Monthly Archives: May 2017

May 17, 2017
Brad Goodsell

Valuation of Senior Living: EGIM

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This is the second, of a three-part blog series, focused on valuation of senior living, and the approaches used in the transaction of senior living properties, that is; Effective Gross Income Multiple (EGIM).

As previously mentioned in my post on May 1st, the valuation approaches that are most prevalent in a senior living sale are the Income Approach or Capitalization Rates, and Effective Gross Income Multiple (EGIM), and Sold Comparables.  In most instances, these statistics serve as our cornerstones of valuation, and set the foundation for a suggested list price.

An EGIM can be used to estimate the value for a non-performing or performing property. While this calculation only carries so much weight with investors, it is a good tool to reaffirm a value generated by capitalization rates. valuation

According to the Senior Care Acquisition Report, Twenty-Second Edition, 2017, assisted living properties had an average EGIM of 3.75.  This figure, multiplied by the gross revenue, produces an EGIM valuation.  It is important to note that these averages, in this case of assisted living properties, are largely skewed by institutional portfolio transactions that occurred during that time period.  Often, individual transactions close at significantly lower multiples.

When choosing an appropriate EGIM for a property, we focus on the same factors (cash flow, competitive profiles and a quality physical plant, etc.) to determine the capitalization rate.  Due to the size, age and quality, an EGIM can be applied to annualized revenue to determine a property value.

It should be noted that EGIM is the least relied on approach utilized by investors.

Closing;

When determining the value of a senior living property, a qualified broker will be able to rely on such things as interaction in the market, recently closed transactions, industry data, property specific information and both positive and negative influences to determine an appropriate cap rate or EGIM for your specific senior living property.

The final post of this series will focus on Sold Comparables, specific to valuation.

Please contact Brad Goodsell at 630.858.2501 or goodsell@slibinc.com to discuss a complimentary property valuation.

May 15, 2017
Jason Punzel

Value Add vs. Stabilized Properties – How are they valued?

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Value Add vs. Stabilized Properties – How are they valued? – by Jason Punzel

As brokers, we sell both value add and stabilized properties and often times investors ask us how are they valued.  To begin with, for a property to be considered “stabilized”, it’s census and monthly (daily) rates must be similar to other properties in the market.  For example, if market occupancy is 92% and the average private pay rate for assisted living is $3,500/month, and if the property that is being analyzed has an occupancy of 93% and average rate of $3,400/month, the property would be considered stabilized.   In this case, the best way to determine its value is by using the Capitalization Rate method.  This involves using the Net Operating Income of the property (NOI) and dividing it by the Cap Rate.  If a property has an NOI of $1,000,000 a year and the typical Cap Rate for this type of property is a 7.5%, then the property’s value would be $13,333,000.  This is a very straight forward method of analyzing the value of a property.

Where valuing a property becomes more challenging is when the property is not stabilized at the current market occupancy and rates.   For example, if a property is 100% occupied with an average monthly rate of $3,500, one might assume that it will be hard to maintain a 100% occupancy on a going forward basis, and therefore will reduce the revenue in their analysis to an amount closer to market occupancy, thus reducing its NOI and price from its current state.

Likewise, if a property has an occupancy rate below market, for example 75%, the NOI of the property is probably very low or may even be negative.  However, the property still has value.  Depending on the quality and location of the property, it may have the potential to achieve a market occupancy rate, and therefore be worth significantly more than simply using the Cap Rate method to determine its value.  A new owner must identify what changes need to take place (capital expenditures, a new marketing plan, a new administrator, etc.), along with the time, cost and likeliness of success to determine the potential future net operating income.   Typically, we see properties that are operating significantly below the market getting sold at a price somewhere between its current state (current NOI/Cap Rate) and its future value (potential NOI/Cap Rate).  The new buyer must be rewarded for solving problems and taking the risks involved in turning around a property.  However, the current owner will not sell unless they think they are getting a fair price for giving up the future upside.

Conclusion:

Senior Living Investment Brokerage, Inc. works with both sellers and buyers on stabilized and non-stabilized facilities and has a long track record of selling both types of facilities.

For more information about the value of your senior living communities, please contact Jason Punzel at 630-858-2501 x 233 or punzel@slibinc.com.

Seattle 4

May 1, 2017
Brad Goodsell

Valuation of Senior Living: Cap Rate

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Ultimately, the valuation of senior living properties, and in-turn subsequent pricing decisions are the focal of point of a senior living transaction being considered a ‘success’.  While there are many influences on pricing, many not necessarily being under the control of the owner/seller, these outside forces are nonetheless considered during the valuation process.

Being that the sale of a senior living property is a unique transaction, most often incorporating both the sale of the real estate, as well as the business, there are two common variables used when pricing a senior living property.

valueThe approaches that are most prevalent to senior living, are the Income Approach (or Capitalization Rates and Gross Income Multiple) and Sold Comparable.  In most instances, these statistics serve as our cornerstones of valuation, and set the foundation for suggested list price.

This post will focus on the capitalization rate as a valuation tool used by investors, underwriters, brokers, lenders, and appraisers to determine the value of an income producing property.

To understand the capitalization rate (cap rate) approach of valuation, let me first explain how ‘EBITDAR’ is defined.  Simply put, this is the earnings of a property before interest, income taxes, depreciation, and amortization, but after the industry standard management fee of 5% of revenues is added back, removing any prior management fee.

The cap rate is derived by dividing the EBITDAR of a property by its purchase price/value.  For instance, in 2016 the average cap rate of an assisted living property was 8.5%, according to The Senior Care Acquisition Report.

The selection of a cap rate is directly related to the perceived risk of the property; those with cash flow, sound competitive profiles and a quality physical plant will carry less risk and justify a lower cap rate.  Conversely, those senior living properties that are smaller, distressed or located in a less desirable markets will typically carry additional risk and thus a high cap rate.

Closing;

When determining the value of a senior living property, a qualified broker will be able to rely on interaction in the market, recently closed transactions, industry data; and property specific information, both positive and negative influences to determine an appropriate cap rate for you specific senior living property.

Upcoming posts will focus on Gross Income Multiples and Sold Comparables.

Please contact Brad Goodsell at 630.858.2501 or goodsell@slibinc.com to discuss a complimentary property valuation.