Monthly Archives: August 2017

August 21, 2017
Jason Punzel

The Danger in Long Term Financial Modeling in Seniors Housing

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The Danger in Long Term Financial Modeling in Seniors Housing – by Jason Punzel

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 things that could happen during the hold period.   The IRR method (leveraged and unleveraged) is a much more valuable tool.   By using IRR or a discounted cash flow model, 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 long term financial modeling in Seniors Housing is in the assumptions made.

In using IRR, or any long-range planning tool, one must be 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 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 that 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.

Conclusion:

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, it is 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.

Seattle 3

August 18, 2017
Brad Goodsell

Who Will Buy My Senior Care Property?

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It’s a question frequently asked by owners of smaller portfolios or a single property; who will buy my senior care property?  As a broker, it is my job to ensure that your senior care property is confidentially marketed to a select group of qualified buyers.

Depending on the location, number of beds/units and acuity level, buyers for a senior care property can range from the large healthcare REITs, private equity groups, regional (and local) operators, as well as ‘mom and pop’ type operators.

Because of such a large pool of perspective buyers, it is essential to the sale of a senior care property that the list price (and price per unit and associated cap rate) are in-line with market trends, while also taking local market influences into account.  SeniorCareBuyerAs such, your senior care property will marketed to the appropriate perspective buyers who are most qualified and interested.

At times, a property may garner interest from buyer groups of varying backgrounds (both in the number or properties owned and available capital).  An example of this may be a property that is smaller in the number of beds/units, but is a newer build, located in a high-barrier to entry market.  Because of these factors, REITs and regional ownership groups may be interested, whereas if the same senior care property was located in a lower barrier to entry market, the property may only appeal to regional or local buyers.

Additional perspective is provided by my business partner, Jason Punzel, in his blog post (Who Are the Buyers for Seniors Housing Communities?)  from earlier this year.

Closing;

When considering the sale of your senior care property, Senior Living Investment Brokerage will walk you through the entire sales process and associated timeline, helping you understand how to best market your property to the most targeted pool of buyers.

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

August 18, 2017
David Balow

Are Online Reviews Impacting Your Senior Living Community?

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As a Senior Living broker, I spend a lot of my time evaluating our clients’ and prospective clients’ Senior Living assets for a confidential sale. There are some important components we evaluate for each individual asset including: financial performance, market demographics, area competition, upside potential and the physical property itself. In our thorough evaluations, I can’t help but find myself gravitating towards what’s being said in online reviews (Google, Facebook, Caring.com, etc.) about the communities I evaluate. While I don’t deem online reviews as a primary source for my evaluations, I do think they carry some weight.

When I read online reviews, it helps me form a more complete picture of the community that I am evaluating. I believe it provides some clarity as to the overall culture of the community.  In those reviews you find out if children whose parents reside in a community are happy with the level of care they are providing and the facility itself. You find out if staff are truly passionate about their jobs. For instance, I was looking through a Facebook page of a community I was evaluating, and found that a staff member for that community was “tagging” themselves at the facility, and complaining about how much they hate their job. How does that make a community look to the public? reviews-image_0

While online reviews are not going to add monetary value to the valuation of a community, it is going to help give a more complete picture as to how the community is perceived by those connected in some capacity to the community. If you are an owner of a Senior Living community, it’s important to see what’s being said about your community by searching for online reviews. Make sure that you respond to negative reviews in a way that’s either apologetic, or showing that you are committed to making improvements. If you see staff members complaining online about their jobs, have a conversation with them about it so they aren’t harming your communities’ reputation.

If you own a Senior Living community, and would like an evaluation on your community, to give you the “complete picture”, please contact Dave Balow at balow@slibinc.com or 630.858.2501.