Monthly Archives: June 2017

June 29, 2017
David Balow

Why do Senior Living buyers want Assisted Living Program (ALP) beds?

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As a Senior Living broker, we interact with active buyers seeking acquisition opportunities on a daily basis. For each of our buyers, not only do we strive to develop an ongoing relationship, but we always seek to understand what their acquisition criteria is, at any particular time. In New York, we are finding an increasing number of buyers who are actively seeking out Assisted Living Facilities licensed for ALP beds.

What is ALP? The Assisted Living Program (ALP) is defined by the New York State Department of Health as a service which, “Serves persons who are medically eligible for nursing home placement but serves them in a less medically intensive, lower cost setting.” This license allows for Assisted Living Facilities in New York to provide some level of care that a resident may be able to receive within a Long Term Care facility. Some of those services include: physical therapy, occupational therapy, speech therapy and personal emergency response services.

The State of New York not only regulates this program, but they have also limited the number of ALP beds that are able to be licensed throughout the state. This results in only a select number of Senior Living facilities having the ability to be licensed for the Assisted Living Program. Facilities that are licensed for ALP must provide appropriate staffing in order to fulfill each service that the ALP provides its residents receiving that level of care.

Facilities with ALP beds are attractive to buyers, primarily for the additional Medicaid revenue that is realized from each ALP resident, in addition to their regular monthly room rate. Much of this additional revenue is able to transfer down to the bottom line, thus creating a stronger NOI for owners that are licensed for ALP.

If you currently own a New York based Senior Living community that is ALP licensed, please contact Dave Balow at 630.858.2501 or balow@slibinc.com to discuss the demand for your community, and to get a no-obligation valuation.Dave Balow - Headshot

June 19, 2017
Jason Punzel

How Closely are Senior Living Cap Rates and Interest Rates Correlated?

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How Closely are Senior Living Cap Rates and Interest Rates Correlated? By Jason Punzel

As we see interest rates starting to rise, many owners are asking us how closely are cap rates and interest rates correlated and how will it affect the value of their senior living communities.

The interest rate on a US Treasury Bond is considered the “risk free” rate of return since the United States Government has never defaulted on its treasury bonds, it is the world’s trade currency, and the United States has the ability, through the Federal Reserve, to print money to meet its obligations.   Therefore, many investments are analyzed by their spread over the US Treasury rate.   The riskier the asset, the larger the spread is over the US Treasury.  Over the past 10 years, skilled nursing cap rates have averaged about 1,000 basis points above the US 10 year treasury rate and assisted living cap rates have averaged about 600 basis points above the US 10 year treasury rate.   This is because skilled nursing is considered a riskier asset than assisted living.

This raises the question, is the risk “spread” over the US Treasury a constant or not?  Or, when interest rates change, do cap rates always change in exact correlation?   Although interest rates and cap rates are closely correlated, there is not a 100% correlation.

The risk premium over the “risk free” rate of a US Treasury Bond of any asset is going to vary based upon the demand of investors.   If the given asset suddenly becomes more attractive to investors, the risk premium will decrease, and vice versa.  The risk premium also varies based upon future expectations of a given asset.  Seniors housing assets still have a greater risk premium than traditional market rate apartments since the investment community considers it a riskier asset.  However, given the future demand for seniors housing, this risk premium may decrease, resulting in a lower cap rate, even if interest rates increase.

Conclusion:

While interest rates do have a strong correlation with cap rates, there are many other factors that go into determining a cap rate, most importantly, the future risk that investors perceive in a given asset.  Thus, in a rising interest rate environment, we can expect cap rates to increase.  However, based upon investor demand, the correlation will not be exact.

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.

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June 16, 2017
David Balow

5 Questions To Ask Before Buying A Senior Living Community

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Buyers of Senior Living communities have a thorough review process when evaluating acquisition opportunities. Senior Living buyers want to see current and historical financials, census information, Medicaid rates, survey histories, and many other pieces of information about the acquisition opportunity. While each buyer is different in how they like to review deals, here are 5 questions to ask before buying a Senior Living community:

1)      Do I know the market? There is a big difference between operating in an urban setting, and a rural setting. A primary market and a secondary market. Knowing how to operate where the acquisition opportunity resides is very important to a buyer.

2)      Do I have economies of scale? Buyers who have an established footprint in the area of the acquisition opportunity can recognize many operational efficiencies, which can positively affect their bottom line.

3)      Will I need to invest CAPEX to update the facility? If a facility needs work to the physical structure itself (new roof, new flooring, etc.), that will impact a buyer’s consideration and potentially any offer that they would consider making.

4)      What’s the culture of the community like?  Buyers don’t want to see disgruntled staff, or unhappy residents. Often times when buyers tour facilities, they are noting what the culture of a particular community is like, and that will have a strong influence on their decision.

5)      Is there any upside?  Buyers want to see what’s in it for them for a Senior Living community they are interested in acquiring. Buyers want to see things like: Adjacent land on the property to expand onto, opportunities to improve upon occupancy with better marketing, a chance to acquire more private pay residents, and opportunities to trim expenses by providing their own ancillary services.

If you are an owner of a Senior Living community and wanted to gain a better understanding of what buyers are looking for, and potentially how they would evaluate your community, please contact Dave Balow at 630.858.2501 or balow@slibinc.comDave Balow - Headshot

June 9, 2017
Brad Goodsell

Valuation of Senior Living Properties: Sold Comparables

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The valuation of senior living properties is a central discussion point for any owner considering a sale of their asset.  This is third, and final part of a blog series, focused on the valuation of senior living properties using Sold Comparables as component of valuation.

Previous prior blog posts (Cap Rate Valuation & EGIM Valuation) discussed the most prevalent valuation method in a senior living sale that is the, Income Approach (or Capitalization Rates and Effective Gross Income Multiple).

At Senior Living Investment Brokerage, we very closely follow the Senior Housing Merger and Acquisition market specific to the West Coast, and throughout the country.  Compiling sales comparables for senior living and skilled nursing, we have current, up-to-date information.  With every property being unique, all sold comparable need to be analyzed for quality and relevance to the subject senior living property.

senior living properties valuation

In today’s market, there is a wide range in value when based solely on a price per unit basis.

As such, it is important to consider the many factors impacting a comparable relevance to a the subject property.  Some factors impacting the valuation of a senior living property that are worth considering may include; geographic location, age, size, and quality of the physical plant.

Once comparables are established, adjustments can be made accordingly to the subject property’s value based on positive or negative attributes.  Negative adjustments to valuation may be made due to a smaller, rural, Medicaid, older, or less profitable senior living property.  However, positive adjustments can be made if the subject senior living property is larger, better located, private pay, newer, or more profitable.

Closing;

When determining the value of a senior living property, a qualified broker will base their property valuation and analysis to incorporate all relevant factors, thus ensuring an educated sale price is offered.

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