Ask any skilled nursing investor about the metrics that get them excited about a potential deal, and you’ll probably hear about the strength of a given operator in a market — along with other common factors such as proximity to a hospital, involvement in local care networks, and relatively young age of plant.
In addition, the actual number of beds in a facility can play a key role in the deal-evaluation calculus for investors and operators, with a variety of opinions on the perfect “sweet spot” of volume and efficiency.
In general, buyers tend to look for properties with bed counts in multiples of 60, as those increments allow operators to optimize their staff-to-resident ratios per patient day, according to Isaac Dole, founder and managing partner of the Chicago-based Birchwood Healthcare Partners. But once those multiples are established, potential investors face a variety of pros and cons to weigh as they consider whether bigger truly is better.
“SNF properties need some economies of scale,” Chad Vanacore, an equity research analyst with investment banking firm Stifel, told SNN.
In Vanacore’s view, the right size for a solid skilled nursing investment starts at around 100 beds, as operators need that size to weather frequent small changes in census. For instance, he gave the example of a 100-bed facility that loses a single resident for an occupancy decline of 1%; if a 40-bed building saw that same person leave, the operator would be left with a 2.5% occupancy decline to explain to its landlord.
Size also brings greater efficiencies when caring for residents, according to Dole: A 150- to 180-bed facility lends itself to a more formal hierarchy with multiple leaders and redundancy across key staffing roles. The larger floor plans associated with bigger buildings also open up the opportunity for specialized units for residents with certain conditions, allowing investors to set a certain building apart from competitors in a given marketplace.
“This opportunity is much more applicable to larger bed count buildings than smaller, because the units typically need to be large enough to justify staffing them independently of the rest of the building,” Dole said.
Certain local factors can bring even greater underlying value to a facility’s bed count — particularly in certificate-of-need states, where laws restrict the total number of skilled nursing beds that can operate either statewide or in a specific market. In these states — which number 38 as of 2018 — savvy investors can buy a larger property than they actually intend to operate, then sell the rights to the excess beds to another operator, or apply them to another under-bedded facility they own in the same state.
“The actual bed has value regardless of whether it is used or not,” Dole said.
But the individual unit size question can go both ways: In certain markets that typically feature older buildings with three- and four-person units, the bed counts can be misleading. A 120-bed facility with a high concentration of multi-person rooms could only be viable as a 60- to 70-bed skilled nursing facility given current consumer preferences, Dole noted.
That’s why at Eastern Union, a New York City-based mortgage brokerage firm, borrowers and operators tend to evaluate bed counts on a region-by-region basis, director Philip Krispin told SNN.
“In many cases, they don’t place an overwhelming value on bed count when they are devising the viability of a new facility or, more importantly, an investment strategy,” Krispin, who leads Eastern Union’s health care group, said. “Principals frequently consider bed count only within the context of other factors.”
For instance, while a given operator may target 120-bed properties, the layout of the individual buildings has significant weight in the final decision-making process. If a building has a more open-concept, hub-and-spoke floor plan, for instance, the operator could end up requiring fewer nursing stations to provide the same level of coverage as in a more traditional, hospital-corridor layout, Krispin said.
“By and large, Eastern Union’s clients pay close attention to staff efficiencies associated with facility layouts, for example, as opposed to specific bed counts,” he said.
In addition, state-level laws can serve to place a premium on smaller buildings: In Kansas, for instance, bed taxes on operators fall considerably once the count drops below 45 beds, Dole said. In that case, an investor or operator may intentionally remove beds from service to benefit from the lower tax burden.
For these reasons, analyzing bed counts can only get an investor or operator so far when evaluating deals — and the eventual per-bed price will reflect multiple factors other than just a building’s size.
“The geographic market, the local reimbursement model and rates, and staff scarcity can also register a greater impact on decision-making than bed count,” Krispin said. “If a facility is situated in some of the ‘better’ states or in particular counties, an operator or an investor may be prepared to take on a center with fewer or greater than their typical target bed size.”