even in the face of negative metrics. Charles Bissell, managing director of JLL Valuation & Advisory Services, said banks don’t necessarily want to hear from appraisers that the per-bed prices are too high given the potential for baby boomers to fill them sometime in the future. The concept of value, he noted, is simply whatever motivated investors are willing to pay.
“It’s our job as appraisers, as valuation consultants, to determine what a willing buyer would pay for the asset, and if the buyers are ignoring the fundamentals and pricing aggressively — if they’re effectively betting on the future cash flows, betting on cap rate compression — it’s our job to reflect that in a valuation,” Bissell said, adding the caveat that most bids for senior housing and care properties come in within a defined range — with very few outliers, in his experience.
Still, Kauffman warned the the nursing sector is going through an “adjustment” period, with per-bed prices declining 12.1% between the second quarters of 2017 and 2018 — and the correction may not yet be over.
“The pricing of skilled nursing has come down, relatively speaking, over the last year and a half. I think you’ve had some adjustments — you’ve had some adjustments on the lease side,” he said. “That has happened. This is another case of: How long does that adjustment take?”
But overall, the panelists were generally bullish on the amount of capital flowing into long-term care and senior housing.
“Investors believe that as the baby boomers age, as the sector grows, it’s going to continue to become more institutionalized,” Bissell said. “We’re going to attract more core money, and investors will desire seniors housing to a greater degree in their portfolios, and it’s going to drive cap rates down relative to the other sectors.”
And as that capital flows in, investors will lean heavily on operators to provide solid data on performance and find ways to make money for their owners. Christopher Claps, managing director of Locust Point Capital — which last month announced a $312 million fund aimed at senior housing and skilled nursing — said that good facilities can still succeed with occupancy in the 80% range, but it’s up to their operational leaders to sort out how to make the formulas all work.
“I think the preponderance of the market today is really looking to the operator to do that. We share what we know — we see a lot of buildings, know a lot of operators — but the onus is really on the operators,” Claps said.
Written by Alex Spanko