Inside the Forces Driving Skilled Nursing Valuations in 2022

Many investors have not shied away from the skilled nursing industry in spite of the ongoing labor shortages, rising costs and looming federal regulations consuming operators — and they don’t appear to be doing so anytime soon.

Private buyers continue to be purchasing the overwhelming majority of available assets, closing roughly $1 billion in skilled nursing transactions as of the second financial quarter of 2022, according to preliminary data from NIC MAP Vision.

“They’re coming in strong and they’re coming in aggressive … It’s just been exciting to see what’s going on and trying to get your head around it and why the prices have continued to increase and continue to do really well,” Amy Sitzman, managing director at Blueprint Real Estate Advisors, said at the NIC Fall 2022 conference.

The private buyer category, at least according to the National Investment Center for Seniors Housing & Care (NIC), encompasses private real estate investment trusts (REITs), smaller family partnerships and owner-operators.

Meanwhile, public REITs seem to be the sellers in the market at this time, according to industry investors, and while there continues to be some activity from institutional private equity, they remain “very disciplined” in terms of their investment profile and what they are ultimately willing to pay.  

As valuations continue to soar, however, there is a wide distribution in price per bed costs — some going for as low as $38,000 while others are traded as high as $165,000. The average price per unit reached nearly $100,000 in 2Q.

Some of that variation can be attributed to a number of factors including the age of the facility, the number of Medicaid versus Medicare beds available and the overall labor environment.

Labor costs impacting deals

The industry’s ongoing workforce crisis, while showing some small signs of abatement, has impacted both the buyers and sellers of skilled nursing deals.

Cascadia Healthcare has seen a 12% increase in labor costs, not including agency, over the last year, according to Steve LaForte, director of corporate affairs and general counsel. That number grew close to 20% in the last two years, he said on the NIC panel.

Cascadia operates 37 facilities across Arizona, Idaho, Montana, New Mexico, Oregon and Washington.

Because Cascadia considers itself a turnaround organization, many of the buildings they acquire are filled with agency, LaForte said. And as difficult as it can be, Cascadia’s model is to get rid of agency as quickly as possible.

They do so through instilling culture in the buildings they acquire and by investing in both recruiting and retention efforts, he said.

Clint Malin, co-president and CIO of LTC Properties, said the real estate investment trust looks for that type of culture-based focus when deciding which operators to partner with.

Both on the seniors housing and skilled nursing side, LTC also looks for regionally-based operating companies, he said on the panel. LTC has more than 200 investments in its portfolio across 30 different states, split fairly evenly among senior living and SNF.

“I think there’s a tipping point to where companies can become too large, and I think it’s important to know what’s the appropriate growth and size that you can manage because as you get larger, culture becomes more and more of a challenge,” he said.

Malin pointed to LTC’s recent slew of deals with Park Ridge, Ill.-based Ignite Medical Resorts, as one example of a regionally-based operator who focuses heavily on culture.

From a valuation and underwriting perspective, employee turnover and agency usage can also impact the bottom line.

“For us, the labor expense is really a double edged sword. So we all understand the financial impact of higher wages and what that does to EBITDAR, potentially valuation and what we are able to lend against. But the other big issue in the skilled nursing space is the difficulty finding labor has a direct impact on revenues,” said Aaron Becker, senior managing director, head of seniors housing & healthcare production at Lument.

As private investors buy, REITs sell

Over the course of the pandemic, some investors, like public REITs, have largely remained on the sidelines to get a better sense of where the market was headed before deploying capital.

LTC specifically has been “recycling capital” from a lot of the older skilled nursing properties in its portfolio, according to Malin.

Instead the REIT has set its sights on more recently built facilities when looking at acquiring assets on the market, he added.

REITs, in addition to private capital, have also explored ways to repurpose skilled nursing facilities by transitioning the buildings to behavioral health assets, according to Sitzman.

Blueprint recently launched a behavioral health advisory group to meet the growing demand.

Still, Malin said REITs are “counter cyclical” and as the industry reaches a new environment with rising interest rates, it could make them more competitive in the market to acquire additional assets.

Operators like Cascadia are revisiting their REIT lease structures, and in some cases, choosing to own the properties themselves.

Cascadia started with 16 facilities that were all REIT leases and now the operator owns 10 of their 37 buildings, he said.

Reimbursement bumps, construction costs influence deal decisions

While it remains to be seen how market conditions will impact the industry in the long-term, panelists agreed both construction costs and recent Medicaid payment bumps are playing factors in deal making overall.

LaForte said Cascadia has specifically looked to states that have made financial commitments to operators over the last two-and-a-half years — including those who have increased Medicaid rates — when acquiring a facility.

Cascadia is currently interested in growing in Oregon and Montana, both with favorable rates and state advocacy environments, as well as Washington — which has stepped up more recently with provider support.

Ultimately 35% of the skilled nursing market remains single owner, “Mom and Pop” style operators and that number is likely to dwindle as operating challenges continue — which potentially opens the door for additional acquisition opportunities, he said.

Both Malin and LaForte also expressed concern over the current impediments facing operators to build new facilities. Cascadia has completed two new builds over the course of its lifetime, and most recently had a third slated in the Vancouver, Wa., area with land bought during Covid.

The SNF operator is now putting that project on hold and selling the land due to rising interest rates, supply chain issues and overall rising costs associated with doing business, he said.

“That’s important because I think as we go forward for sustainability in the industry, we need CapEx improvements and we need new development,” LaForte added.

LTC faced a similar situation, according to Malin, with a piece of land that was slated for development. The original replacement estimate was around $13 to $14 million but bids have come in at $15 million, and more recently, between $16 to $17 million in recent months, he said.

While LTC has chosen to keep the land at this time, the market has certainly created obstacles for new builds overall.