Is Now a Good Time to Sell?

This is the question that I am asked most often in my conversations with owners and operators of senior housing communities.  The answer is never simple and depends on several factors.  What are some of these factors?

 

1. Is it a strong market?  The answer is a resounding yes.  There is more debt and equity to be placed now than in recent memory and not enough inventory on the market to keep up.  Simple supply and demand theory leads to higher pricing.  

2. How is my facility performing?  While that answer is different for every community, it is likely that as the summer is almost over and the fall is beginning, your community is operating at its peak levels for the year. 

3. When do I want to close?  Many potential sellers want to sell before the beginning of a new year in order to reduce partial year paperwork, i.e. cost report, prorations, capital gains tax treatment.  It typically takes 3-4 months to close, so if you want to close by year end, now is an ideal time to list your facility.

4. Is the cost of capital low?  When the cost of debt (interest rates) and equity (internal rates of return) is low, buyers can afford to pay a higher price for obvious reasons.  Interest rates are near historical lows and with the economy improving, there is risk in those rates increasing.  Equity internal rates of return are also very competitive right now.  All of this leads to low costs of funds for buyers and lower cap rates for sellers!

Although I don't have a crystal ball, there may never be a better time to consider a sale of your long-term care or senior housing community.  For a complete analysis of what your community is worth, contact Matthew Alley – alley@slibinc.com or (630) 858-2501

Selling..Keep calm..Where to start?

So, you have thought about selling your seniors housing or long-term care community.  Now what? 

For most of our clients the stress and anxiety immediately sets in.  Put that fear to rest by working with a professional that handles hundreds of transactions.  Senior Living Investment Brokerage, Inc. is there to help you.  

Here is one tip.  As part of the process, take inventory of your community and what might need to be fixed or improved.  One of the biggest stresses is when someone points out the things wrong with your community.  Beat them to the punch and it will avoid a lot of unnecessary stress.  Make sure floors/carpets are clean, paint is touched up and it is a pleasant experience to walk the halls.  If you make a good first impression with the condition of the community, it will alleviate a lot of the tedious investigation.  What they see first will give them the impression of how the rest of the community is taken care of.

Contact Ryan Saul to discuss our sales process and other things you can do to alleviate stress.

The Price is Right....well, hopefully

It is extremely important to position a community at the best, most realistic price during the first market exposure.  In the sales process, once a property has been exposed to the most active, qualified Buyers, activity dramatically decreases to the less active, less qualified "bargain" Buyers.

Drawbacks of an Overpriced Property

Many Sellers feel that an overpriced property can always be reduced if it doesn’t sell.  The danger with this approach is that by the time the property is finally reduced to its market value, it may have been on the market so long that Buyers perceive it to be a “tainted” property.  Buyers then question how long the property has been on the market and why it hasn’t sold.  Their offer to purchase, based on that knowledge, may be below its actual value.  Senior Living Investment Brokerage uses market research and our vast knowledge of the Seniors Housing market to arrive at an ask price that is both realistic and fair to the Seller but also attractive to Buyers.  This pricing process takes into account a number of key factors including property location and condition, upside, financial indicators and sales comparables, as well as current activity.  We present realistic pricing and do not attempt to “buy” our assignments.

We do not over-promise pricing expectations and our marketing proposals do not exceed what the property can support in the open market.  Over the past three years we have sold our offerings for 96% of our initial market valuation.

Contact Ryan Saul to learn more about what your community is worth and how to get top dollar in today's market.

What a buyer can do

I am often asked by buyers of nursing homes and assisted living communities what they can do in order to "get the deal."  Well, there are a lot of things that a buyer can do in order to grab a seller's attention.  A little work up front can go a long way when that perfect opportunity comes up.  Here are a few things you can do in order to better your chances to get the deal.

1. Prepare a bio with company history and facilities owned and operated.  What is your mission?  Sellers want to know your philosophy and who they are leaving their property to.
2. Have your equity lined up.  Ask your personal banker to provide a letter referencing your financial strength and ability to provide the equity required for a transaction. 
3. Have your debt lined up.  Obtain letters from two lenders speaking to their interest to provide financing for you.
4. Put together a professional letter of intent with your logo.  The letter of intent should clearly state the purchase price, earnest money deposit, due diligence period and closing period.
5. Have your due diligence list ready so that a seller can anticipate the type of information that they will need to put together for you.
6. It might sound simple, but don't breach confidentiality and abide by the process that the broker and seller have established.  Meet timelines and provide all information that is requested.

