At what age is a Senior Living Facility Obsolete?

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At a certain age, virtually any type property will become obsolete.  Thus, at what age is it for Senior Living and Skilled Nursing Facilities?   I believe it is more a matter of functionality than age.

In today’s competitive world, Assisted Living Communities that are older converted Skilled Nursing Facilities tend to have challenges in keeping stabilized occupancy.   Often times they have shared bathrooms, small one-room units and limited common areas.  With lower acuity residents, private bathrooms are a must when marketing a facility.   Larger units with multiple rooms that can function as an Independent or Assisted Living unit have great appeal to allow residents to age in a place as additional care becomes necessary.

Skilled Nursing Facilities that have 3 and 4 bed wards (rooms) are very difficult to fill and often times the total bed count needs to be reduced to allow for mostly private or 2 bed rooms.   Even if the facility is accepting mostly Medicaid residents, two residents per room tends to be the maximum that is acceptable.

Other facility challenges include long narrow hallways, low ceilings, lack of elevators, and poor lighting.  Depending on the structure, these challenges can be very difficult to rectify.   While it tends to be the older Skilled Nursing Facilities that were built in the 1960s and 1970s, some Assisted Living Communities built in the 1980s and 1990s can also have a functionally obsolete design and layout.

If lack of private bathrooms and small rooms are the challenge, sometimes a solution is to focus on higher acuity Assisted Living and/or Memory Care where residents have higher acuity needs and can use a bathroom or kitchen on their own.  Unfortunately, there are some communities that have too many design and layout issues to overcome and possibly the best solution is to build a new facility on the existing ground.

To discuss the age, functionality and sale ability of your Senior Living or Skilled Nursing Facility please contact Jason Punzel at 630-858-2501 x 233 or [email protected]  or Joy Goebbert at 630-858-2501 x 230 or [email protected].

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Have Senior Housing prices peaked?

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Recently, I spoke at the Washington Healthcare Association’s (WHCA) annual conference.  I have spoken there three times on the general state of the senior housing and skilled nursing sales market.   For the first time, I had to say that the data shows that pricing has peaked.   According to the National Investment Center (NIC), prices peaked in mid-2015.   As a firm, Senior Living Investment Brokerage, Inc. sells 90+ facilities each year and we have a very good pulse on the market.  Our data would support this conclusion.  On a facility that we would have received six offers a year ago, we now might receive four.   Prices seem to be down approximately 5%.  However, when analyzing pricing over the past six to eight years, today’s prices are still very good.

The million-dollar question (quite literally!) is, where is pricing going in the future?  Prices are still very good and there are still many buyers with plenty of access to capital.  However, the Federal Reserve has come out recently talking about increasing rates again, which could push up the rate on the ten-year treasury, increasing borrowing costs.   If interest rates continue to rise, we could see a further decline in pricing.   However, we don’t see a dramatic decline in the next 6-12 months.   There are too many good buyers with plenty of capital to invest.   Occupancy is steady and new construction in most markets is not out of line.  Beyond 12 months, it is very difficult to predict and prices could change much more.  For any owner thinking about selling in the next several years, now might be a very good time.

For a market valuation on your senior living or skilled nursing facility, please contact Jason Punzel at [email protected] or Joy Goebbert at [email protected], 630-858-2501.

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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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Matthew Alley Speaks at InterFace Seniors Housing Texas Conference

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On November 19th, I participated in a panel entitled “Investment Market Update: Who’s Buying, Who’s Selling & Will Velocity Keep Going Up and Cap Rates Keep Going Down”. We had a lively discussion on the current market, and I wanted to share a few takeaways.

1. Who are the active buyers and sellers in today’s market? There is more variety in buyers now than in the past decade. REITs, private equity, owner-operators and even some “mom and pops” have been interested in purchasing properties and growing their portfolio.  The sellers have been more diverse than normal as well.  “Mom and pops” are still very active sellers, but we have seen more regional and national owners look to take advantage of the strong market and either sell their entire portfolio or divest of a couple of properties that don’t match their strategic vision.

2. Are there different buyers for different seniors housing asset classes? Yes, absolutely.  Institutional groups typically chase larger, higher quality assets with consistent cash flow.  Their low cost of funds has driven owner-operators down the acquisition spectrum to the smaller assets that may be underperforming.

3. What are the most important metrics that buyers are using in today’s market? Cap rates are the most important metric when valuing a cash flowing property.  The difficulty comes in valuing a property that is underperforming.  In those cases, a potential new operator will put together a pro forma and land on a rate of return that they’re comfortable with.  Those deals typically see a wide range in offer prices.

4. What is the optimal size for acquisitions? Typically, the larger the offering, the better.  Institutional groups have a lot of equity to deploy and if they can deploy it in 10 $30 million transactions as opposed to 25 $10 million transactions, groups will typically prefer fewer transactions.  One-off or small portfolio transactions have a different pool of buyers, which tends to be less institutional and requires a broker to have a greater knowledge of the individual market and its individual buyers.

5. With pricing so strong in today’s market, why are some owners making a decision to hold? The current market conditions have hastened the timeframe for owners that had a planned exit strategy in the next 12-24 months.  That being said, some owners are trying to increase their portfolio’s profitability and increase value in that way.  Even if cap rates see a modest increase, a major increase in profitability will still see the owner come out ahead by waiting to sell.

6. Should we be concerned about overdevelopment in the seniors housing space? I think it is the biggest risk to the acquisition market moving forward.  This is obviously a market-to-market (and sometimes, submarket-to-submarket) risk.  If the area that an owner has a seniors housing facility becomes overdeveloped in the future, census levels will obviously suffer and valuations will go down.

7. What does the increase in development do to cap rates moving forward?  It adds a level of risk moving forward.  Anything that adds risk – whether it be development, reimbursement or labor risk among others – will naturally push cap rates up.

8. Where do you see the market headed over the next 12-24 months? In the near-term, it should be strong – cap rates are still higher than most other asset classes, interest rates are low and institutional equity needs to be placed.  Further into the future, overdevelopment, government reimbursement changes, interest rate increases, increased regulation, increased tax rates and the housing market could cause a bit of a pullback in pricing.  That being said, I still think the seniors housing space is better equipped to handle this uncertainty than other asset classes.

If you have any questions on the topic of this post or would like a confidential valuation of part or all of your seniors housing portfolio, please contact Matthew Alley at 630-858-2501 ext. 225 or [email protected].

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