Some REITs Worry Where Hot SNF Market Will Lead

The average price per bed for nursing homes rose almost 22% year over year for the first quarter of 2021, as staffing shortages and slow occupancy recovery has done little to cool an already heated market, leaving some real estate investment trusts most active in the space disconcerted of what the future may hold.

“If I went back to February or March 2020, I never would have thought we’d see what we’ve seen over the last two years in the skilled nursing side,” Vikas Gupta, senior vice president of acquisitions and development at Omega Healthcare Investors (NYSE:OHI), said during a panel at Skilled Nursing News’ RETHINK conference. 

“We’ve got headlines about nursing homes being the worst thing in the world, and we’re seeing the per bed price the highest they’ve ever been. So it’s a beyond-weird world,” he added.

Last week, DAC Acquisition LLC entered into a merger agreement with Diversicare Healthcare Services for $10.10 per share, at a premium of approximately 210% compared to its 90-day average trading price. It isn’t the only company willing to pay above market prices for SNF assets right now.

“We look at just about every SNF that gets marketed, and we always get outbid, especially on the smaller stuff,” Gupta said. “[The smaller assets] are getting prices on a per bed level that I’ve never seen before in my career, for buildings with no cash flow.”

Bankers agree as the red hot SNF market has seen buyers willing to pay $17,000 more per bed compared to 2020 in terms of evaluation, according to data presented by Evans Senior Investors during a webinar last month.

Mark Lamb, chief investment officer for CareTrust REIT (Nasdaq: CTRE), thinks there’s a lot of capital out there, which is driving prices up.

“They are flushed with cash, debt is cheap and you have a perfect storm for some operators that have done well through COVID and are well capitalized,” he said during the panel. “In general, the lack of deals on the market with liquidity and the price of debt — it’s a perfect storm for buyers right now.”

For Lamb, he’s seen deals work for certain operators with key staff in the right places and leaders who don’t want to leave a particular town or community and CareTurst in those instances has been willing to take chances and buy facilities with negative cash flow or breakeven.

“Sometimes you can take that risk if you know some day one changes can be made quickly,” he said.

One of CareTrust’s most successful recent transactions included three buildings in the Dallas Fort-Worth area that were collectively losing $3 million at the time of purchase.

“I think those buildings collectively make three or four million today,” Lamb said.

As to what is causing the SNF market to heat up to this extent, Lamb thinks the answer could relate to case mix index.

“From what I’m seeing … a lot of the high price per bed transactions are getting done in CMI- based Medicaid states,” he said.

He described the proposition as “risky.”

Omega plans to stick to its evaluations no matter what others in the market are doing.

“The new players, the private equity, the family offices, it’s inflating prices and I think it makes it difficult for buyers like Mark and me and other regional players to play,” Gupta said. “At Omega, we’re very disciplined, we will stick with what we think prices should be on a per bed basis, a cash flow basis, a replacement cost basis, but a lot of those things have been thrown out of the window.”

The Provider Relief Fund, or lack thereof, further muddles a market that may be too hot for its own good and could lead to a tipping point further down the line.

“If they don’t release the funds you will start to see operators hit the wall. It’s not a matter of if, but when,” Lamb said. “The biggest issue we see from our operators is labor. One California market was paying $85 an hour for CNAs.”

He feared the inflated market would lead to problems down the line, especially with the funds currently on hold.

“It’s scary. There’s money out there that should and needs to be released to skilled nursing,” Gupta said. “If more money doesn’t come, the problems will start to be seen.”