Per-bed prices — a gold-standard valuation metric for buyers looking to invest in skilled nursing facilities — have remained stable for most of the COVID-19 pandemic, and even picked up at the end of 2020. But focusing on cash flow is perhaps even more important as the government shoots money into the industry.
Bed prices are in a holding pattern as federal and state governments continue to bolster the industry with financial aid that will eventually end. That aid, in the form of CARES Act grants, Payroll Protection Program loans, and other sources, will eventually be audited and potentially be clawed back.
Ben Bohland, a managing partner at Senwell Senior Investment Advisors, said that even with large transactions in 2020 that might have skewed bed valuation prices, prices are up, despite occupancy rates at historically low levels.
“The government is supporting the skilled nursing industry, and I think that they’ll continue to do so in a significant way; people can see that,” Bohland said. “I don’t think the government would let skilled nursing fail, especially with what we just went through with COVID. Investors can see that.”
Isaac Dole, the founder and CEO at health care real estate investing firm Birchwood Healthcare Partners, said strong per-bed pricing is especially true for facilities that are more stable, have a higher quality mix, and are located in a denser market.
“Those communities that are on the opposite end of the spectrum to those [better facilities] have experienced reduced pricing during the pandemic,” Dole said.
Investors who target the lower-priced facilities have a high degree of confidence in their ability to turn around struggling facilities — and they don’t necessarily have the same confidence in maintaining highly efficient and highly stable facilities.
That’s according to Michael Segal, senior managing director at the Chicago-based investment and brokerage firm Blueprint Healthcare Real Estate Advisors.
At the beginning of the pandemic, there were many investors that were waiting for opportunistic deals, in the form of highly distressed facilities that needed to be sold at below-market pricing, to become available. But that hasn’t happened en masse as first expected.
“That hasn’t come to fruition at this point, and a lot of that is because of the government grants and the Medicaid rate increases, even though census levels remain low,” Segal said. “Those distress deals, for the most part, have not come to market.”
Another reason why bed prices haven’t fallen dramatically: Capital is entering the industry at levels not seen previously, according to Bohland. Investors in asset classes hit hard by the pandemic are using the 1031 tax exchange, which defers the capital gains tax if an owner sells and then buys a similar property.
“They are coming over to senior care and housing with 1031s, needing to deploy their capital quickly,” Bohland said. “They are in markets with lower capitalization rates and have been making competitive bids in relation to bed prices.”
The temporary financial stability from government is also driving investors to ensure that post-takeover, taxpayer identification numbers are kept, according to Dole — and real estate investment trusts (REITs) and private landlords alike are transitioning facilities to operators with stronger balance sheets, or aggregating communities into larger pools with proven operators.
Meanwhile, Blueprint’s Segal said he’s seeing facilities being sold or transitioned from larger operators to more local and regionally-focused players who have more bandwidth and focus at the facility level to make quicker operational adjustments.
“Some of these national and super-regional providers, they’re like large cruise ships — they can’t necessarily turn and go in a different direction very quickly,” Segal said. “While a lot of the smaller, local and regional operators are more like smaller speedboats and can turn much faster.”
Skilled nursing facility investors are also watching Upper Payment Limit rules, which can serve to boost Medicaid rates. Lawmakers in states like Indiana and Utah have talked about reducing UPLs or taking them away altogether, but Bohland at Senwell said he doesn’t see UPLs going anywhere because reimbursements would need to be subsidized in some other way — especially during the pandemic.
“If Indiana takes UPL off the table, you’re going to leave those skilled nursing operators in terrible situation where the whole industry could collapse,” Bohland said. “And I don’t think that the state would ever do that.”
And in states with higher Medicaid reimbursements, per-bed prices usually slant higher, according to Segal. In Illinois, for instance, reimbursement can average around $140 a day, while in West Virginia, the price per day can be around $300.
“We’re starting to see a larger gap in prices per bed from those states that are highly attractive in today’s market — particularly in the Mid-Atlantic and Southeast region — compared to those that have historically been relatively stable, and at the lower end of the range, in the Midwest and the Great Plains region,” Segal said.