Price for skilled nursing facilities increases in 2009

After dropping 17% in 2008 from an all-time high set in 2007, the average price paid per bed for skilled nursing facilities increased slightly in 2009, according to a new report on the seniors housing and care M&A market to be published by Irving Levin Associates, Inc., a research and publishing firm that tracks mergers and acquisitions in the seniors housing and health care markets. The skilled nursing industry has been resilient in the recent economic downturn, and despite uncertainty with regard to Medicaid and Medicare reimbursement, buyers were still finding opportunities in a relatively slow acquisition market. In the 2006 to 2007 period, prices were pushed up as Medicare and its higher rates became a more important part of the skilled nursing business, drawing more investors into the market. With the credit crunch and market uncertainty, this started to unravel, but not nearly to the extent as in other real estate-oriented sectors.

“In addition, the overall quality of communities sold continued to decline as owners of the newer, higher-quality properties mostly waited on the sidelines for a better market. Many of the sales in 2009 were either distressed properties or from distressed sellers who had to sell.”

The average sales price for skilled nursing facilities increased by 4% in 2009 to $47,500 per bed, according to Levin’s report, The Senior Care Acquisition Report, Fifteenth Edition. This was after an 18% decline in the average price per bed in 2008. Despite the horrific economic environment, this still represents the third highest average price of the decade. “The increase in 2009 was so small that we believe it represents more of a market stabilization than a sign of renewed strength in the skilled nursing sector,” stated Stephen M. Monroe, editor of the Report. “In addition, skilled nursing is so health care-oriented that changes in the real estate market have a much less significant impact these days.” Average capitalization rates in 2009 for skilled nursing facilities essentially remained flat with 2008 at 12.8%.

In the assisted living market, the average price per unit fell for the second year in a row after record prices paid in 2007. In 2009, the average price paid fell by 9% to $113,300 per unit, compared with the 21% decline in 2008. The median price, however, rose slightly in 2009. “Assisted living prices definitely felt the impact of the weak real estate market combined with the lack of sufficient capital for a healthy acquisition market,” stated Mr. Monroe. “In addition, the overall quality of communities sold continued to decline as owners of the newer, higher-quality properties mostly waited on the sidelines for a better market. Many of the sales in 2009 were either distressed properties or from distressed sellers who had to sell.” Unlike the skilled nursing sector, average assisted living capitalization rates increased by 100 basis points to 10.0%, an increase that was somewhat expected in the market. “There are still transactions done at lower cap rates, but nothing like the 2006 to 2007 period, as buyers are much more conservative in this market,” continued Mr. Monroe.

The dollar value of all publicly announced seniors housing and care mergers and acquisitions increased to $4.1 billion in 2009 from approximately $1.8 billion in 2008. Most of the increase came from two large transactions, both of which have still not closed. This is still far below the high-volume years of 2006 and 2007 when there were $22.6 billion and $16.6 billion, respectively, of announced transactions. “The year 2009 ended up much stronger than many expected, with the volume of transactions in the fourth quarter greater than the second and third quarters combined. That level of activity, however, may not continue into 2010,” commented Mr. Monroe.

The Senior Care Acquisition Report, Fifteenth Edition, contains statistics on the skilled nursing facility, assisted living and retirement housing merger and acquisition market, including prices per bed or unit, capitalization rates and income multiples, in more than 150 pages. The statistics are based on more than $1.8 billion of seniors housing and care arm’s length asset sales that closed in 2009. It also includes transaction information on each of the publicly announced senior care, home health care and hospice acquisitions in 2009.