Washington Healthcare Association Conference

On Monday, February 24^th, I had the honor to present at the Washington Health Care Association’s Spring Conference.  The topic was on Valuing and Analyzing Senior Living and Skilled Nursing Facilities.  During the hour long session, we discussed the current market and valuations, and then analyzed facilities using an ROI/IRR spreadsheet.   This allows investors to calculate how small changes in assumptions (rent growth, expense growth, exit cap rates, etc) can have huge impacts on the IRR over the hold period.

For those of you who were not able to attend, feel free to contact me at punzel@slibinc.com or 630/858-2501 to get a copy of the presentation, including the most recent market valuations.  

Blockbuster deal: Good or Bad?

Brookdale buys Emeritus.  It is in the headlines of every Seniors Housing magazine, website and blog.  As a broker, I think these deals are good for our business.  It highlights the fact that our industry is doing very well.  I also believe that they will examine their newly acquired portfolio and divest those assets that are not a good fit (geographic, age, financial performance).  This gives local and regional operators the opportunity to acquire value-add deals. 

I also believe these blockbuster deals help those that own communities think about selling and ponder the question of what their property is worth.  So what is your assisted living community or nursing home worth in today's market?  The only way to know is to allow us to put together a confidential proposal.  We all know the market is constantly changing.  For more information about what your community is worth, please contact me at Ryan Saul.

Nick Cacciabando Sells Iowa Skilled Nursing Facility

Nick Cacciabando has sold a 75 bed Skilled Nursing Facility in Iowa. The facility was family owned and operated since it was developed in 1966. This was the Seller's only seniors housing community and they are retiring from the business. The Buyer purchased this facility utilizing a 1031 Exchange. This was a strategic acquisition as they have an existing presence in Iowa and are planning on realizing operational efficiencies through economies of scale. The census at the time of sale was 85% and the property sold for a 8.9% capitalization rate/.72 GIM. For additional information on this transaction, contact Nick at 314/961-0070 or nbando@slibinc.com

How Closely are Cap Rates and Interest Rates Correlated?

A cap rate is calculated by dividing the net operating income of a property by the purchase price.   The cap rate would equal the rate of return on equity if a property was bought with all cash and the net operating income stayed the same for the next twelve months.    As cap rates increase, the purchase price decreases, and vice versa.  

The interest rate on a US Treasury Bond is considered the “risk free” rate of return, since US Government has never defaulted in the past, it is the World’s trade currency, and it has the ability through the Federal Reserve to print money to meet its obligations.   Therefore, many investments are analyzed by their spread over the US Treasury rate.   The riskier the asset, the larger the spread is over the US Treasury.  Over the past 10 years, skilled nursing cap rates have averaged about 1,000 basis points above the US 10 year treasury rate and assisted living cap rates have averaged about 600 basis points above the US 10 year treasury rate.   This is because skilled nursing is considered a riskier asset than assisted living.

This raises the question, is the risk “spread” over the US Treasury a constant or not?  Or, when interest rates change, do cap rates always change in exact correlation?   Although interest rates and cap rates are closely connected, there is not a 100% correlation. 

However, inherently, the risk premium over the “risk free” rate of a US Treasury Bond of any asset is going to vary based upon the demand of investors.   Additionally, the risk premium varies based upon future expectations of a given asset.  Seniors Housing assets still have a greater risk premium than traditional market rate apartments since the investment community considers it a more risky asset.  However, given the future demand for seniors housing, this risk premium may decrease, resulting in a lower cap rate, even if interest rates increase.  Thus, while interest rates do have a strong correlation with cap rates, there are many other factors that go into determining a cap rate, mostly importantly, the future risk that investors perceive in a given asset.

For more information about Senior Living asset values, please contact Jason Punzel, Senior Associate, at Senior Living Investment Brokerage, INC.  punzel@slibinc.com.

2014 Seniors Housing Market Outlook

Overall Market Trends

The seniors housing merger and acquisition market finished 2013 in robust fashion, driven in part by investors searching to find attractive yields on their investment portfolios and the ability of institutional fund managers to blend these lower yield expectations of investors with non-recourse debt in this continued low interest rate environment. Many private owner / operators are feeling the additional burden of an increasingly intense regulatory environment and a more complex operating environment where economies of scale are proving to be increasingly more important.

