Different types of buyers in the Senior Housing Market

There are many types of buyers in the senior housing market and sometimes it can get confusing for sellers to know who they are really dealing with.  While it is great to get a high-price offer for your community, if the buyer doesn't have the ability to close, it is doesn't matter how good the offer is.

There are four main types of buyers:

1.       Real Estate Investment Trusts (REITs) – REITs are publicly or privately traded real estate companies that typically have ample cash available to acquire properties.  Most of the time REITs buy a community and at closing, sign a long term NNN lease with a local or regional operator to operate the community.  REITs typically buy with cash. 

2.       Private Equity Companies – They come in all different sizes from multi-billion dollar companies like the Carlyle Group to much smaller companies.  Private Equity companies typically buy properties and use a management company to operate them.   Private Equity companies typically buy with cash or with a large line of credit.

3.       Local and Regional Operators – Local and Regional operators may own/lease 5-50+ communities.  They may use a REIT or Private Equity company as a partner or may buy a community on their own.  If they are buying a community on their own, they typically use bank debt and raise equity internally with high net worth individuals, and through friends and family.

4.       “Mom and Pop” Operators – They typically own from 0-5 properties.  Most REITs and Private Equity companies will not partner with Mom and Pop operators because they are too small and the communities they operate are not large enough.  They typically buy with personal equity or friends and family’s equity, and bank debt.

As a seller, it is important to understand what type of buyer is making an offer to buy your community and how they plan to financing the purchase.  Far too many buyers try to put communities under contract to buy, and THEN try to find the equity and debt.   This often times lead to delays in closing, cancelling the offer to purchase, or retrading at a lower price.

At Senior Living Investment Brokerage, Inc. we have relationships with over 1,700 of different types of buyers and can help you understand what type of buyer is making an offer, their track record in closing deals and how they plan to finance it.

For more information on selling your community, contact Jason Punzel at 630-858-2501 x 233 or punzel@slibinc.com.

How many months of consistent cash flow do I need to maximize the price in selling my Senior Living Community?

When determining the price a buyer is willing to pay for a Senior Living Community, they look at many things.  Ultimately, though, every operating asset is worth the future cash flow it will produce and future sale price, discounted back to today’s value.   One of the best ways to predict future cash flow is by analyzing what the community is currently producing and what it has produced in the past.   The more consistent a community has produced cash flow over the past several years, the more confident a buyer will be that it will continue to do so and willing to pay more for the community.  

However, often times a community, or any business, will go through some struggles.   If an owner fixes the problems and increases cash flow over an extended period of time, most buyers will give the owner credit for its current higher cash flow and base the purchase price on the new amount.  However, when there is not a long track record of consistent cash flow, the potential buyer is going to try to determine if it is realistic that the new, higher cash flow will continue.  There are several key questions they will ask and analyze:

1.  Is the community’s new rents and occupancy similar to the market?      

2.  Does the physical structure warrant market rate rents and occupancy?  

3.  Did the community increase occupancy via Medicaid or by offering steep incentives/temporary discounts?

Typically, a minimum of three months of consistent cash flow is needed to maximize the price.  12-24 months is ideal.  However, if a seller can clearly demonstrate what they did to fix the problem, sometimes even a shorter amount of time is needed.  Though, the new cash flow will HAVE to continue through the marketing, due diligence and closing timeline, which could take 3-6 months.

If a potential buyer determines that the new, higher cash flow will realistically continue, a higher price is warranted.  However, if the new cash flow is just a cyclical event or was achieved by using Medicaid or steep discounts, it will be difficult to achieve the higher sales price and a longer track record may be required. 

For more information on what your Senior Living Community might be worth, contact Jason Punzel at 630-858-2501 x 233 or punzel@slibinc.com.

Will the New Owner Keep My Employees?

Will the New Owner Keep My Employees? 

One of the most common questions we get asked by potential sellers is, “Will the new owner keep my current employees?”  Of course the answer depends on the situation; who is the new owner, how well is the current facility operating, etc. 

