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 Wrapping Up Year 2017 in Data

Despite numerous challenges last year, investor interest continues in the skilled nursing sector.

 

The skilled nursing sector continued to face challenges in 2017 due to many factors, including length of stay pressure from managed care, changing regulations, competition from other post-acute providers (such as home health), and labor pressure—both retention challenges and wage rate growth pressure.
 
Despite the continued challenges in the sector, there continues to be interest from investors, whether from larger institutional players or smaller regional owner/operators. However, the price per bed softened in 2017 from 2016.
 
The latest sales transactions data show 2017 was still a relatively robust investment market for skilled nursing as there were $6.5 billion in closed transactions.
 
The latest sales transactions data below include data on both skilled nursing (nursing care) and seniors housing (assisted living, independent living, and memory care).

Seniors Housing and Care Transactions

Institutional buyers played a major role in propelling seniors housing and care closed property sales transaction volume in 2017, which registered $16.6 billion. The total includes $10.1 billion in seniors housing property sales and $6.5 billion in nursing care property sales. The total closed transactions volume was up 14.4 percent from the previous year’s $14.5 billion. Seniors housing saw a 34 percent increase in volume from $7.5 billion in 2016, while nursing care volume decreased 6.6 percent from $7.0 billion the year before.

The dollar volume in 2017 was due to a strong first quarter and a very strong third quarter. Those two quarters represented 70 percent of the dollar volume for the year. The fourth quarter historically is a strong quarter compared to the rest of the year.

However, in 2017, that was not the case. Of course, one possible explanation for this could be the wait-and-see approach as the tax reform bill was unfolding as 2017 was coming to a close. Time will tell if deals were delayed into the first quarter of 2018, or perhaps the second quarter, and then it would be possible to see a solid start in transactions volume for 2018.

Smaller Transactions Dominate

Dollar volume was up in 2017, but when looking at the total number of deals closed, a measure different than dollar volume, the number of transactions closed dropped 9 percent. The number of deals closed in 2017 was 491 of which 98 were portfolio transactions and 393 single-property transactions. That compares with 539 transactions closed in 2016 of which 109 were portfolio transactions and 430 were single-property transactions.

Over the past couple years, portfolio transactions represented 20 percent of overall closed transactions. This was even the case back in 2015, when the public buyer type, namely the publicly traded real estate investment trusts, or REITs, represented the majority share of buyers. Indeed, single-property transactions are very important to the market in terms of the flow of transactions.

There now have been 17 straight quarters with over 100 total deals closed. The fourth quarter of 2017 registered 124 deals closed, which was up from the third quarter of 2017, but down from the fourth quarter of 2016 and 2015 when 161 and 151 transactions closed, respectively.

As far as the size of the deals, small deals of $50 million or less dominate the activity, which makes perfect sense considering the single-property market represents the majority by far of the number of transactions closed. In the fourth quarter of 2017, smaller transactions dominated, more than usual, representing 96 percent of all transactions closed.

Over the past couple years, as the public buyer type has become less represented within the overall volume, there has been a decrease in large deals of $500 million or more. While 2015 alone saw 10 transactions of $500 million or more, 2016 and 2017 together registered a combined total of only 10 transactions of $500 million or more.

Institutional Capital Driving Volume

As noted above, transactions dollar volume for 2017 registered an increase from 2016 as the institutional buyers, comprised mostly of equity funds that manage pension money or other types of institutional money, played a major role in higher volume.

Over the past couple years, the institutional buyers have increased their share of total buyer volume significantly, in addition to increasing their dollar volume overall. In 2015 institutional buyers registered $3.2 billion in closed transactions, representing only 15 percent of all buyer volume. In 2017, institutional buyers registered $6.6 billion in closed transactions, a 107 percent increase from 2015, and represented 40 percent of overall transaction volume.

Some relatively large deals of note by institutional buyers in 2017 were:
■ Kayne Anderson, the institutional alternative investment manager, bought a $633 million portfolio from Sentio Healthcare Properties, which consisted of 32 seniors housing and care properties. This deal included some medical office building (MOB) properties, which are not reflected in these volume numbers;
■ Columbia Pacific purchased 54 seniors housing properties from Hawthorn Retirement Group for $1.8 billion that included over 6,100 units;
■ Blackstone closed on a portfolio of 60 Brookdale Senior Living properties from HCP representing $1.1 billion in volume, with a unit count of over 5,500;
■ Blackstone, in another large deal, closed on the Senior Lifestyles portfolio from Welltower for $747 billion, including 25 properties and over 3,600 units; and
■ Lastly, another large deal was the acquisition by the Chinese life insurance company, Taikang Life Insurance, closing on a partial interest from Northstar which, per the Associated Press release, was approximately $460 million and included over 200 properties.

While institutional buyers’ activity has increased, the public buyers’ activity decreased significantly after 2015, including their share of the total volume. As the public buyers’ share has decreased, so has the overall dollar volume.

The public buyer type represented 53 percent of the $21.9 billion in closed transactions in 2015. As of 2017, the public buyer represented only 23 percent, and total volume was only $16.6 billion. Public buyer volume in 2015 was $11.6 billion, and in 2017 it had decreased by 67 percent to $3.8 billion.

While mentioned last here, don’t forget about the private buyers who include private REITs, private owner operators, and private partnerships. The private buyers have been very steady with their rate of acquisitions, averaging $6 billion dollars per year from 2015 through 2017. Indeed, it’s a very impressive deal flow. The private buyer registered $6.8 billion in volume in 2015 and represented 31 percent of all volume. In 2017, it registered $5.6 billion and represented 34 percent of the total volume. Even with the relatively weak fourth quarter volume in 2017, private buyers registered $1.2 billion in closed transactions.

