Skilled Nursing Cap Rates Expected To Stay Low As Market Shows No Signs Of Slowing

November 4, 2021, Alex Zorn, Skilled Nursing News - Commercial real estate volume has been booming this year, particularly in the most recent quarter as it surpassed $450 billion year-to-date, according to Zach Bowyer, JLL managing director.  The combination of a pent up market and low cap rates continue to push pricing in the skilled nursing space.

Commercial real estate volume hasn’t reached such levels since 2007 with Q3 2021 reaching $193 billion, the highest quarter ever recorded, Bowyer added. 

While long-term care deal volume was shown to be down slightly in the third quarter from the second quarter, according to data from Norwalk, Conn.-based Irving Levin Associates, deal value was up 4% as skilled nursing deals continue to show strong per bed pricing despite operational challenges. 

Evans Senior Investments announced Wednesday that it completed three separate transactions for a Pennsylvania owner/operator looking to exit long-term care.  The combined purchase price for all three transactions was $150 million or $121,000 per bed. 

“Changes in reimbursement for skilled nursing facilities had a profound impact on operations, pushing skilled nursing facility (SNF) valuations to all-time highs, helping to keep capitalization rates relatively low,” Bowyer said on a panel at the National Investment Center for Seniors Housing & Care (NIC) conference this week.

Still, he maintained that “the devil is in the details” when it comes to valuations. 

“What I want to do here is I want to highlight the importance of focusing on the individual asset when conducting evaluations and not relying on a single narrative when approaching valuations,” Bowyer explained.  “I also think buyers and sellers are having to get very creative with how they’re approaching transactions with a wide range of strategies and we’re seeing a wide disparity in valuations as a result.”

Welltower Inc. (NYSE: WELL) Senior Vice President and co-head of U.S. Investments Nikhil Chaudhri said the real estate investment trust looks for alignment between employees, partners and investors when making deals. 

“In the last 18 months we’ve deployed roughly $6 billion of capital predominantly in senior living and when we think about how we’re deploying capital, we’re not thinking about year one, we’re not thinking about year two, we’re not thinking about cap rates,” he said during the panel.  “We’re focused on total return.”

He did say that government funding such as the Provider Relief Fund has been essential in keeping the skilled nursing sector alive and well.

“Stimulus was instrumental [for the skilled nursing sector],” Chaudhri explained.  “It was very important for the business and for the industry.  How we approach it from a valuation perspective is that it’s viewed as a one-time item and just like any other one-time item it is normalized out.”

He said that though operators weren’t getting credit from a valuation perspective, the stimulus allowed many to stay afloat and stabilize operations, resulting in performance that was a lot better than it would have been without that support.

White Oak Healthcare Partners LLC Managing Partner Jason Dopoulos said the government support led to a quicker bounce back in occupancy for the sector.

“Many states have certificate of needs (CONs), there’s many groups that own their own ancillary companies and we’ve seen a big demand in getting nursing beds,” he said. “We’ve just seen that market heat up.”

Dopoulos has seen the combination of smaller family-owned facilities looking to sell and other operators looking to grow their regional footprint to support their ancillary businesses lead to high pricing despite compressed margins.

“I think there’s pent up demand,” he said.  “With the SNF market, it’s almost like you play or you don’t, but the buyers have been very aggressive in that market.”

Dopoulos will be interested to see how cap rates change post-COVID but said that the long-term trends have stayed the same.

A report released over the summer showed that cap rates for the most desirable facilities in core locations averaged around 10.9%.  Cap rates share an inverse relationship with prices so as cap rates decrease, prices go up.

“For financing, for traditional SNFs, especially if people are coming for bridge-to-HUD, rarely are we going below like 12%,” he said.  “If you have a Medicare-only asset or are in a state where it’s tough to build and have a good relationship with the hospitals, you can see cap rates in the 10-11% range.”

He said good assets are typically in the 12-13% range in the sector.