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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Is “Price Per Unit” a Good Valuation Metric for Senior Living

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According to the Senior Care Acquisition Report 2016, the average price per unit for Assisted Living Facilities in 2015 was $189,200 and for Independent Living Facilities it was $192,900.   However, is this really a good metric for valuing a senior living community?

In 2015 the average price per unit for Class A Independent Living Facilities was $248,500 and Class B wa $138,300.   We currently have a Class C, 110-unit Independent Living Community under contract in the Pacific Northwest that will sell for less than $40,000/unit.  As a company, last year we sold Skilled Nursing Facilities from $10,000-$130,000+/bed and Assisted Living Communities from $20,000-$300,000+.  There are some older facilities in rural areas that have negative EBITDA which may not have any interested buyers and thus have little, if any value.  Additionally, there are facilities in downtown areas of San Francisco, Seattle and New York for example that would sell for $500,000+/unit if they were actively marketed by Senior Living Investment Brokerage, INC today.

Because of the wide range in prices, we strongly recommend that owners focus more on cap rates and internal rates of return when valuing their properties.   Ultimately, buyers are interested in a return on their investment and they will use these metrics to determine the price they will pay.   The price per unit then becomes the result of and not the cause of the price.

To discuss the value 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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How Do Rising Interest Rates Impact the Value of my Senior Living Community?

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Over the past several years, interest rates have remained 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 1.8%, the Federal Funds Rate has been close to 0% for years and the Fed made its first rate increase this past December.   The 10 Yr Treasury hit an all-time high in August, 1981, at 15.32% and has averaged 4.64% since 1870.   Thus, there is a high likelihood that interest rates will increase as they revert back to the historic mean.

Interest rates are a measure of an investor’s desired rate of return.   An interest rate, or a rate of return, is made up of three components, risk, inflation, and time value of money (allowing someone else to use your money).   The theoretical risk free investment is a US Treasury or FDIC insured savings account/CD.   Thus, all other investments can be benchmarked by these indexes.  The greater the perceived risk of an investment, the greater the spread, or “risk premium”, will be for that investment over the US Treasury.   Today, average capitalization rates (rates of return/risk premium) for assisted living facilities are around 7.5%, or about 500 basis points above the 10 US Treasury.   This is the risk premium investors place on assisted living versus the alternative of investing in a “risk free” US Treasury bond.   When the rates increase on US Treasury bonds, typically cap rates increase on senior living communities (or any investment), assuming the risk premium stays the same.

To determine the value of a senior living community, the Net Operating Income (NOI) is divided by the Cap Rate.

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

Thus, as interest rates, and cap rates increase, values go down.  Below are several examples:

NOI = $600,000, Cap Rate = 7%, Value = $8,571,429

NOI = $600,000, Cap Rate = 8%, Value = $7,500,000

NOI = $600,000, Cap Rate = 9%, Value = $6,667,000

As you can see, for every 1% increase in the cap rate, the value drops by over 11%.   Thus, if interest rates continue to rise over the next several years, it could dramatically affect pricing.   If an owner has a desire to sell their community anytime in the next several years, now might be an opportune time.

For a complete analysis on how interest rates can affect your community’s value, both now and in the future, contact Jason Punzel, Senior Living Investment Brokerage, INC, at 630-858-2501 x 233 or [email protected]

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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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