Buying Boom to Continue in Skilled Nursing as Private Equity Keeps ‘Chasing Deals’

Private equity investment in the skilled nursing space has gained steam over the last few years, even before the COVID-19 pandemic, and that is only expected to continue in 2022 as more competition has returned to the marketplace.

The trend was evident throughout 2021 as the most active buyers throughout the year were private equity as many real estate investment trusts (REITs) took a wait-and-see approach given some of the price-per-bed evaluations.

And in Skilled Nursing News’ 2022 outlook survey, private equity firms again topped the list of likely SNF buyers.

Industry experts tell SNN they expect the next 12 months to be another busy stretch of time for the transactions market, if not potentially even more active than the year prior.

“There’s a large appetite for seniors housing across the board, including skilled nursing, and I think based on our activity and what we’re doing, I see that to continue and to be even more active than 2021,” said Brian Chandler, managing director in JLL’s valuation and advisory services, said.

Inside the private equity boom

Of the $3.7 billion spent in total skilled nursing transactions in 2021, $3.3 billion, or roughly 89%, were considered private buyers.

That’s according to new data from the data service affiliated with the National Investment Center for Seniors Housing & Care (NIC).

The share of skilled nursing transaction property closed by private buyers started to increase in 2016, NIC senior principal Bill Kauffman told SNN.

From 2015 to 2016, private buyers went from 33% to 36% of the transaction market, Kauffman said of the NIC MAP Data released by NIC MAP Vision.

That number jumped to 82% in 2020.

The NIC transaction data is broken down into five categories: private, public, institutional, user/other and cross-border. The private buyer category encompasses private REITs, smaller family partnerships and owner operators, whereas the public category includes publicly traded companies or public REITs.

Throughout different time periods certain types of buyers will dominate the transaction markets, as is indicated in the data, according to Kauffman.

Before private buyers came onto the scene in a bigger way, he said, public companies were the largest player in the SNF transaction market.

“Some of it relates to the cost of capital in the publicly traded markets versus the private markets .. there’s a lot of different nuances when it comes to who’s actually being the more aggressive buyer,” Kauffman said.

The increased M&A activity this year in particular is largely being driven by the influx of capital in the market, Chandler told SNN.

“Private equity firms are chasing deals and looking at the rate of returns that they can get on these skilled nursing facilities,” Chandler said. “They’re joint venturing with strong operators in the markets and partnering with them and they’re able to feel comfortable with the operator partnership.”

While Kauffman similarly expects that private capital will continue to be aggressive in the transaction market in 2022, all it takes is one large deal from a publicly traded entity in the skilled nursing space to “move the needle.”

Sabra Health Care REIT CIO Talya Nevo-Hacohen told SNN that while they are starting to see “a little bit more deal flow” in the nursing home space, pricing remains aggressive.

Sabra has continued to diversify its portfolio among seniors housing, skilled nursing and behavioral health assets.

“Private capital, specifically the New York-based private capital, is buying up a tremendous amount and they seem to be the buyer of every skilled deal that I see announced,” Nevo-Hacohen said.

It’s a trend that is not only evident in health care but across several other property types such as hotels, she said.

“Everything’s trading at strong valuations and probably pre-pandemic valuations partially because there’s just so much capital looking to get deployed and interest rates remain very low,” Nevo-Hacohen said.

Future transaction trends

As Covid case rates continue to fall after the omicron wave and the industry continues to look toward an endemic future, the topic of waning government support is one that can’t be avoided.

For operators, the murkiness of future federal safety nets could mean an even greater rush of transactions if that safety net is removed.

There is a possibility that you’ll have forced sales that buyers in a stronger position will come in and buy out,” Kauffman said. “If that were to happen you might have a bidding scenario between the investors and I think once again, you’re going to have certain investors bidding higher than others.”

“Maybe it gets to the point where you have other funds from the government, but that is not likely in the current situation right now,” he added.

Health Resources and Services Administration (HRSA) official Scott Kodish told SNN in early February that all of the Provider Relief Funds (PRF) have been allocated, but $5 billion remains that has not yet been disbursed to providers.

Regardless of the distress that some expect to see in the market, others like Nevo-Hacohen believe the opportunity for occupancy pick up is there – especially as elective surgeries ramp up again and there are more skilled nursing discharges.

“The trajectory was in place and then we got hit a little bit by delta but then with omicron we really found in December, January everyone’s plateaued,” she said.

The occupancy rate sat at 75.7% by the end of November, increasing a mere 28 basis points from September to October, according to NIC.

What’s important to remember, according to Nevo-Hacohen, is that “the government has not let skilled nursing fail” throughout the pandemic.

“I don’t think they’re going to let the skilled nursing industry fail because their occupancy rate is unable to rebound because of Covid and further variants and labor pressure,” she said. “I mean imagine if they did, how catastrophic that could be.”