Although it’s been difficult to bring consistent data to the table, dealmaking in the skilled nursing space continues to be lucrative for both the buyer and seller.
Matthew Alley, managing director at Senior Living Investment Brokerage (SLIB), says SNF market data from 2020 and 2021 will be considered ‘outliers’ in a few years, but that’s not stopping an increase in transactions right now.
Alley, who has a focus on assets in the Texas market, told Skilled Nursing News during a recent conversation he has had “more offers on deals” in the past six months than ever before.
Excerpts from that conversation, edited for length and clarity, are below.
SLIB has offices in Chicago, Ill. and St. Louis, Mo.
What has the skilled nursing real estate market been like at this point in the pandemic?
It’s interesting, we’ve been telling a lot of the owners that we work with, that are potential sellers, that the market is really hard to value right now.
What operating income number do you use? Do you use 2020, which obviously was a really weird year, do you use 2021, which is also a weird year, do you balance that with pre-COVID numbers? And so we’ve been going out with deals that are unpriced or don’t have a list price, more often than normal because the market has just been reacting to skilled deals a little bit less predictively. Generally that’s been on the advantageous side to the seller.
So skilled is an unpredictable market based on available data, but that’s a plus to the seller?
It’s just been a challenging time in this industry to value deals. When people ask me what [capitalization] rates are doing, it’s really hard to tell because what are you including, you know, what time period are you using? Census is still down from pre-COVID, but it’s creeping back up. Obviously you’re able to skill-in-place a little bit more so you’ve got better pair mixes.
What does incomparable data mean for dealmaking?
People aren’t using the same [data] at all. It’s hard because you have to look at each deal individually. If I have a building that was making $1 million a year leading into COVID, and now it’s making $2 million a year, and their Medicare mix has gone from 15% to 40% since COVID started, then you’re probably not going to get full value for where you’re at right now.
On the flip side, if a building has a minor increase in Medicare census, but their [overall] census is down by 15% to 20%, now their [net operating income] is much lower and we’ve got to kind of balance that off of where they were pre-COVID. Generally, what we do now is we will present financials in three to four different time periods, and then let the market decide from there.
So then what happens when you finally take a portfolio or a facility to market?
I’ve had more offers on deals than I ever have, over the past six months or so. Capital has been sitting on the sidelines for a really long time, and they’re eager to get money invested. You also have, from the private groups, it’s not just private equity — a lot of the deals we’re selling are to private owner-operators, and those owner-operators, they’ve received a lot of stimulus funds and may be a little bit more liquid than they have in the past.
They’ve got money to invest and the easiest way to invest that money is, well, one of the ways to invest that money is through acquisitions.
Buyers are liking this market environment too?
Interest rates are still incredibly low. They’ve crept up in touch, but they’re still historically at incredibly low levels. Lenders have also had a lot of capital that’s been sitting on the sidelines and so they’re getting more aggressive with higher [loan-to-value ratios] and less recourse needed than they were a year ago.
It’s a very competitive lending market which has helped buyers. Ultimately, if your monthly interest payment goes down you’re able to pay a little bit more from a purchase price which has really benefited sellers. We’ve seen that throughout most sectors of real estate, going all the way to personal houses. People are in a position to have a little bit more, a little bit more capital to put to work which has driven prices up.
How did market value work prior to the pandemic, for the skilled nursing industry?
Pre-COVID it was easy, you’re either looking at a trailing three-, a trailing six- or a trailing 12-month period and anything less than or longer than that, it’s because there was a very unique story to it. Now, every building has a unique story to it in how everybody handled COVID and buildings that may have shut down or that were near them.
So yes, that’s changed in a big way. When we’re looking at cap rates for 2020 and … 2021, I think those numbers are essentially going to be outliers.
How do you grapple with two years of ‘outlier’ numbers, as a broker?
We’re trying to report on the time period that makes the most sense and we think that buyers spend the most time looking at. But in reality, it’s all about what the buyer thinks they’re going to be able to do at this point in 2022, 2023 and beyond, and looking at recent numbers provides a little bit of a framework, but ultimately they’re paying for what it’s going to do in the future once they buy it.
So buyers believe there’s a lucrative future for the industry?
You have operators that are aggressively looking to grow, and they’re more liquid than they have been in the past. That’s obviously going to drive pricing up. I think people are also bullish on the skilled nursing industry right now. There’s significant challenges, especially with staffing … now you have real staffing issues, they could last long term. Is the federal government, are the individual state governments going to step up to the plate and keep these nursing homes open? I think they’ve shown that they will.
People saw the worst potential environment in 2020 and realize that the industry is going to be just fine, no matter what happens. They’re willing to get a little bit more aggressive, assuming that we’re on the upward trend of where we are with the virus.
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