When is the Best Time to Sell my Seniors Living Community?

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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 cap rate.   A cap rate is similar to an interest rate or rate of return and measures investor’s perception of risk in a given asset.   A high cap rate indicates greater risk, and thus a lower value.

Net Operating Income (NOI) /Cap Rate = Value  – (the higher the cap rate, the lower the value)

When a property is not operating at its potential, net operating income is lower than its potential and the value is thus lower.  Many owners think it might make sense to try to improve their community’s NOI and sell in the future.  There are two points 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 a great deal of change – capital expenditures/remodeling, a new management company, new staff, etc.  Does the owner have the ability, resources and desire to execute these 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 hope 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.  Interest rates are very low today, but clearly on the rise.  As the American economy improves and unemployment continues to drop, the Fed will continue to raise short term interest rates.    As interest rates rise, investors return expectations will also rise, resulting in higher cap rates and lower values.

Let’s use an example of a community that is currently producing $600,000/year in NOI and the current cap rate for that type of community is 8%.   To determine the value, the NOI of $600,000 would be divided by .08 to come up with a value of $7,500,000.  However, in this example, 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 increase and now the cap rate for this type of community has increased to 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 someone else builds a competing facility close by and saturates the market, or the new marketing director turns out to be worse than the previous one.  Or the Executive Director quits and the owner can’t find a competent 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 inhabit 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, Senior Living Brokerage, Inc., 630-858-2501 x 233 or [email protected]

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What is the best list price for my Seniors Housing Community?

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As a company, Senior Housing Investment Brokerage, Inc. represents many different types of buyers; REITS, Private Equity companies, Regional Operators, Non-Profits and small, privately owned operators.  When it comes time to sell, typically the most, or one of the most important factors is obtain the best price possible.

As brokers, owners rely on us to provide them with an accurate assessment of the value of their Seniors Housing Community and suggest a list price to help them obtain the best terms possible in the market place.  As a company, over 95% of the time the final sales price is within the price range from our original market analysis.  After determining a market value range, the next step is deciding on a list price.   Typically, we suggest a list price of about 10% above the market value range.   Thus, if we expect a property to sell between $9,500,000-$10,000,000, an appropriate list price would be between $10,500,000-$11,000,000.

Often times, sellers believe that by listing the property at a much higher list price, that it will result in a higher final sales price because buyers will “meet them in the middle.”   From our experience, this is rarely the case and a high list price usually results in a much longer process and sometimes even a lower final sales price.

Buyers who have the capital available to purchase a $5, $10, $20+ million property, are very experienced and tend to have tight underwriting guidelines to achieve the returns their investors require.   Buyers are not going to be “tricked” into paying more for a property because of a high list price, pride of ownership, or because it is a nice, new building.

A high list price usually results in many buyers quickly passing over the deal because they don’t think the seller is realistic and they don’t want to pursue a property that they think there is very little chance of buying at a market price.   When there is little activity at first, and sellers reduce their price to a market price, buyers start to wonder if the seller will continue to reduce their price or if the property has something wrong with it.  Both which can cause more delays and decreased interest in the market place.

It is much more effective to have a list price that is realistic and creates a lot of activity from buyers quickly.  This creates competition among buyers by getting several offers at once and has a much greater chance of driving the up the price than having a high list price that slowly gets reduced because of inactivity.

If would you like to get an accurate market price analysis, please contact Jason Punzel at [email protected] or 630-858-2501.

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Is the Market at its Peak in Seniors Housing?

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For the first time in many years, we have started to hear buyers, lenders and operators start to question whether the market peaked.   Commercial real estate in general, and Seniors Housing specifically, both have seen increases in value since the trough of the market in 2009-2010.

Cap rate trends are a good way to follow the market.  Cap rates vary widely, but according to the latest report from Irving Levin & Associates, the average cap rate for the 12 months proceeding Oct 1, 2015 for Independent Living was 7.2%, Assisted Living was 7.8% and Skilled Nursing was 11.8%.   Overall, the cap rates were steady, or had dropped slightly from the end of 2014.

Cap rates, and thus real estate values, tend to correlate closely to interest rates.   This is not only because most buyers use some type of leverage on the properties, but even more so, interest rates are a base rate of return that all investors use to evaluate all types of investments.  We have seen many new investors start to invest in the Seniors Housing market over the past several years because the cap rates were higher than in other types of income producing real estate.  Many saw it as an opportunity to achieve better returns.

Couple this with short term interest rates near zero percent and the 10 year US Treasury around 2-2.3%,  and there is little room for rates to go lower.   Thus, there is little room for cap rates to go lower as far as being correlated with general interest rates.  Currently, it does not appear that the Federal Reserve will be dramatically increasing interest rates anytime soon, there is certainly a lot more room for interest rates to go up than down.

However, cap rates remain higher in Seniors Housing than many other types of real estate and income producing assets.   To the extent that investors continue to divert money from other investments into Seniors Housing.  Cap rates could still go lower, pushing prices higher.  Nonetheless, with the amount of new investors that have entered the industry in the past several years, it is doubtful that a significant amount more new investors will continue to enter this industry causing a further compression in cap rates.

If the net operating income of an asset goes up, or down, prices will likely also go up, or down, with cap rates staying the same.   Given relatively low inflation and a surge in new construction, it is doubtful that net operating income will increase dramatically in Seniors Housing over the next several years.

Overall, we believe the main driver for increased values going forward will be an increase in net operating income, not a further compression in cap rates.  While net operating income in Seniors Housing could continue to grow, it will probably be at a slower pace.  Cap rates have more room to go up than down.  Though given relatively low inflation and a slowdown in the global economy, it is doubtful that an increase in rates will happen at a fast pace anytime soon.  The combination of these factors will mostly likely lead to Seniors Housing prices staying relatively stable, but with a risk of a decrease if interest rates increase faster than expected.

If you believe now might be a good time to sell your Seniors Housing Community, please contact Jason Punzel at [email protected] or 630-858-2501 for an in depth analysis of what your community might be worth.

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Should I sell or lease my Senior Living Facility?

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When considering to exit the senior living industry, there are two main alternatives to consider, selling the facility fee simple, or leasing it to an operator.  There are advantages and disadvantages of each option.

The biggest advantage of selling an assisted living facility (or independent living facility) is an owner receives all of their cash up front and has no future financial liabilities or risk.  The owner no longer has the risk of the market going down in the future, new government regulations, overbuilding, etc.   The biggest disadvantage of selling is paying the capital gains tax, which can be substantial for those owners who have owned their facilities for a number of years.

Leasing, on the other hand, has the advantage of not having to pay a large sum of capital gains tax and the advantage of receiving monthly rent.  For those owners who do not need a large amount of cash upfront, leasing can provide a great residual income for years.    However, the disadvantages of leasing are many.  To begin with, an owner must find a quality tenant that has the operational and financial ability to run the facility for the length of the lease.   If the operator defaults on the lease, the owner could be in the position to have to take over the operations of the facility, which could be in poor condition.  Additionally, at the end of the lease, the owner still has to make a decision on what to do with the facility.  If the market is worse, and/or if there are new competitors in the area, the facility could be worth substantially less than at the beginning of the lease.

When the market to sell a senior living facility is good, like it is today, it typically makes more sense to sell and eliminate the risk of an operator defaulting and/or the facility being worth a lot less at the end of the lease.    However, when the market to sell is not as good (like it was in 2009-2010) it might make more sense to lease the facility to a quality operator.

For more information on different exit strategies, contact Jason Punzel at [email protected] or (630) 858-2501 x 233.

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