Skilled Nursing Price Per Bed Decreases

The storyline for seniors housing and nursing care pricing has started to diverge over the past year.
Seniors housing’s average price per unit (PPU) of $180,500 was flat in the fourth quarter of 2017 when compared to the third quarter. However, on a year-over-year comparison, seniors housing’s average price per unit is up 9.3 percent from $165,100 in the fourth quarter of 2016. And from its cyclical low in 2010 of $58,600, it is up over 208 percent, which comes out to be a 16.2 percent compound annual growth rate over the period.

The trend for the nursing care price per bed is another story. Its average price per bed dropped 1 percent in fourth quarter 2017, from $84,600 in the third quarter down to $83,800. On a year-over-year comparison, the nursing care average price per bed is down significantly, by 16.5 percent from $100,300 in the fourth quarter of 2016. However, from its cyclical low in 2009 of $48,700, it is up 72 percent, which comes out to be a 6.4 percent compound annual growth rate.

It appears that the average nursing care price per bed drop has stabilized somewhat this past quarter, but stakeholders will see how it holds up over the next few quarters.

The transactions market appears relatively healthy as volume in 2017, both in terms of dollars and the number of transactions, proved to have momentum. This momentum comes at a time when seniors housing and nursing care are experiencing their own unique challenges, whether it be over supply concerns for seniors housing, or occupancy and length-of-stay pressure in skilled nursing. However, there is still strong interest from investors, especially the institutional investors. Barring any capital market shocks, 2018 should also see a relatively strong transactions market.

The Latest NIC Skilled Nursing Data Report: 4Q 2017

Now, moving on to the latest skilled nursing revenue and occupancy trends as reported in the NIC Skilled Nursing Data Report.

NIC released its latest Skilled Nursing Data Report on March 8, 2018. The report now includes urban vs. rural trends, along with revenue mix by payer source. In addition to key monthly data on skilled nursing metrics, it includes time-series data from October 2011 through December 2017.

Here are some key takeaways from the report:

1. Occupancy continued to decrease in the fourth quarter of 2017 despite an early and severe flu season. Historically, there has been an uptick in skilled mix in the fourth quarter if flu season was both early and relatively severe, as it was the case this year. Occupancy decreased 66 basis points from the third quarter of 2017 to end the fourth quarter at 81.9 percent. Compared to a year ago, occupancy declined 159 basis points from 83.5 percent in the fourth quarter of 2016.

2. Differences in occupancy trends in rural and urban settings were pronounced over the last 12 months, with rural occupancy rates declining more sharply than urban. This may reflect many differences, including demographics, competition from home health care and telehealth, and reforms to the health care system.

With the introduction of this new geographic perspective on NIC’s skilled nursing data, more research is needed to shed light on the drivers of occupancy in the rural and urban sectors.

3. Managed Medicare revenue per patient day (RPPD) pressures were again evident in the latest data as it reached a new low at $433. However, an analysis of urban vs. rural areas suggests that the pressures of managed Medicare are more prevalent in urban areas than rural areas, as the managed Medicare patient day mix currently stands at 7.3 percent in urban areas and only 2.7 percent in rural areas.

In addition, managed Medicare patient day mix in rural areas has essentially been flat over the past 6.25 years, ranging from 2.5 percent to 2.7 percent, whereas it grew from 5.8 percent to 7.3 percent in urban areas in the same period.

4. Medicaid revenue mix now represents essentially half of all revenue at skilled nursing properties at 49.3 percent as of the fourth quarter of 2017. That percentage is up 70 basis points from the prior year in the fourth quarter of 2016.

Meanwhile, revenue mix has decreased for Medicare, the highest payer, to 22.8 percent, which is down 98 basis points from the prior year. This trend presents a challenge to the traditional skilled nursing business model as Medicaid, the lowest payer, is growing in revenue mix as the highest payer, Medicare, is decreasing in revenue mix.

5. Private patient day mix is significantly higher in rural areas when compared to urban areas. Rural private patient day mix is now 15.6 percent as of the fourth quarter of 2017 compared to only 6.5 percent in urban areas. One possible explanation for the differences among geography types is that urban skilled nursing properties may face higher competition for market share, in part because of a greater supply of similar products such as home care and other seniors housing types.

6. A comparatively higher private patient day mix over the years and a significantly higher increase in private revenue per patient day, along with less exposure to the pressures of managed Medicare, are the main drivers of rural areas showing a slight increase in the overall weighted average revenue per patient day across payer types over the past 6.25 years. However, higher expense growth, especially wage rate growth over the years, needs to be factored in when assessing the overall profit of the business.

The current report is based on data collected monthly, but reported quarterly, from approximately 20 operators and 1,500 properties. The data represent national, aggregate figures. However, NIC plans to grow the data set, adding more operators and properties to produce state-level reports. NIC welcomes the participation of operators nationwide in this confidential data collection process. Participants will receive a free benchmark report every month for their contribution.
 
Feel free to reach out with any questions regarding this article or the NIC Skilled Nursing Data Initiative. Download the latest report and future reports at: http://info.nic.org/skilled_data_report_pr.
 
Bill Kauffman, CFA, is senior principal at the National Investment Center for Seniors Housing and Care. He can be reached at bkauffman@NIC.org or 443-837-2429.
 
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