If you would like to learn more about buying or selling a nursing home or assisted living facility, please contact Ryan Saul at Senior Living Investment Brokerage, Inc. at ryansaul@slibinc.com or 630-858-2501.

Ryan Saul Secures Buyer for Illinois Skilled Nursing/Independent Living Community

Ryan Saul has sold a 62 bed skilled nursing facility with 8 independent living units in the rural community of Walnut, Illinois. The facility, on 11.5 acres, has minimal staff turnover and great quality care. The skilled portion was built in 1977 and the independent portion of the building was built in 1998. This was a rare situation where the transaction was a stock sale. The Selling entity consisted of 26 stockholders from the local community. The buyer was currently managing the facility making them the best fit for a stock sale/purchase. For additional information, please contact Ryan Saul at ryansaul@slibinc.com or 630/858-2501.

Closing Costs

Most clients realize that when they sell their seniors housing or long term care asset, they will incur a number of transaction-related closing costs.  Having a good understanding of these costs up front through a dialogue with your broker, attorney, and accountant, can help you calculate the net proceeds upon a sale, and ensure it makes sense to go out to the market.  The last thing any party to the transaction wants is an unexpected expense that jeopardizes the viability of the deal.  Here are some closing costs and credits that often figure into the equation:

-Pre-payment penalties on loans (confirm the loan is not in a lockout period).

-Legal Fees

-Accrued Paid Time Off (“PTO”) – Buyer is typically credited accrued employee benefits at the time of sale 

-Transfer Tax 

-Recording Fees  

-Property Tax – All property taxes need to be brought current 

-Tail Insurance

-Brokerage Fees

-Escrow Basket – It is not uncommon for Buyers to set aside an Indemnification Escrow Holdback for a period of time (range from 6 months to 3 years) and depends largely on the perceived potential liability. 

-Refundable resident deposits

-Prepaid items: RE taxes, insurances, benefits, leases, P&I (credits)

Each State is different, so it is important to also talk to your legal and tax advisors.  To discuss the value of your community in today’s market so you have a baseline gross figure to work from, please contact Toby Siefert at 630-858-2501 ext. 235 or siefert@slibinc.com

Medicare - What no one is talking about . . . yet

So, you have heard me preach about how strong the market is.  I have been on my soap box, jumping up and down, pleading with people to think about what their nursing home or Seniors Housing community is worth.  Now is the time to sell.   Change is coming.  I don't think it is the kind of change that drives pricing up.

1) We know that interest rates and the cost of capital are increasing.  This will inevitably lead to downward pressure on pricing.

2) Our favorite White House is now talking about accelerating Medicare cuts to skilled nursing facilities.  They are looking to cut healthcare spending by $400+ billion over the next 10 years.  In the budget, 2015 brings a 2.5% reduction.

My crystal ball, which is often cloudy, says that as we get closer to the implementation of these Medicare cuts, we may see a correction in pricing.  My advice is to take advantage of the current market.  A market that we are seeing record prices per bed/unit.

If you would like to know what your nursing home or Seniors Housing community is worth, please contact Ryan Saul at ryansaul@slibinc.com.

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

Nick Cacciabando Brokers Iowa SNF

Nick Cacciabando has sold a 75 bed Skilled Nursing Facility in Iowa. The facility was owned and operated by the same family since it was developed in 1966. This was their only long term care/seniors housing facility and they are retiring from the business. The Buyer utilized a 1031 Exchange in purchasing the facility. This was a strategic acquisition for the Buyer as they have over 10 facilities in Iowa. Census at the time of sale was 85% and the sale resulted in an 8.9% capitalization rate. For additional information, please contact Nick Cacciabando at 314/961-0070 or nbando@slibinc.com

Skilled Nursing Cap Rates - why are they higher?

Lately, I have spoken with several Skilled Nursing facility owners about why capitalization rates are so much higher for Skilled Nursing facilities than Assisted Living and Independent Living facilities, not to mention other commercial real estate classes.  

