Monthly Archives: February 2015

February 27, 2015
Jason Punzel

The Danger in Long Term Financial Modeling

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Long term financial modeling is essential in evaluating any income producing asset.   Using the Cap Rate method, one is only looking at the current (or trailing) net operating income, which does not factor in all of the many things that could happen during the hold period.   The IRR method (leveraged and unleveraged) is a much more valuable tool.   By using IRR or discounted cash flow, one is able to factor in future impacts on cash flow such as rent growth, expense growth, vacancy, capital expenditures, leverage, future interest rates, and future sales price.

However the danger in using IRR, or any long range planning tool is being disciplined enough to not use the financial model to justify a current sales price.  For example, if a property is selling at $10,000,000 and a company’s investment threshold is a 10% IRR, it could be very easy to increase the future rent growth to 3% vs. 2% to help justify a current sales price.  In a financial model that I recently developed, the IRR went from 8% to 18% just by increasing the rent growth from 2% to 3% per year.  While this may seem like a lot, the future rent growth compounds upon itself and the NOI increases much faster during the hold period resulting in a more cash flow, AND a higher sales price at the end of the hold period.  Similarly, an expense increase of 2% instead of 3% resulted in an IRR of about 24% vs. 18% in the same model.  These are just two of many examples of how changing a few “minor” details, can dramatically change the IRR and justify a given purchase price.

Another important item to consider is most models predict a straight line future.  For example; rent growth will be 2% a year during the hold period (or expense growth, vacancy, etc).  We all know that this simply won’t happen.  There will be ups and downs based upon the economy, competitors, etc.  If we predict a 2% rent growth each year and one year the rent growth is zero, and then resumes at 2%, not only did the property lose the 2% rent growth that year, but every subsequent year because financial models compound each year.

While long term financial models are very useful, and essential, in valuing a property, one must be very careful to take an unbiased, conservative approach as to not use the model to justify a sales price.  Additionally, is it useful to run multiple financial models, or stress tests, to study how different financial scenarios effect the rate of return of a given property.

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

February 9, 2015
Grant Kief

Matthew Alley and Jason Punzel Handle Texas ALF Transaction

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Southern Knights front

Jason Punzel and Matt Alley sold a 37 unit Assisted Living Community.  The operations had been break even for 2013 and 2014 but was full with a waiting list.  The Seller is an independent owner/operator exiting the seniors housing business.  The Buyer is a regional owner/operator based in Oregon.  The property, located 35 miles northwest of Houston, is 20,793 square feet on 4.3 acres of land.  It was built in 1999 with an addition in 2005.  The price was $2,700,000.  For additional information, contact Matt at alley@slibinc.com or Jason at punzel@slibinc.com    630/858-2501

February 9, 2015
Grant Kief

Matthew Alley and Patrick Byrne Sell Texas Skilled Nursing Facility

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Grace Care

Pat Byrne and Matt Alley recently sold a 145 bed Skilled Nursing Facility in Texas.  The 54,600 square foot building on 5.49 acres of land was built in 1969.  The census has been around 65% for the past couple of years.  The new operator should be able to improve the census, payor mix and profit margins.  An Oklahoma real estate investor purchased the property and a Fort Worth based operator will assume the operations.  For additional information, please contact Matt Alley at alley@slibinc.com or Pat at byrne@slibinc.com

February 5, 2015
Matt Alley

Will Demand Keep up with Increased Development?

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It is clear that the demand for seniors housing is expected to increase in the coming years.  According to the latest National Association of Home Builders’ (NAHB) 55+ Housing Market Index (HMI), builder confidence in the 55+ housing market has reached a high not seen since 2008.  The third quarter of 2013 showed its 12th consecutive quarter of year-over-year improvement.

According to NAHB chief economist David Crowe, “By the year 2020, almost 45 percent of all U.S. households will include someone at least 55 years old.  The number of those households seeking housing better suited to their changing needs will therefore rise dramatically.”

What is a bit less clear is how the development boom, especially in the “sunbelt states”, will affect supply and demand trends in the seniors housing industry.  NIC MAP reports that new seniors housing development is 2.1% of the existing supply; however, that number is much higher in “sunbelt states” and major metropolitan areas.

For instance, NIC MAP shows that inventory of memory care units in the Houston metropolitan area has more than doubled since the fourth quarter of 2006, which has led to a drop in average occupancy rates from 94.9% in 2006 down to 78.9% in the third quarter of 2014.

What does this mean for you?

1. Increase in 55+ demographics does not negate risk in the sector moving forward.  If increase in supply outpaces increase in demand in a specific market, occupancy rates will drop.

2. Be aware of development plans in your specific markets.  If you feel a market is experiencing too much development, it may be an ideal time to sell before the fundamentals of a market change.

3. Conduct a thorough market study before considering new development or expansion.  Keep an eye on permits being pulled, listen for construction rumors, etc.  Demographic trends will not cover up bad development decisions.

The market is incredibly strong right now and it may be the right time to sell your seniors housing community.  For a complete analysis of what your community is worth, contact Matthew Alley – alley@slibinc.com or (630) 858-2501.

Source: “Dispelling four myths about seniors housing demand” by Charles Bissell, MAI in December 2014 / January 2015 Senior Housing Business Magazine

February 4, 2015
Grant Kief

Pat Byrne, Jeff Binder and Ryan Saul Team Up to Sell Missouri SNF

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Senior Living Investment Brokerage, Inc. was engaged to sell a Skilled Nursing and Assisted Living facility in Southeast Missouri.  The 124 bed community consists of 108 skilled nursing beds and 18 assisted living beds.  The skilled portion was originally built in 1973 and renovated in 1996 while the assisted living portion was constructed in 1996.  The single story building consists of approximately 42,000 square feet on 3.2 acres.  The property has a strong operating history and excellent reputation in the community.  The Seller is a large regional operator based in Illinois.  The Buyer is a smaller regional operator out of Kentucky.  For additional information, please contact Jeff or Pat at 314/961-0070 or Ryan at 630/858-2501.