In October, a panel of skilled nursing facilities (SNFs) experts joined moderator Steve Monroe, managing editor and partner of research and publishing firm, Irving Levin Associates, for a question-and-answer session about buying, selling and valuing SNFs.
Here are some of the insider tips and perspectives offered during the 90-minute webcast:
Cash flow is king
The average and median price per bed in SNFs may have some weight when it comes to underwriting, but not nearly as much weight as cash flow, said J.P. LoMonaco, president of Valuation & Information Group, a healthcare valuation and financial services company based in California, and Kent Eikanas, president and chief operating officer of Cornerstone Real Estate Funds. "Typically, you underwrite a skilled nursing facility based on the cash flow," Eikanas said. "At the end of the day, I think folks tend to look more at the price per bed as a cap as opposed to what the median or average is.... I think it's more of a guideline, a check on what you're paying for a particular facility."
Positioning a facility for a $25,000 to $35,000 per bed sale
Aside from hiring a good broker, said Mark Myers, senior vice president of investments and senior director, Marcus & Millichap, a California-based real estate investment services firm, SNF owners should make facility presentation improvements, like fixing leaking roofs, polishing the floors and replacing ripped patient curtains. "... (B)ut don't spend significant capital improvement dollars because you're not likely to realize a return on those investments, particularly if they are investments that have a long term payback," he said.
SNF owners also should make sure internal financial statements reflect an efficient operation and a true cash flow picture. "Bad news doesn't kill deals but surprises do," he said, "so you don't want to present financial statements that are not really reflective of your true cash flow."
Low-priced facilities: who's buying, who's selling
Operators with a good track record of turning around "broken toys" and who have a "deep bench" of staff are buying low-priced facilities said Myers, and smaller providers, the mom-and-pops, are the ones selling.
Building, buying new or buying old
Is it better to buy an existing facility or build a new one? Is it better to buy low and improve operations or buy a newer facility but have little room to make improvements? In each case, the answer is it depends, said the panelists. Location factors into deciding between purchasing an existing facility or building new, said Avi Rothner, vice president of acquisitions for nursing home operator, Hunter Management, as does one's ability to disrupt a market. Whether to buy low and improve operations or buy a newer facility depends largely on how quickly you want a return on your investment, said Myers. Real estate investment trusts tend to want a fast turn around but larger operators may be willing to wait.
Medicare and Medicaid
SNF operators may be focused on growing Medicare reimbursement, said Rothner, but the reality is that most of the money you take in and most of your residents will be Medicaid based. "You got to understand the drivers and realize that no matter what you're going to do in the short, and the medium, and probably even in the long term, Medicaid is going to be a part of your facility and understanding it, learning it, and then eventually mastering it, is going to be very important in your success."