Inside the Factors Driving High SNF Deal Prices — And Why Market Adjustment May Be Coming

Bed pricing for nursing homes remains astronomically high, despite a spate of economic factors that have dampened dealmaking, leading operators surprised and confused about the trend.

Unfavorable interest rates, higher costs of care and market inflation have caused M&A activity to normalize, and yet bed prices haven’t budged.

Bed prices averaged $97,000 per bed in the nursing care sector for the fourth quarter of 2022, according to data published by the National Center for Seniors Housing & Care (NIC) data. That’s a 9.5% increase from a year ago.

Operators have called the bed pricing trend one that “defies logic.”

Several factors are behind the higher bed prices. These include, a low cost of capital, pandemic era supports and favorable Medicaid rates, an increased projected need for SNF services for a growing aging population commonly known as the “silver tsunami,” and the industry generally being seen as recession proof. 

However, just as the industry evolved during the pandemic, more changes might be in the works now that it’s over, making it a dynamic time for the industry. This has, in turn, made it really difficult to predict the direction of bed prices, according to Erik Howard, executive managing director of business development and marketing for Capital Funding Group (CFG).

“A hodgepodge of factors are pulling and pushing in terms of what could or should drive prices higher,” said Howard. “Reimbursement gains have been positive, you’ve got the silver tsunami, but you’ve got nursing homes, unfortunately, they’re closing in rural areas, which is creating bed scarcity.”

Finance specialists in the space have listed a myriad of reasons behind the pricing. Some say it’s a result of high Medicaid rates or increasing Medicaid rates, depending on the state, and competition from private capital.

“While some of those local and regional providers do have interest in growth and expansion, they find themselves just not able to compete with some of the other offers that are received out there in the market,” said Michael Segal, executive managing director and partner at Blueprint Healthcare Real Estate Advisors. “A lot of that has to do with the private capital that’s pushing into this space and continuing to prop up or even drive higher pricing.”

Others subscribe to a more controversial theory, that groups are overpaying for SNFs in order to support their ancillary businesses.

Looking ahead, finance specialists anticipate pricing to come down a bit, as the types of deals change. The last several years have been defined by stable facilities and portfolios, or those with a ton of cash flow potential, Segal said.

But more distressed property sales in the future will bring more opportunistic buyers to market – and reflect more opportunistic pricing, he said.

Tony Ruberg, senior managing director with VIUM Capital agreed that pricing may pull back a bit mainly due to rising interest rates and where the debt capital markets are, as well as fewer lenders in the space.

Meanwhile, repairs and updates to facilities may bring pricing down in the coming years as well, Ruberg said, with many 40-plus “aged” SNFs with three- or four-bed wards in the building, needing a lot of infrastructure improvement.

Factors involved in SNF bed pricing

Brokers in the space say it’s not just one factor informing SNF bed pricing currently. The main drivers include government support of the sector during Covid, an assurance of more people needing SNF services, and the space being “recession resilient.”

Other factors – historically low cost of capital, although some brokers say that’s changing – along with overpaying to deepen footprints in existing markets and favorable Medicaid rates are all considered in bed pricing.

“They’re all very interconnected in terms of the way that investors look at the sector overall,” said CFG’s Howard. “As you continue to see more state support for Medicaid, which has traditionally been underfunded, as that support continues to strengthen and solidify, the visibility of those cash flows for investors becomes clearer.”

There’s also more interest and demand, more competition in states with higher Medicaid rates.

States sweeten the deal even more when they connect Medicaid increases to labor initiatives, added Howard.

Meanwhile, the labor shortages haven’t made it easier for the nursing home industry to recover even as recruiting in a recession can be helpful for an industry that is seen as being recession resilient. A recession might have eased staffing woes, Segal said, if the sector wasn’t in such a deep labor hole already.

“It may help some, but it’s certainly not going to help us recover the quarter million nurses that exited our space that we desperately need,” said Segal. “There’s a lot of competition for a fairly finite group of employees that would fit well in this type of working environment.”