Despite an unfavorable increasing tax environment for an owner considering a sale, timing is ideal as pricing has reached historic levels for existing facilities. Also, with the significant amount of transactions that occurred in 2013, buyers are now focusing on 2014 acquisitions opportunities with fewer options to pursue.

This market also provides a good opportunity for groups looking to expand as capital is affordable and readily available.

Bradley Clousing of Senior Living Investment Brokerage, Inc. contributed to Senior Housing News' recently released 2014 Outlook. Click here to view the full article.

Skilled Nursing Summary

Overall, we anticipate the continuation of aggressive pricing for skilled nursing assets given the lack of acquisition opportunities available. However, a number of factors have the potential to curb pricing in the near future. The primary risks are reimbursement pressure and increased labor costs.

Positive Factors

• Pricing for existing facilities to remain aggressive given the lack of product available in the market. Most aggressive pricing in States that have a moratorium on CON's. Some States, like Florida, are considering a partial lift of the CON, which could have significant pricing implications.
• Cost of debt remains historically low. Also, availability of debt for acquisitions is readily accessible, especially for well-located assets.
• More equity and capital looking to be deployed in the sector.
• Limited new construction. Click here to view NIC's most recent report on new construction.

Negative Factors

• Likely increase in labor costs due to the Affordable Care Act. The delay in the employer mandate has provided temporary reprieve.
• 2012 Report on Shortfalls in Medicaid Funding shows the largest deficit since inception of the report. Click here to read the full report. This is the most recent data available.
• Further pressure on Medicaid could come in the form of the reduction of federal subsidies over the long term after the Affordable Care Act expansion in many states. Click here to read the report on which States have participated.
• Increased regulatory burdens by state survey teams.

Assisted Living & Independent Living Summary

Overall we anticipate the continuation of aggressive pricing for assisted, as well as, independent living assets given the lack of quality assets available. Communities that were once dominant in the market could find new competition on the horizon. On the other hand, the availability of capital has driven capitalization rates to record low levels.

Positive Factors

• Pricing for existing communities to remain aggressive given the lack of assets available in the market.
• Cost of debt remains historically low. Also, availability of debt for acquisitions is readily accessible.
• More equity and capital ready to deploy in the sector driving capitalization rates to historic lows.
• Continued investment return compression in other sectors within commercial real estate has driven additional asset allocation from institutional funds to the seniors housing industry.
• Strategic alignment of operators and institutional capital has created a much more efficient acquisition process for many buyers. 

Negative Factors

• Likely increasing labor costs due to the Affordable Care Act. The delay in the employer mandate has provided a temporary reprieve.
• Increased activity in the construction pipeline could affect the performance and pricing for once dominant facilities in specific markets. This is more of a concern in the major metro markets, not in the secondary markets. Click here to read NIC's most recent report on new construction.
• Increased regulatory burdens by state survey teams - assisted living only.

With these factors in mind, there may never be a better time to explore the strategy of a sale. For a no cost, no obligation pricing proposal on your facility contact:

Brad Clousing, Managing Director

Senior Living Investment Brokerage, Inc.

Phone: (630) 858- 2501 ext. 231

Email: clousing@slibinc.com   

  

Brad Clousing and Ryan Saul Sell Georgia Personal Care/Memory Care Community

Ryan Saul and Brad Clousing sold a Personal Care and Memory Care community in Oakwood, Georgia. Oakwood is located in the northern portion of the Atlanta MSA. It was built in 1998 and underwent an extensive renovation and additional units were added at this time bringing the total square footage to 36,766. Census at the time of sale was 92%. The Buyer is an institutional owner/operator. It was a cash purchase with the intent of placing FNMA debt on the asset. The Seller was a local owner that used a third party manager. The purchase price was $11,750,000. For additional information please contact Ryan at ryansaul@slibinc.com or Brad at clousing@slibinc.com 630/961-2501