Monthly Archives: November 2018

November 15, 2018
Jason Punzel

How do Senior Living Cap Rates compare with Apartment Buildings?

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How do Senior Living Cap Rates compare with Apartment Buildings? – by Jason Punzel

A Cap Rate is the most commonly used method in determining and comparing the value of a real estate asset.   A cap rate is derived by dividing the annual net operating income by the purchase price.   A cap rate, similar to an interest rate, is an indication of perceived risk.  Thus, the higher the cap rate, the lower the price of the asset.

According to Senior Care Investor, in 2017 the average cap rate for an independent living facility was 7%, the average cap rate for an assisted living facility was 7.6%, and the average cap rate for a skilled nursing facility was 12.3%.  The average cap rate on an apartment building ranged from 4.5% for class A core assets to 5.73% for Class B assets in secondary markets.

Why do senior living facilities have higher cap rates than apartment buildings?  Senior living facilities are still considered riskier because an investor is buying the real estate and the operating business instead of just the real estate, as is the case for apartment buildings and commercial real estate.   Operating margins are considerably lower in senior living facilities and thus, a much smaller margin of error.  If occupancy drops 10% in a senior living facility, it could result in a 35%+ drop in net operating income, whereas, the same drop in occupancy in an apartment building might only result in a 20% drop in net operating income.  Additionally, a senior living facility might take ten times more employees to operate than a similar sized apartment building.   With more employees, comes more risk.

The upside with senior living facilities is that with a higher cap rate, there is a higher potential return if an operator can continue to maintain and increase net operating income.   The cost of debt is about the same, whether a senior living facility or an apartment building, so the opportunity for arbitrage is much greater.   For example, if the cost of debt is 5%, and the cap rate on an apartment building is 5.75%, the interest rate arbitrage is only 75 basis points, whereas a senior living cap rate might be 7.5%, resulting in a 250 basis point arbitrage.

Conclusion:

Although senior housing facilities have higher cap rates, and a perceived higher risk, good operators that can maintain and grow net operating income can make a far greater return than with an apartment building.    The key of course, is finding the right operator.  

Contact Information:

For more information on what your Seniors Housing Community may be worth, please contact Jason Punzel at punzel@slibinc.com or 630-858-2501.

November 8, 2018
Matt Alley

Independent Owner (“Mom and Pop”) Sales

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Independent Senior Housing Sales

Independent seniors housing sales are one trend that I have seen in twelve years as a Broker with Senior Living Investment Brokerage, Inc.  Independent (or “mom and pop”) owner-operators are having more difficulty running their long-term care or seniors housing facility in a profitable manner than in the past.  This is leading to an increasing number of independent seniors housing sales.

I believe that several factors have led to the squeeze that independent operators have felt recently.

Technological Disadvantage

As systems have gotten more complex (and more expensive), the larger regional and national operators have been able to afford the best systems for reimbursement, payroll, employee benefits, etc.  It is common for a larger party to take over a facility run by an independent operator and be able to increase their Medicaid and Medicare reimbursement strictly from an upgrade in systems.

Marketing Ability

Larger regional and national operators have the ability to smooth marketing expenses over multiple facilities in a similar market.  If an independent operator owns only one community, it is often cost-prohibitive to hire an employee solely focused on marketing. The marketing responsibility typically falls on the owner, executive director or business office manager, who are all in charge of a multitude of daily responsibilities.

Recent Legislation

The tightening reimbursement, many states’ moves to managed care and the increased presence of provider tax or federal subsidies of the state Medicaid programs have made the payment atmosphere more difficult over the past couple of years.  The mandatory offering of health insurance can squeeze already thin margins and make it very difficult to expand the employee base.  If the federal minimum wage is increased, that may make this effect even more dramatic.

Increased Development

The recent boom in development of long-term care and seniors housing facilities throughout the country (especially in urban and suburban markets) has made it more difficult on independent operators.  Increased development has led to a greater supply of newer facilities on the market, which doesn’t allow for independent operators to compete on a physical plant level.

Stress Levels 

The amount of time and energy it takes to run a senior living facility independently as well as the overall emotional and physical stress can be overwhelming. Owners are often wearing many hats and handling responsibilities beyond their own.  A lot of owners are aging out as well having owned facilities for 20+ years.

These factors as well as others are making it more difficult for independent owner-operators to be profitable and compete. If you are an independent owner-operator considering your options, I’d be happy to prepare a complimentary confidential marketing proposal of your facility or portfolio.

At Senior Living Investment Brokerage, Inc., we have a long track record of independent seniors housing sales and serving the needs of independent owner-operators.  We have completed several transactions recently for single facility operators.

If you have any questions on the topic of this post, please contact Matthew Alley at 630-858-2501 ext. 225 or alley@slibinc.com or www.matthewalley.com