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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Broker nursing homes and assisted living

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Senior Living Investment Brokerage, Inc. is the preferred choice to broker nursing homes and assisted living.  Many in the industry are asking me what I expect to happen in 2016.  At one point, I thought pricing and number of communities sold would be flat or even down compared to years past.  However, January and February were record months for requests for proposals.  Senior Living has completed more proposals for clients in the first two months of 2016 than the first two months of any other year.  Those proposals will likely lead to listings and new inventory to sell.  What does this mean for you?

If you are buying nursing homes or assisted living, expect a wave of opportunities to come in the coming months.   If you are looking to sell a nursing home or assisted living, act now before the market changes.  There is still capital available and buyers looking to acquire communities.

Please contact Ryan Saul (630-858-2501) to learn more about what we have for sale or to discuss a confidential proposal to find out what your nursing home or assisted living community is worth.

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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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New Year Same Market?

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As we start the new year initial signs point to the fact that we are in the same market as 2015. For the past 4-5 years, a new year brings follow up from buyers looking to acquire long-term care or Seniors Housing communities.  It also leads potential sellers to follow up and see what their community is worth.  This year is no different.  I’ve had a number of requests for proposals and receive daily calls from buyers aggressively looking to acquire facilities.

What does this mean for you?  If you are a seller, the strong demand should be enough for you to have a proposal done to see what your community is worth.  If you are a buyer, the spike in requests for proposals should lead to new inventory for you to purchase in the next few months.

Please contact Ryan Saul for more information about the current market. 630-858-2501.

 

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