Typically, if a facility is being ran well, there is a high probability that the new owner will keep the current employees.  To operate effectively, the community needs to have employees, and it is in the new owner’s best interest to not “rock the boat” if the current employees are doing their job well and have good relationships with the residents.

If a facility is not being operated well or is losing money, there is a greater probability that a new owner may change some employees.  However, this is not always the case.  Often times a community needs capital improvements, better management, or upgraded IT systems to improve and the current employees are doing a good job with what they have to work with.  In this case, the new owner will probably keep the current employees and work with them on improving the facility.

There is no guarantee on what the new owner will do.  When selling a facility, the current owner has to realize that changes will happen after the sale and sometimes the changes will effect employees.  However, most new owners have a strong desire to keep good employees that care for the residents and treat the facility as if it were their own.  Thus, new owners typically ask who the key employees are and wait to evaluate them for a few months before making any personal decisions. 

To discuss this question or other questions about selling your Seniors Housing Community, please contact Jason Punzel at 608-858-2501 x 233 or punzel@slibinc.com.

Operating Margins of Senior Living Communities compared with Apartment Buildings

In analyzing thousands of communities each year, we find a very wide range in operating margins.  Newer, larger communities have higher operating margins than older, smaller facilities.  Communities with high occupancy rates, have higher operating margins than facilities with lower occupancy rates. 

However, stabilized assisted living communities typically have operating margins (EBITDA margin) between 25-40%, and independent living communities between 30-40%+.   Stabilized apartment buildings that are similar in age and size have operating margins between 40-55%.  This is due to the fact that apartment buildings do not have all of the extra services, medical, food, activities and staffing that independent and assisted living communities have.  Additionally, apartment buildings typically have less common areas; kitchens, dining rooms, etc, allowing for more rentable square feet, than senior living facilities. 

Because of the higher operating margins and lower variable expenses, investors perceive apartment buildings to be lower risk than senior living facilities resulting in lower cap rates (higher prices).  Apartment buildings can have cap rates 150-250 basis points lower than a similar age and size senior living facility.   However, as senior living facilities continue to become more main stream with investors, the perceived risk decrease resulting in a smaller spread in cap rates.

For more information on what your Seniors Housing Community may be worth, please contact Jason Punzel at punzel@slibinc.com or 630-858-2501.

How do Cap Rates for Senior Living compare with Apartment Buildings?

How do Cap Rates for Senior Living compare with Apartment Buildings?

A Cap Rate is the most commonly used method in determining the value of a real estate asset.   A cap rate is derived by dividing the annual net operating income by the purchase price.   The higher the cap rate, the lower the price of the asset.   The greater the perceived risk is in an asset, the higher the cap rate, and thus, the lower the price.

According to Senior Care Investor, in 2013 the average cap rates for an independent living facility was 8.2%, the average cap rate for an assisted living facility was 8.7%, and the average cap rate for a skilled nursing facility was 13%.  According to Freddie Mac’s survey in February, 2014, the national average for apartment buildings in the US was 6.4%.

Why do senior living assets have a higher cap rate than apartment buildings?  Senior living assets are still considered riskier because an investor is buying the real estate and the operating business instead of just the real estate and leases as is the case for apartment buildings and commercial real estate.

However, this also presents an opportunity for those who are good at operating seniors housings communities to make a greater return on their investment than investing in lower cap rate real estate assets.

For more information on what your Seniors Housing Community may be worth, please contact Jason Punzel at punzel@slibinc.com or 630-858-2501.

Should I sell now or wait to improve my community’s performance?

As broker’s we get posed this question often.  The biggest driver of a community’s value is its current net operating income and Cap Rates.   Communities are typically valued be dividing its current net operating income (NOI) by the current cap rate.   A cap rate is similar to an interest rate and measures investor’s perception of risk in a given asset.   A high cap rate indicates greater risk, and thus a lower value.