First off, a primer on how cap rates work.  A cap rate is defined as the NOI divided by the purchase price of the facility.  Using a very simple example, if a facility has $1 million in NOI and it has a 10% cap rate, the facility will be worth $10 million ($1 million / .1).  

Average cap rates vary based on industry trends and interest rates, but currently average cap rate ranges are as follows:

• Independent Living - 7.0%-8.0%
• Assisted Living - 8.0%-9.5%
• Skilled Nursing - 12.5%-13.5%

There are three reasons that Skilled Nursing facilities have much higher cap rates than Assisted Living or Independent Living facilities: 

1. Reliance on Government Reimbursement: There is no question that the majority of Skilled Nursing facilities rely on Medicaid and Medicare reimbursement for the majority of their revenue sources.  Assisted Living typically has very little Medicaid reimbursement and Independent Living has no government reimbursement (unless it's low income housing). 

This can have an enormous impact on value because if the state cuts its Medicaid rate by 10%, every SNF in the state will lose 10% of its Medicaid revenue with little that the facility can do to recoup it.  If the federal government cuts its Medicare rate by 5%, every SNF in the country will lose 5% of its Medicare revenue.  This decline in revenue dramatically impacts the bottom line.

While other real estate classes are affected by economic trends, both nationally and locally, government reimbursement is an added risk for the Skilled Nursing class that needs to be factored into expected returns and hence, values / cap rates.

2. Additional Liability:  As the acuity level of the residents increases, the risk of liability increases.  A resident that needs more assistance is going to be more likely to have an accident or unexpected downturn in his/her health, which can lead to greater risk of a lawsuit.  In states that do not have tort reform, this can be a large risk that is not easily insured against, even with liability insurance policies. 

3. Increased Specialization in Care:  Additionally, as the acuity level of the residents increases, the specialization and expertise needed to care for those residents increases.  An operator of Skilled Nursing facilities needs to hire more competent staff with a greater level of skill in caring for residents than Assisted Living or Independent Living operators.  

While an operator needs to consider the increased risk of running Skilled Nursing facilities, higher cap rates lead to greater investment returns than most other commercial real estate classes. 

For more information, contact Matthew Alley at alley@slibinc.com or 630-858-2501

Retrades Defined (and what it means for you):

Retrades have become a relatively common occurrence in seniors housing M&A.  For those readers who are fortunate enough to have not experienced this, a retrade is renegotiating the agreed upon purchase price - oftentimes at the point after the buyer has completed due diligence and earnest money is about to become non-refundable.  Retrades are often linked to some unexpected decline in census or performance, or findings in the physical plant which will require major expense.  These retrades are much easier to negotiate than the times a buyer asks for a reduced price and it appears that they didn’t do their homework on the front end, or never planned on following through on their offer price which secured the deal.

There are two hurdles that retrades create: 

1. Seller’s Sales Expectations: If we are under contract on a facility for $12 million and before closing the buyer asks for a retrade down to $10.5 million and the deal falls apart, the Seller will never forget that at one time their facility was “worth” $12 million, even if all the other market feedback was $10-10.5 million.  The original buyer set an unrealistic sales expectation that can be very difficult to duplicate.

2. Wasted Time:  When a buyer retrades to a lower price, oftentimes our firm already had multiple offers in that lower range, only now we may be closing in on year-end or other deadlines and/or both sides have a significant investment into the deal.  

What does this mean for Sellers?  One benefit of working with Senior Living Investment Brokerage is to utilize our knowledge of who closes deals at or near the original terms and who “ties” deals up.  However, too many times the reason we have to deal with a retrade is because the seller “took their hands off the wheel” once the deal was under contract.  A Seller needs to run the community as if they weren’t selling- right up until the day of closing.

What does this mean for Buyers?  We have already experienced clients who request that potential buyers put up non-refundable earnest money at the time of signing the LOI.  That doesn’t fly in today’s market, but we can see things moving that direction, even if only a “token” amount is non-refundable.  As more and more buyers enter the market, sellers are looking for ways to differentiate between Lookers and Closers.  

For more information, contact Toby Siefert at siefert@slibinc.com or 630-858-2501