Assisted Living Buyer and Seller Gap
Recently I was involved with underwriting and negotiating for a seniors housing property in Loveland, Colorado. The building totals approximately 85,500 square feet under one roof and was completed in the spring of 2007. The unit mix totals 104 units; including (10) 304 square foot studios, (60) 377 square foot studios (20) 602 square foot 1 bedroom and (14) 947 square foot two-bedroom units. The property was being quietly marketed through a seller’s broker. The asking price was $17.9 million, which equated to a 7.25% cap rate on annualized first quarter 2011 financials. This is for a property with a Medicaid census of approximately 60%, and some functional issues with the layout of the units. Furthermore, the finish of the property is average and needed renovations to meet the market.
The buyer’s intention was to convert 18 units to memory care and keep 82 units for assisted living. The buyer considered the total number of assisted living units, without a memory care component, was out of balance; particularly with consideration to some softness in the Loveland assisted living market. The buyer’s estimate of necessary renovations for the property to attract a higher percentage of private pay residents and add a memory care wing was approximately $1.05 million.
Based upon these factors the seller was willing to move forward with a $13.5 million purchase price. This would be the top end of their price since there all in cost in the project, after transaction cost and additional marketing expenses would be approximately $15 million, and they felt that amount is pushing the top end for the market. This is based upon current market conditions, with softness in lease up and occupancy at competing facilities. Also factored in is the additional supply in the pipeline in close proximity. Furthermore, the design of the units they consider to be a bit awkward and likely negatively impact the market rates. Their offer of $13.5 would include assumption of the HUD loan currently being pursued by the owner.
The offer price equated to a cap rate of 9.75%. The offer was rejected by the owner and no counter offer was made due to the owner’s expectation of a sub-8% cap rate on an average quality property with a high percentage of Medicaid residents.
Seller’s expectation appear to remain above the market for senior housing properties justifying the limited transaction activity in this care type. Contact Ryan Housekeeper of Tranquilium, to discuss brokerage and development opportunities of seniors housing properties, (734) 929-2250, ryanh@tranquilium.com
Tranquilium Services
Tranquilium provides analysis, brokerage, consulting and asset management services for commercial real estate participants. Target clients are lenders, investors, buyers, sellers, developers and operators of seniors housing assets. Services involve feasibility and valuation analysis, acquisition and disposition brokerage, development and operation consulting and asset management. Contact Ryan Housekeeper at 734-929-2250 or at ryanh@tranquilium.com, for a quote and scope of services that fit your needs.
Valuing Green Real Estate
The ability to accurately value green building beyond the immediate cost savings will incentivize an increased investment in sustainable real estate. Incentives are being provided by government regulators to promote green development. Valuation expects and investors need to identify the value in which these incentives generate and quantify the positive impacts of green building versus conventional building in order to achieve optimal financial results for investors and carbon reduction goals for society. Contact Ryan Housekeeper at ryanh@tranquilium.com or (734) 929-2250 in order to discuss how Tranquilium can assisted in this process.
Smart Growth
Tranquilium seeks to collaborate with organizations and community advocates to advance the principals of “Smart Growth”. The focus is on creating dense mixed use properties, near existing infrastructure; thereby preserving open space and providing housing for a variety of income levels and lifestyles. This development pattern serves to advance the quality of the community, environment and economy. This shall be accomplished by cost effectively developing or revitalizing walkable built environments, offering a variety of transportation options and utilizing sustainable building principles. “Smart Growth” creates a sense of place.
Seniors Housing Valuation Consulting
The amount of demand to purchase good quality seniors housing facilities far exceeds the available supply of readily interested sellers. This factor compounded with very few new development projects actively moving forward, due to lack of financing; and improving seniors housing fundamentals, has created what should remain for an extended period of time a seller’s market for seniors housing. This is counterintuitive to real fundamentals in general across all other sectors. However, the reality is need based seniors housing is more recession proof than any other real estate sector and prudent investors are acutely aware of this factor; along with the highly appreciated fact by all of us that our population is rapidly aging. Therefore, this is and will continue to be a good time to position you property to sell.
If the property is underperforming Tranquilium works with operators nationwide and can provide consulting services through relationships with a variety of proven industry professionals which can help to optimize operating performance, and improve census, providing the advise, action plan and implementation needed in order to improve the properties bottom line, increase earnings before interest, taxes, depreciation and amortization (EBITDA) and justify a lower cap rate sale due to the improved historical performance of the property.
