2020 SNF Market Outlook – by Matthew Alley

This week, I presented on the 2020 SNF market outlook with industry publication Skilled Nursing News. In case you missed it, a full copy of the presentation slides and audio is available here.

The Webinar, “Beyond PDPM: Top Challenges and Opportunities in 2020” featured the following speakers:

  • Bill Kauffman of NIC (0:00 – 16:40) on “Transaction, Occupancy and Revenue Trends.”
  • Fred Bentley of Avalere (16:41 – 32:43) on “Trends Reshaping the Skilled Nursing Landscape”
  • Matthew Alley of SLIB (32:44 – 47:43) on “Analyzing and Valuing Skilled Nursing Communities for Sale and Purchase.”
  • Alex Spanko of Skilled Nursing News (47:44 – 1:00:33) Moderating Q&A

Access the presentation slides and audio here, or read on for an adapted summary of SLIB’s portion of the Webinar:


Analyzing and Valuing Skilled Nursing Communities in 2020 (32:44 – 33:57)

When valuing Skilled Nursing Facilities, first identify the key variables that will impact value for the specific facility or portfolio. Second, decide which methodology would make sense to value the community or portfolio. Put yourself in the buyer’s shoes – what is important to them? Third, run the facility through the chosen valuation method and review. Finally, compare the property/portfolio against recent sales as available. There are no “perfect” comparables in this industry, but recent sales are a helpful additional filter for determining value.

Key Variables in Determining Value (33:58 – 39:29)

Location – What are the reimbursement rates in this location? Is the SNF located in a CON state? What barriers to entry exist for buyers in this market? Demographics also vary by location. Is the SNF located in a younger market? Are there many seniors or adult children in the area? Is the senior population in this location projected to grow or decline? Is the SNF in an urban, suburban, tertiary or rural market? Primary market SNFs typically sell for a higher price per bed than rural SNFs.

Operational performance – What is the facility’s Net Operating Income (NOI)? Is the community earning or losing money? What is the Medicare and Private Pay Quality Mix? Do the rates at this facility provide upside to a Buyer? How does the community census compare to local competitors? Operating margin is also important to consider, as a Buyer reviews where potential expense cuts could be made.

Physical plant – How many nurses’ stations are there? One nurses’ station is preferable to multiple. Is the facility older or newer construction? How many beds are at the community? In our experience, smaller communities do not garner as much attention as 100+ bed communities. How many stories are in the facility? Single-story facilities tend to gain much more interest than multi-story facilities. We recently marketed a four-story community in Texas that was passed over by qualified buyers largely because it had multiple stories.

Approach / Methodology Used for Valuation (39:30 – 42:10)

There are three traditional approaches used for valuation. Income Approach (capitalization rate and EBITDAR), GIM (Gross Income Multiplier) and Sold Comparables. The last approach should be considered with caution, as there are not many perfectly comparable sales.

Additional factors should also be considered when valuing SNFs in the 2020 SNF market. Is this a standalone community or larger institutional portfolio? How do current rates and occupancy compare to the market? Is the community performing well, or is it a value-add community? How do the historical financials and pro forma compare? Would a Buyer be able to easily finance the community? A poor facility reputation or survey history may not show up in the financials but will be considered by a potential Buyer.

Biggest Concerns with Skilled Nursing Valuation (42:11 – 44:13)

Several concerns face SNF owners and operators ahead in 2020.

-The uncertainty of future Medicare reimbursement and shorter length of stays may impact SNF groups in 2020.

-The tightening of state budgets can affect each state individually.  Medicaid is a large line item for each state, and states that have tighter budgets might see Medicaid cuts or a lack of future increases.

-Overbuilding, especially with the “transitional care” model, can cause concern and take Medicare residents from traditional nursing homes.

-Occupancy, as well as the Medicare / Private Pay mix has dropped nationwide.

-PDPM could also force smaller operators to sell. While this may not lead to a rush of sales January 1st, smaller operators may struggle to keep up with technological improvements. This will lead to additional supply on the market in later 2020 and 2021.

-Functional obsolescence is also important to consider. Many 40+ year old buildings may not meet resident demands. As a result, this will drive down value in the eyes of potential Buyers.

Valuation Detail (44:14 – 45:34)

Despite pressures on the Skilled Nursing industry, pricing over the last several years remains fairly constant. There was a bump in 2016 due to quality, larger portfolios going on the market. Furthermore, pricing seems to be trickling up in 2019 despite current industry pressures.

Price per bed has remained fairly constant since 2015 moving into the 2020 SNF market.

Source: Skilled Nursing Acquisition & Investment Report

Pricing for performing SNFs has not changed much in the past 4-5 years. Cap rates have hovered between 12-12.5%, and the previous 10 years has seen cap rates generally between 12.5 – 13.5%.

It is important to consider historical and recent trends in cap rates moving into the 2020 SNF market.

Source: Skilled Nursing Acquisition & Investment Report

Recent Comparables / SNF Sales (45:35 – 46:36)

Stabilized properties have been selling for around $80,000 per bed. Non stabilized properties have sold for about $45,000 per bed. SLIB’s properties under contract have continued with this trend.

For more details on recent SNF sales, please contact me or view the full presentation.

Valuation Variables Summarized (46:37 – 47:43)

Ultimately, variables that contribute to net operating income carry the most weight with respect to valuation in the 2020 SNF market.

Buyers will also pay for some upside potential but will not pay for all of it. Consider the resources and effort it will take to achieve.

Pricing ultimately varies greatly based on revenue, income, age, size and location, with Class A quality facilities selling for a much higher price per bed. SNFs also show a larger difference in price per bed than seniors housing buildings.

Access the full presentation slides and audio for the 2020 SNF market outlook Webinar here.

Questions? Comments? We’d be happy to expand on any topic in a future blog post. Contact Matt or the editorial team today.

For more information on any topic discussed in this post, or if you would like to know what your senior housing facility or portfolio is worth in today’s market, email Matt Alley or call (630)-858-2501.


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Matt Alley

Author Matt Alley

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