Monthly Archives: April 2019

April 15, 2019
Jason Punzel

How to Increase the Value of my Seniors Housing Community?

Share

How to Increase the Value of my Seniors Housing Community? – by Jason Punzel

The value of a Seniors Housing Community is derived from the cash flow and rate of return a buyer is seeking to achieve.   The common formula is Net Operating Income (NOI) divided by the Cap Rate (unleveraged rate of return).  The Cap Rate is a measure of risk, whereas the lower the cap rate the higher the price.

Thus, there are two ways a Community can increase in value:

  1. A reduction in the Cap Rate (cap rate compression)
  2. An increase in the Net Operating Income

There are two main reasons for a change in a cap rate.   First, a change in the interest rate, the second is a change in the perceived risk of an asset.   Cap Rates, or rates of return, are closely correlated with general interest rates.   As interest rates increase or decrease so do cap rates.  Secondly, investors perception of the risk of an asset can also change.   For example, many investors perceive that retail real estate is much risker today than ten years ago, prior the proliferation of Amazon and other on-line retailers.   Thus, retail cap rates are higher today, compared to other real estate asset classes, than they were ten years ago.

Changes in Net Operating Income:

The other way to increase a Seniors Housing Community’s value is through an increase of Net Operating  Income.  If revenue increases by 4% and expenses increase by 4%, then the NOI will increase by 4% as well as the value of the community (assuming the Cap Rate does not change).  However, if revenue increase 5% and expenses only increase 3%, the NOI will increase 9%, as will the value.  Conversely, if revenue increases 3% and expenses increase 5%, NOI decreases by 1%.   Below is a chart depicting the different scenarios.

 

Year 14% – growth5%/3%3%/5%
Revenue$3,000,000$3,120,000$3,150,000$3,090,000
Expense$2,000,000$2,080,000$2,060,000$2,100,000
NOI$1,000,000$1,040,000$1,090,000$990,000
Value @ 7% Cap$14,285,714$14,857,143$15,571,429$14,142,857
% Increase4%9%-1%

 

As one can see, NOI growth can have large swings based upon revenue and expense growth.

Conclusion:

Owners have very little control over the change in Cap Rates, but have much more control over changes in the NOI of their community.   It is important for owners to strive for revenue growth to increase faster than expense growth to increase the value of their community.

For more information on how to increase the value of your Seniors Housing Community, please contact Jason Punzel at punzel@slibinc.com or 630-858-2501.

April 5, 2019
Matt Alley

Private Operators are Becoming More Active

Share

Private Operators are Becoming More Active

As Jason Punzel blogged in March and the Senior Care Investor commented on this week (“For the first time ever, there have been four straight quarters with at least 100 announced seniors housing and care acquisitions.”), Seniors Housing M&A activity has continued to stay strong throughout the past year despite concerns about the industry due to overbuilding and government reimbursement.

According to Steve Monroe, editor of Senior Care Investor, “nearly half of the buyers were private operators, and most of these were smaller transactions that usually involved one property.”

How does the Activity of Private Operators Affect Asset Pricing?

For the large institutional level portfolios, this won’t affect pricing all that much.  Most of those portfolios are still being purchased by larger private equity or publicly traded REITs.

For the smaller deal with some challenges, it’s made the market more robust.  The private operators are generally more flexible dealing with one-off transactions and are willing to write in more upside to the deal.

If you are an owner of a single facility or small portfolio, now is a great time to consider selling your asset(s).  I would be happy to prepare a complimentary confidential marketing proposal of your facility or portfolio.

At Senior Living Investment Brokerage, 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 and small portfolio 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.matthewdalley.com.

matthew-alley-sm