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.

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