Skilled Nursing Remains at Bottom of Investor Wishlists Despite Occupancy Gains

Freestanding nursing facilities still rank low on investor wishlists, even though the sector saw an uptick in occupancy late last year, according to a new survey of senior housing investors from the professional services firm JLL (NYSE: JLL).

Though 41% of survey respondents — which included lenders, operators and consultants, among other transactions professionals — ranked freestanding nursing care facilities as “not at all desirable” in the spring 2019 report, that represents a striking improvement from last year, when 56% of survey respondents said the same.

Sector Desirability From Spring 2019 JLL Survey JLL
Source: JLL Seniors Housing Investor Survey and Trends Spring 2019

However, that improvement was somewhat offset by a drop in the number of respondents who saw freestanding nursing facilities as a “somewhat desirable” investment; that number fell from 33% in 2018 to 21% this year.

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Just 4% of investors said freestanding nursing facilities were “very desirable,” compared with 7% saying the same in 2018.

The drop in the “not at all desirable” segment came primarily because respondents in some markets still showed positive demand for SNFs, even though operators are grappling with staffing difficulties and struggling to keep control on costs, Lisa Strope, vice president of research at JLL told Skilled Nursing News. But because of those pockets of demand, investors are cautiously optimistic about the product type, she added.

The outlook for revenue and expenses also remained bleak. The survey respondents were asked to indicate the expected change in income and costs for the next 12 months for the various seniors housing sectors, including seniors-only apartments, independent living, assisted living, memory care, and skilled nursing. The high-end forecast for growth in annual skilled nursing revenue was a 3% gain, while the low was no change at all; the average forecast for revenue came in at 1.9%, the lowest average projection of all the sectors.

Skilled nursing expenses, on the other hand, were expected to increase by 3.4% on average, tied with memory care for the top average projection for expenses.

Given how service-heavy the skilled nursing sector is, it had the highest capitalization rates, as reported by the survey respondents. Over the 2018 survey, the skilled nursing sector had a 20 basis point decline, the report noted.

Perhaps as a result, value change projections for SNFs in 2019 were fairly pessimistic.

“Respondents are less optimistic about valuations in the skilled nursing sector, with more than half expecting some decrease in skilled nursing valuations, as this sector continues to deal with declining lengths of stay, a challenging reimbursement system, and steep wage increases,” JLL noted.

Chuck Sudo contributed reporting.

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