Bed prices at nursing homes have remained robust in recent years despite industry upheaval, and while it’s impossible to paint the state of the market with a broad national brush, the coming year could bring even higher figures as owners and operators pull off turnaround projects.
A snapshot from the third quarter of 2019 revealed a seemingly large gap between the lowest bed price decile, at just $32,000 per bed, and the highest climbing to $134,000, Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care (NIC) noted during SNN’s annual 2020 outlook webinar in December.
Industry experts say the gulf between low to high bed costs isn’t unexpected or dramatically different from other quarters.
But one skilled nursing investment firm — Senwell Senior Investment Advisors — predicts that the floor-to-ceiling gap could become narrower in the upcoming months, potentially a good sign for the financial health of the nursing home industry. Currently, no news is good news — although positive shifts are coming, Ben and Brandon Bohland, manager partners at the Toledo, Ohio-based Senwell, told SNN.
Senwell reported different bed-price data for the fourth quarter of 2019 on a regional level — showing a low of $52,000 price per bed in the Midwest, and a high of $96,000 in the Southwest, according to the Bohlands.
That’s a slight deviation from Senwell’s fourth quarter 2018 data, when the low in the Midwest was marginally higher at $58,000 and the high in the Northeast sat at $117,000.
“You’re not seeing a lot of changes quarter to quarter if you look region by region, although there’s a big variance in NIC’s national numbers,” Brandon Bohland said, adding that the difference in national snapshot data was expected given the combined categories of stabilized and non-stabilized assets in more volatile reimbursement Medicaid markets.
Regardless of issues around varying Medicaid reimbursements, Brandon Bohland has high hopes for 2020.
“It’s been the highest dollar amount of capital waiting to be deployed that we’ve ever seen with REITs, and $1.5 trillion in private equity funds sitting on the sidelines waiting to be deployed,” he said, referencing a recent report that found private investors with record-high levels of money not yet invested — more than twice as much as they had five years ago.
“And when a stabilized opportunity comes on the market, you have quite a few bidders,” Ben Bohland added.
Part of Senwell’s optimism stems from what the managing partners see as increasing interest in the space from the outside.
“It seems like on a weekly basis in 2019, we continue to see new funds being dedicated to seniors housing and senior living — with a portion of that flowing into skilled nursing,” Brandon Bohland said, noting that the projected number of facilities that should be coming available may increase in the price per bed.
But looking at costs in states with more litigation issues, such as Kentucky and West Virginia, may make potential buyers think twice, which plays into the variances in values, he said.
Other challenges involve dealing with non-stabilized assets, which are subject to greater variability in bed prices; stabilized assets are easier to underwrite. But Senwell is even optimistic about non-stabilized assets, suggesting that the regional operators coming into the space are savvier and know how to turn around the facilities.
“We’re still talking to mom-and-pops that have paper and pen to take a shot at the opportunities to turn [a facility] around,” Ben Bohland said. “People are becoming sophisticated, and they have the resources to turn it around. If they do it over time, we’re going to be seeing a lot more stabilized assets coming onto the market versus non-stabilized.”
Although the market has seen a great amount of non-stabilized assets in recent years, “the trend going forward is looking like they are going to continue to increase to stabilize, which then increases the overall valuation,” Brandon Bohland said.
Steve Thomes, head of business development at Blueprint Healthcare Real Estate Advisors, said that he has personally sold buildings at prices as high as $180,000 a bed and as low as $20,000 in recent months, suggesting that NIC’s national data gap between $32,000 and $134,000 is not a major gulf. Thomes also noted that the snapshot of one quarter may not be representative of higher bed costs in the market.
“There’s definitely higher deals going on out there on a per-bed basis, so I think maybe that quarter didn’t have as many deals go on that were that aggressively priced. … We’re not seeing any major tectonic shifts that will bring up that bottom line,” Thomes said.
Thomes also pointed to Kentucky as a highly litigious state where he said acquisition “costs could go through the roof” as compared to a “relatively mellow state like a Maryland or a Delaware that are more favorable towards transition of licensure.”
Anecdotally, the Chicago-based brokerage firm is seeing the already-hot states become much more desirable with higher prices per bed — with “some of the less desirable states falling by the wayside.” The Mid-Atlantic states, California, and Colorado are receiving a lot of interest as opposed to downstate Illinois, other rural areas, and Connecticut — difficult geographies to pull off successful deals, Thomes said.
NIC’s snapshot of the third quarter of 2019 pointed to business-as-usual findings for national bed prices per unit, with an average of $78,000 in the third quarter, Kauffman said.
And given the complexity and multiple factors accounting for each deal — such as state-by-state Medicaid reimbursements, litigation concerns, Certificate of Need regulations, and other variances — the data isn’t revealing on its own.
The rolling average “includes the caveat that each individual transaction is probably different than that $78,000 number,” Kauffman said, adding that beds trading at the low $32,000 price are “potentially not stabilized and going through some challenges.”
Last June, commercial real estate services firm CBRE pegged most recent four-quarter rolling average bed price in nursing homes at $77,250, just a $750 difference from NIC’s data in the following year.
According to Kauffman, the prominent factors affecting bed prices — and questions to ask when evaluating a given property’s price — include:
- What are the physical attributes of the property? Does it need renovations to properly compete within the market?
- What is the market in each state? For example, a skilled nursing property selling in Los Angeles vs. beds selling in a rural, North Dakota or South Dakota area will have varying prices.
- What is the bed moratorium or Certificate of Need law in the state, and how stringent is it?
- What is the patient acuity and the reimbursement levels within each state? Higher acuity patients typically offer greater reimbursements.
- What are the cap rates, cash flow, and volume?
A higher cash flow might be expected in an urban area such as Los Angeles with high-acuity patients that bring increased reimbursement levels, Kauffman said. A good operator may also have higher bed prices versus a a provider in rural area struggling with low occupancies — while lower bed prices might also indicate a turnaround opportunity where “it’s selling at a huge discount to the market.”