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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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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When is the best time to list a seniors housing or nursing home community?

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I’m often asked when is the best time of year to list a seniors housing or nursing home asset?  We are all used to residential real estate agents telling us to list in the Spring while the weather is starting to change (at least for us Northerners).

Does it matter for seniors housing communities?

Yes and no.  While there is not the seasonality in the seniors housing market as there is in the residential market, there are good and less optimal times for getting buyers’ (even institutional buyers’) attention.

I would argue that we are entering into one of those sweet spots as we get into the middle of September.  Typically, Senior Living Investment Brokerage, Inc. has its highest volume of listings in September and early October.

Why is that?

During the Labor Day / beginning of October time frame, Buyers have made it through the Summer and are looking to deploy capital before the end of the year.  They are hoping to make one last push to meet their aggressive beginning of the year expansion goals.

With a typical 3-4 month closing period, now is as good of a time as any to consider listing your property with Senior Living Investment Brokerage, Inc.  We can help you procure the right Buyer, who can close the transaction prior to year-end.  Many Buyers are looking to “get money out the door” by December 31st and this may give you an advantage in coercing those groups into making a more aggressive bid than they would in the middle of the year.

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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How additional sources of funds are impacting the seniors housing market

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Over the past couple of years, we have seen capitalization rates (defined as Net Operating Income divided by Purchase Price) drop steadily to historically low levels, which in turn has led to purchase prices being driven upwards.

Now is the time to take advantage of this market and either exit the business through a sale entirely or divest of a few properties from your portfolio that do not fit with your current strategy.

Why is the market so strong right now?  More so than any other factor, the market has been impacted by the increased availability of capital (both debt and equity) and the low cost nature of said capital.  Interest rates are still at historically low levels, and while rates may creep up a bit, most analysts expect a measured increase.

During the Great Recession, transactions were mainly financed by three different methods: (1) all cash; (2) HUD financing; or (3) mostly public REIT financing.  Community banks were only lending to their best clients on the most conservative of terms, and there were not a great deal of smaller, private REITs or private equity firms willing to support the acquisition of seniors housing facilities.

Over the past couple of years, community banks have become more aggressive as they are sitting on a large reserve of cash that they need to deploy and there has been a growth in the private REIT space.  According to investment banking firm , Robert A. Stanger & Co., and reported by Seniors Housing Business, a handful of non-traded REITs devoted to seniors housing have amassed $6.4 billion in equity over the past few years.  The availability of these capital sources has had a huge impact on the seniors housing acquisition market in the form of increased pricing.

The most recent example of this was a $30M nursing home portfolio that Senior Living completed in Texas.  It was purchased by an independent, regional owner-operator and financed by a community bank out of Louisiana.  Until recently, that size of transaction would have been almost certainly REIT financed or purchased by a large, national owner-operator.

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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