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, for seniors housing 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 seniors housing 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 Matt Alley of 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@example.com.
As a company, Senior Living Investment Brokerage Inc, sells all types of senior living and long term care communities. One type of senior living community type we are seeing more of is the “pod” style of smaller buildings grouped together on a single parcel of land. Thus, instead of having one 80 unit facility, there might be five, sixteen unit facilities with one of the facilities being a bit larger where more of the community activities take place. There are some advantages and disadvantages to them. We find that often times residents like the feel of the smaller facilities because they feel more like a home and it is easy for them to get to know the other residents. From a marketing/occupancy standpoint, these types of facilities also seem to be attractive and often times enjoy very high occupancy.
The biggest disadvantage is staffing and efficiency. Depending on the state and acuity level, often times these smaller facilities require a staff person to be in each facility 24 hours a day. For only 12-16 residents, this can be very inefficient and costly. Also, while each facility usually has its own kitchen, it can be very inefficient to have a cook in each facility or to cook in one facility and have to transport to the other facilities. We often find that this type of community set up operates at an operating margin around 25% while a similar age/acuity level facility that has all of the residents under one roof might operate at a 32-35% margin. Thus, it limits that maximum amount of cash flow a community can create, decreasing its value. However, smaller facilities can be more attractive to residents and thus have great occupancy, some of the cash flow deficit may be eliminated. While we see more buyers prefer the larger facility communities, both styles can be very effective in delivering great resident care and producing profitable returns for the owner.
To have Senior Living Investment Brokerage, Inc. help you analyze the value of your senior living community, contact Jason Punzel at 630-858-2501 x 233 or firstname.lastname@example.org.
Attend the Interface Seniors Housing Midwest conference on June 11th in Chicago to hear about how to sell your assisted living community. Ryan Saul, Managing Director at Senior Living Investment Brokerage, will be on a panel to discuss the Seniors Housing investment market: Who’s Buying, Who’s Selling & What’s Driving Deal Velocity in the Seniors Housing space. I can make time at the conference to discuss how to buy or sell assisted living. Please contact me at 630-858-2501 or Email Ryan Saul.
To learn more about the Interface Seniors Housing Conference, please go to interfaceconferencegroup.com/srm2015