The below article was written by Maureen Rutecki, Partner in StoneBridge Business Partners, and recently published by the AICPA, in the FVS Consulting Digest Issue 34 – June 2018.
Recently, a majority owner of a skilled nursing facility (SNF) asked us to review an email from one of the minority shareholders of the facility, who was concerned that the operations were being sold for $20,000 per bed. Attached to the email was a letter from the minority shareholder’s attorney, who was seeking significant documentation about the transaction and other documents that referred to record high prices for senior care facilities’ transactions in 2016, including average prices of $100,000 per bed for SNFs and $500,000 per unit for senior housing facilities.
Gathering the facts
We first took a closer look at the documents the majority shareholder provided and sought out information on 2016 SNF transactions. We turned to the 2017 Senior Care Acquisition Report (SCAR), which Irving Levin Associations published. According to SCAR, the average price per bed for an SNF in 2016 was $99,200.1 (The Senior Care Acquisition Report, Twenty-Second Edition, 2017, Irving Levin Associates Inc. Norwalk, CT, 2017, p. 4.) SCAR goes on to explain, “Some of these are the newly built facilities, while many others are older properties either with a significant Medicare census or in markets with the potential to increase census.” 2 (Ibid., p. 7) Later in the document, the authors explain that all transactions in the book are reported based on the sale of both the real estate and the operating business and that EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) is considered to be the same as cash flow.3 (Ibid., p. 23.)
In the case of the specific transaction in question, the operations, without the real estate, were sold for $20,000 per bed, so the average $99,200-price-per-bed reference, which includes both real estate and operations, was not comparable. SCAR reports data not only on transaction prices (aggregate and price per bed) but also data on number of beds, expense ratios, capitalization (cap) rates, and gross income multiples, among other statistics. Although the typical SNF transaction might have a cap rate in the 11% to 15% range, it is important to understand that these published cap rates are made up of two components: real estate and operations (business).
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About Maureen Rutecki, CPA/ABV/CFF, ASA, MBA: Maureen is a Partner in StoneBridge Business Partners. She specializes in valuation, litigation and consulting services. Her valuation experience encompasses a broad range of companies, complex business arrangements and intangible assets for purposes such as taxation, corporate planning, transactions and financial reporting. Maureen’s litigation experience includes disputes related to a diminution in value, shareholder oppression, lost profits and marital dissolution matters.