Monthly Archives: January 2015

January 23, 2015
Ryan Saul

New Year, Same Market

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As we flip the calendar to 2015, many reflect on last year’s activity in the long-term care / seniors housing market.  Active is an understatement.  I hear the phrase, “drinking from a fire hose” often.  That about sums up the dollar and transaction volume we have experienced lately.  Senior Living Investment Brokerage, Inc. had yet another record year.  The market is booming and we constantly hear buzz words like peak, boom, top-of-the-market, etc.  As we start the new year, companies are setting growth goals.  The first quarter is always a great time to test the market with an opportunity.  So, what does that mean for you?

If you have thought about selling, now is the time to capitalize on the torrid market.  It is a wise business practice to have your community or portfolio valued in order to help in the decision making process.   Allow me to put together a confidential proposal to determine current market value for your long-term care or seniors housing asset.  For more information, please contact Ryan M. Saul.

January 21, 2015
Grant Kief

Brad Clousing Facilitates Sale of Georgia Personal Care Community

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Brad Clousing recently sold a 40 unit, purpose built, personal care community just south of Atlanta in a growing submarket.  At the time of sale, the community was in receivership but was beginning to stabilize.  Anew operator had recently been hired.  The building would need capital improvements in order to obtain an assisted license.  Census at LOI was 77% but by the close of escrow had moved to 95%.  The 26,813 square foot facility was built in 2000.  Acquisition financing was provided by Community Southern Bank.  The Buyer was a Chicago based owner/operator.  For additional information, please contact Brad Clousing at 630/858-2501 or clousing@slibinc.com

January 9, 2015
Grant Kief

Ryan Saul Facilitates Sale of Two Illinois Seniors Housing Communities

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Ryan Saul recently sold two Seniors Housing communities in the Chicago MSA for a regional hospital system.  The first facility is a 231 bed Skilled Nursing Facility which Ryan had previously sold to the current Seller.  The second facility is a 209 beds/units consisting of Intermediate Care beds and Assisted Living/Independent Living units.   The Buyer is a local, Illinois based company that owns other communities in the market.  For additional information, please contact Ryan Saul at 630/858-2501 or ryansaul@slibinc.com

January 8, 2015
Jason Punzel

Cap Rates vs. Internal Rate of Return (IRR)

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Our industry uses Cap Rates, as a standard pricing measure.  The Cap Rate is derived by dividing the Net Operating Income (NOI) by the purchase price.  The lower the Cap Rate the higher the price, and vice versa.   However, a Cap Rate is simply a snap shot based upon current, or trailing 3/6/12 months of NOI.  The Cap Rate does not factor in future capital expenditures, rent and expense growth, vacancy, or future sales price.   Thus, while a Cap Rate can be a useful tool, it is not the best indicator of future returns.

The Internal Rate of Return (IRR) can be a more useful tool in evaluating the returns on a property over the entire holding period.  The IRR is calculated by taking all future cash flows, and the future sales price, and discounting back to present value.  Thus, all future cash flow items, revenue, expenses, capital expenditures, vacancy and future sales prices can be modeled to better predict future returns.

Thus, a new property with a low Cap Rate may have a higher IRR than an older property with a higher Cap Rate.   This could be due to lower future capital expenditures, faster rent growth, lower future vacancies, etc.

Additionally, IRR is usually calculated both with and without leverage.   This is another shortcoming of using Cap Rates, the failure to factor in debt.   Different properties support different leverage amounts and types of debt.   A newer property financed with long term, low rate financing at 80% LTV, has the ability to increase its returns, and lower its risk, far greater than an older property with a 70% LTV, with commercial bank debt, fixed for 3-5 yrs.

However, IRR has its shortcomings too.  It assumes that all positive cash flow is reinvested at the same rate of return as the IRR, which oftentimes is not.  Also, when there is a year with negative cash flow, the calculations can be a bit inaccurate.   However the biggest drawback in IRR is one’s own financial modeling.   It is very difficult to predict the future and there in lays the challenge.   We don’t know what rent growth will be over the next five years, or what a property might sell for in seven years, etc.

While there is no perfect tool to evaluate a senior living community, a longer term approach is better than just looking at a snapshot in time.  Thus, using an IRR methodology is more useful than just looking at the cap rate.

To learn more about how these methodologies effect the price of your senior living community, contact Jason Punzel at punzel@slibinc.com or 630-858-2501.