When a property is not operating at its potential, net operating income is lower than it could be and the value is thus lower.  Many owners think it might make sense to try to improve their community’s NOI and then try to sell in the future.  There are two main things an owner needs to consider when thinking about this strategy.  First, is it realistic that their community’s net operating income will increase in the near future without significant changes – capital expenditures/remodeling, a new management company, new staff, etc.  Does the owner have the ability and resources to execute this changes?  The community will not simply do better on its own because it may have had success at some point in the past.   The industry is constantly changing and improving, and owners need to also continue to change and improve to keep up.  It is not simply good enough to keep doing what you have done in the past and hoping things will improve on their own.  This strategy doesn’t work in any industry.

The second item to consider is; where will cap rates be in the future?  Cap rates are greatly influenced by interest rates.   As interest rates rise, so do cap rates, and thus property values decrease.  Although there is not a 100% correlation between cap rates and interest rates, there is a very strong correlation between the two.  Since interest rates are at an all-time low right now, there is a good chance that they will raise in the future, and cap rates will along with them. 

For example, a community is currently producing $600,000/year in NOI and the current cap rate for that type of community is an 8%.   To determine the value, $600,000 would be divided by .08 to come up with a value of $7,500,000.  However, the owner is not happy with the value and decides to spend $300,000 on remodeling, hire a new marketing director, and spend more of their own time at the community to help control expenses.   Over the course of two years, the owner increases NOI to $800,000/year.   However, during that time, interest rates increased and now the cap rate for this type of community has increased to a 10%.   The new value would be determined by dividing the current NOI of $800,000 by .10, equaling $8,000,000.  Thus, after spending $300,000 in remodeling, the owner has only increased the value by $200,000 after working hard for over two years.  It is also possible, that NOI doesn’t increase at all with a remodel and new marketing director because a competitor builds a new facility close by and saturates the market, or the new marketing director turns out to be worse than the original director, or the Executive Director quits and the owner can’t find a good new one, or one of the many other challenges that owner’s face every day occurs. 

The biggest risk facing owners today who are considering selling in the next several years are rising interest rates.  If a community is not preforming at its optimum, an owner has to realistically assess if they have the ability, time and resources to make the changes needed to truly increase the NOI, understanding there are many outside factors that could inhibit their ability to execute the plan.  The old saying, “A bird in the hand is better than two in the bush” is often true today.

For a complete analysis of what your community is worth, contact Jason Punzel – punzel@slibinc.com or 630/858-2501

Can Interest Rates Go Any Lower?

Over the past several years, interest rates have been extremely low.  The 10 year US Treasury rate (a common benchmark for financial instruments) reached an all-time low in July, 2012 at 1.53% and today is around 2.64%, the Federal Funds rate has been close to 0% for several years.   The 10 Yr Treasury hit an all-time high in August, 1981 at 15.32% and has averaged 4.64% since 1870.  Many people assume interest rates have to increase since they have been the lowest that most can remember.

However, it is possible that might not be the case.  Japan’s 10 Year Treasury rate has fluctuated between .5%-2% from 1998-present and is currently at .59%.  Japan had an incredible economic run for years that ended in a deep recession in the early 1990s, leading to historically low interest rates for almost two decades.  However, unlike the US, Japan has suffered a declining population, bouts of deflation and near constant recessions over the past 20 years. 

While Japan is an example that American interest rates COULD continue to stay low, or even decline, the odds are certainly greater that they will increase.   America has an increasing population, is the world’s technology leader, has the best University system in the world and is still the world’s largest economic and military power.  As long as America’s economy grows, interest rates will eventually raise back to the long term average.  Thus, now is a great time to consider selling.

For a complete analysis on how interest rates can affect your community’s value, both now and in the future, contact Jason Punzel – punzel@slibinc.com

Value Add vs. Stabilized Properties – How are they valued?

Value Add vs. Stabilized Properties – How are they valued?

For a property to be considered “stabilized”, it’s census and monthly (daily) rates must be similar to other properties in the market.  For example, if market occupancy is 92% and the average private pay rate for assisted living is $3,500/month, and if the property that is being analyzed has an occupancy of 93% and average rate of $3,400/month, the property would be considered stabilized.   In this case, the best way to determine its value is by using the Capitalization Rate method.  This involves using the Net Operating Income of the property (NOI) and dividing it by Cap Rate.  If a property has an NOI of $1,000,000 a year and the typical Cap Rate for this type of property is a 7.5%, then the property’s value would be $13,333,000.  This is a very straight forward method of analyzing the value of a property.