Staff is a big piece of the puzzle, Ruberg said, when considering bed pricing, and the sector is already seeing staffing agency costs normalize to some extent.

Another market-specific factor in bed pricing comes from the push for operators to expand their regional reach, pushing bed prices up, Ruberg said. An operator with facilities exclusively in one state or region is willing to pay more to scale in that area, he said, in order to have a deeper relationship with local hospitals.

“A single building operator who’s looking to sell may be surprised at the price they get,” noted Ruberg. “If somebody owns five or six buildings around that market, adding one more is a pretty easy lift for them. They’re willing to pay a little higher price than what you might expect to get otherwise.”

Perhaps the most interesting factor affecting bed prices is connected to ancillary services, suggesting bed pricing doesn’t just take the facility into account. Dealmakers for SNF portfolios increasingly consider related party businesses. Some say this is a controversial reason for higher bed prices.

“This one’s tough to quantify, but I do subscribe to the theory,” said Segal. “There are so many investors in the space that also are investors or owners of complementary ancillary businesses that also provide either health care services or complementary services that are utilized within a skilled nursing and long term care facility.”

These investors, he said, have an interest in pharmacy companies, lab businesses, staffing agencies, rehab companies – all of which can drive higher values through potential growth and profitability.

This move to grow ancillary services makes sense given the space’s continuing shift toward higher acuity. SNFs of the future will need such specialities in order to properly care for sicker patients.

Buyers may be making those investments for ancillary companies they invest in or own, in an effort to grow and scale those businesses as occupancy increases.

There’s even a bit of an expectation that any dollars going outside of the operations, to related party services, is appropriate to ensure a facility remains at the cutting edge of technology, and clinicians are able to work at the top of their license to serve complex cases.

“It’s baked into the equation in terms of that return on capital,” said Howard. “We’re interested in doing business with folks that are looking to have great care, and great outcomes.”

That includes investing in staff and property equipment, and ancillary services, depending on community need, he said.

Ruberg sees this factor as having a more nuanced influence on bed pricing – as regional operators continue to bring ancillaries in-house, having scale helps support those businesses. Secondarily, quality is better controlled, and more assured, when ancillaries are part of the deal.

“If you have scale and a geography, that’s definitely a way to improve financial performance at the building level as well as at the ancillary level,” said Ruberg.

Federal support as a backstop, with recession looming

Federal dollars serve as a financial buffer for deals and opportunities in the space compared to other forms of real estate – especially as interest rates have continued to climb over the past six to nine months, Segal said.

Higher returns aren’t solely limited to government support as seen during the pandemic, he added. Naturally higher return profiles and acreage cap rates are seen in skilled nursing transactions.

“To some extent, it became an industry that was too big to fail, just given the sheer number of residents that are being taken care of, and the care that’s required, the clinical complexities of the residents,” noted Howard. “That’s been a very big shift in terms of the perspective and the dynamic in the industry over the past two or three years.”

Federal funding drove bed prices up too during the pandemic by increasing the number of interested buyers, Ruberg said, as seniors housing and nursing homes were becoming a more widely accepted asset class for investors not familiar with the space.

“Seeing that level of government support helped push a few folks over the edge to enter the space,” said Ruberg. “You combine that with the ability to attract equity into deals and the fact that debt was pretty easy to come by, and also very inexpensive, historically speaking, I think that helped drive some bed prices higher as well.”

Cost of capital is a factor that is actually becoming more of a headwind for bed pricing, Howard said, increasing recently and making acquisitions more challenging for owners and operators. HUD rates still remain low, but interim financing like a bridge loan is “a little bit more expensive” compared to what CFG has seen five to seven years ago.

“It’s skyrocketed,” said Ruberg. “A year ago today, on a bridge loan, you were probably paying half the cost of what you are today, from an interest rate standpoint … the forward curve is actually inverted right now, meaning longer term rates are lower than short term rates.”