Operators Face ‘Crossroads’ to Either Get Bigger or Get Out, ESI says

The current skilled nursing market continues to be red hot with some of the larger, more aggressive groups paying prices that are $17,000 more per bed compared to 2020 in terms of evaluation,  Evans Senior Investments data from more than 425 facilities reveals.  

“Despite the pandemic and everything else that is going on in the world, [that price increase] is pretty remarkable and hard to get your head wrapped around,” ESI President Jason Stroiman said during a webinar this week on the industry’s mergers and acquisitions market. 

The competitive SNF market is even driving some of the larger players to be a little more conservative and selective.

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During its earnings call this month, Invesque Inc. (TSE: IVQ.U) chief investment officer Adlai Chester said that current valuations in the skilled nursing market have caused the real estate investment trust to reevaluate its portfolio and look for opportunities to dispose of non-core assets at attractive pricing.

CareTrust REIT (Nasdaq: CTRE) is having similar hesitations and has been pushed out of the market on some of the larger deals because the prices that some are willing to pay for larger portfolios are “tough to get to,” chairman and CEO Greg Shapley said during the REIT’s earnings call earlier this month.

Eighteen months into a global pandemic, with the emergence of the delta variant and census still below pre-pandemic levels, the robust SNF mergers and acquisitions market appears to show no signs of slowing down.

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“Why in the world are these buyers paying these crazy prices? What are they saying in their boardrooms on why it’s a good deal even though it’s 72% occupied and we’re paying as if it’s 92%,” Stroiman asked during the webinar.

He suggested several reasons for the current market environment such as increased access to managed care and better reimbursement. One of the main reasons, however, is that for some larger operators with ancillary businesses that they can bring in and underwrite margins for, the deals seem to be too valuable long term to pass up.

“If you think of a company that has 20 facilities and they add five buildings, from an ancillary standpoint, even if those five buildings were breakeven, they see that as an accretive acquisition because of the margin they are making on the ancillary businesses,” Stroiman explained.

ESI is closing on a deal next month in which the buyer disclosed that they would save $30,000 in one day on contracts they have for televisions and copiers, Stroiman added.

“When you think about all the different contracts, whether it’s food, or group purchasing organizations, they can underwrite all that margin and it helps them justify paying these types of prices,” Stroiman said.

SNF lender The Capital Funding Group, announced $2 billion in deals for the first-half of 2021, including a record-breaking nearly $1 billion month of June and Blueprint Healthcare Real Estate Advisors recently helped in the sale of a 120-bed SNF in Virginia to a northeast owner-operator looking to grow as the seller wanted to take advantage of the hot acquisition market.  

Despite the average industry occupancy at around 72% across the country, according to data from the American Health Care Association and National Center for Assisted Living, buyers are paying prices based on stabilized occupancy, Stroiman added.

“We’re finding that the most active buyers today are other operators, people that are operating the building and growing the platform themselves,” he said.

With the smaller regional groups “not willing to pay anywhere close” to the prices that the larger ones are, Stroiman predicted that consolidation could be on the horizon for the SNF industry.

“I do think we’re at a crossroads where the regional groups need to get bigger and if they’re not willing to pay up, it makes more fiscal sense to sell,” he said. “The smaller regional groups either need to get out or they need to grow.”

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