Where valuing a property becomes more challenging is when the property is not stabilized at the current market occupancy and rates.   For example, if a property is 100% occupied with an average monthly rate of $3,500, one might assume that it will be hard to maintain a 100% occupancy on a going forward basis, and therefore will reduce the revenue in their analysis to an amount closer to market occupancy, thus reducing its NOI and price from its current state. 

Likewise, if a property has an occupancy rate below market, for example 75%, the NOI of the property is probably very low or may even be negative.  However, the property still has value.  Depending on the quality and location of the property, it may have the potential to achieve a market occupancy rate, and therefore be worth significantly more than simply using the Cap Rate method to determine its value.  A new owner must identify what changes need to take place (capital expenditures, a new marketing plan, a new administrator, etc), the time, cost and likeliness of success to determine the potential future net operating income.   Typically, we see properties that are operating significantly below the market getting sold at a price somewhere between its current state (current NOI/Cap Rate) and its future value (potential NOI/Cap Rate).  The new buyer must be rewarded for solving problems and taking the risks involved in turning around a property.  However, the current owner will not sell unless they think they are getting a fair price for giving up the future upside.

Senior Living Investment Brokerage, INC works with many buyers for both stabilized and non-stabilized facilities and has a long track record of selling both types of facilities.  For a more complete analysis of the value of a property, please contact me at punzel@slibinc.com or Jason Punzel – 630-858-2501.

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.  

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.

Cap Rates

How Cap Rates Are Determined

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 cap rate is a measure of risk.  Typically, the higher the cap rate, the riskier the asset is.  Cap rates for skilled nursing facilities typically range between 11-15%, where-as assisted living facilities typically range from 7-10%.  However, why does one assisted living facility sell for a 7% cap rate and another one sells for a 10% cap rate?

Typically, newer, larger facilities located in larger, growing,  metropolitan  areas sell at lower cap rates than older, rural facilities.   Other determinates are the income/occupancy history of a property.  Those properties that have a history of high occupancy and consistent earnings sell for lower cap rates than properties that have struggled in the past.   

Outside factors also determine cap rates such as interest rates, availability of debt and equity capital and general economic conditions. 

The first step in determining value is to engage an experienced professional to assist in the valuation and analysis of your property/properties.  Please contact us if you would like a no-obligation market analysis.   

Jason Punzel, Senior Associate.  punzel@slibinc.com

Portfolio Sales

Pricing Premiums for Portfolios vs. Single Asset Sales

As a company, we value many senior living and skilled nursing facilities both as portfolios and single asset sales.  Often times we get asked the question if there is a premium to sell a portfolio of facilities instead of an individual facility.  In general, the answer is “yes”.  However, it depends on the size of the single asset vs. the size of the portfolio, the location of the portfolio and the make-up of the portfolio. 

In general, portfolios are more attractive to buyers if they are in the same general geographic location, are similar in size and quality and are either mostly seniors housing or mostly skilled nursing.  A portfolio is easier to manage and will fit the acquisition criteria of a buyer better when it is more homogeneous.

When comparing prices of an individual asset vs. similar assets that are in a portfolio of multiple assets we typically see a premium of 5-15% for the portfolio.  A portfolio allows a buyer to deploy more capital at once, achieve greater economies of scale, makes it easier to enter a new geographic location, and often allows for more attractive financing terms. 

Whether you own one community or several, the first step in determining value is to engage an experience professional to assist in the valuation and analysis of your property/properties.  Let us know if you would like a no-obligation market analysis.  

Jason Punzel Presents at the Pacific Northwest Investors Conference

On November 14th, Jason Punzel presented at the Pacific Northwest Investors Conference held in Vancouver Washington.  Jason's topic was on valuing Senior Housing and Skilled Nursing Facilities.   The event was hosted by the Oregon Health Care Association and the Washington Health Care Association. The event was attended by owners, investors, lenders, brokers and industry specialists.  Jason can be contacted at punzel@slibinc.com