After a free consultation Tranquilium can identify the best operator consultant to work with for your property type and in your region. Even if your intent is to sell in a year or more the advice and operation plan will benefit your ability to improve current earnings and optimize the value of the seniors housing asset(s). Improved performance now will reflect as proven historical performance at a future sale date. In this new economic climate, underwriting on past performance instead of future anticipated earnings will remain the key underwriting criteria of prudent institution buyers. Properties that will claim the lowest capitalization rates will be properties that have strong historical performance. The operating consulting services will help generate a higher EBITDA over an extended period of time, justifying a lower cap rate and the optimal market sale price at the time you are ready to sell. Please contact Ryan Housekeeper, of Tranquilium at (734) 929-2250 to discuss the next steps to increasing the value of your asset(s).
Investing in Seniors Housing
Many people recognize the growth to come in the seniors housing industry as the Baby Boomers enter into retirement. According to The Pew Research center starting January 2011 approximately 10,000 baby boomers are reaching the age of 65 each day. This daily trend is anticipated to continue for the next nineteen years. This supports what many people already know and that is we have an aging population.
Investors interested in seniors housing point to the aging Baby Boomer Generation as a reason to invest in seniors housing. Recognition of this demographic trend is also what led me into the industry. Their are tremendous opportunities over the next 30 years serving the growing needs for seniors housing, health care and other services sought by the senior generation.
It is important to note that for approximately the next 15 to 20 years seniors housing will be occupied primarily by the parents of the Boomers and in increasing numbers, the Silent Generation, which follows the World War II generation and precedes the Baby Boomers. As I have pointed out in a prior blog the age of residents residing in seniors housing communities is rising and is at 86.9 years of age, according to The Assisted Living Federation of America. The Silent Generation is smaller then the preceding and succeeding generations.
It is not for another 15 to 20 years until Baby Boomers will be entering rental based multi-unit independent and assisted living facilities in large numbers. For this reason additional analysis is needed before determining if a market is ripe for a new seniors housing community or to invest in an existing seniors housing asset. This demographic trend presents challenges in the seniors housing industry for investor, developers, operators and other vested professionals. To succeed we need to identify markets and properties that will excel during a period when senior growth rates of 85+ in age will be relatively stagnant.
According to recent NIC data the aggregate average for the top 31 markets shows occupancy levels were at a cyclical low of 87.4% for Assisted Living in 1st Quarter 2010 and 87.0% for Independent living in 3rd Quarter 2010. This is down from the most recent cycle peek of 90.7% for Assisted Living in 3rd Quarter of 2006 and 92.7% in 1st Quarter 2007.
NIC data supports why it is important to consider the current micro market trends. Many would consider Arizona and the Phoenix area in particular as a great place to retire; however, according to NIC the occupancy of Independent Living facilities in the Phoenix market declined 780 bases points from 91.5% in 3rd Quarter 2007 to 84.3% in 3st Quarter 2010. The Phoenix Independent Living occupancy rate as of 4th Quarter 2010 has increased slightly to 84.6%; however, the market still remains near the bottom of the 31 major market list provided by NIC. A significant cause for the decline, in addition to economic factors, was the addition of 1,600 IL units to the Phoenix market since 1st Quarter 2008. AL occupancy has rebounded much stronger then IL. AL occupancy in Phoenix is up 400 bases points to 89.4% in 4th Quarter 2010, since reaching a cyclical low of 85.4% in 2nd Quarter 2009. AL inventory additions in the Phoenix market have been much more limited since 1st Quarter 2008, with only 186 units, with 110 units currently under construction.
This shows the importance of considering micro-market trends. The growth in Baby Boomers retiring is not directly impacting or even correlated to the trends in independent living occupancy rates as some people may incorrectly assume.
Tranquilium provides expertise in identifying strong markets for seniors housing developments and the acquisition of existing seniors housing properties. Ryan Housekeeper services as a buyers representative for investors and is available to serve property owners seeking to sell their seniors housing assets. In addition, Tranquilium provides market study services for landowners to determine an appropriate course of action with their land site. Please contact Ryan Housekeeper at ryanh@tranquilium.com or 734-929-2250 to discuss these and other opportunities further.
Seniors Housing REIT Activity
Market activity in the seniors housing industry clearly has been increasing for the past couple of quarters, starting with an active end to 2010. The announcement of the Ventas- NHP merger reflects the growing strength of health care REITs in this industry. The largest four REITs in the industry of HCP, Ventas, NHP, and Health Care REIT are soon to join the auto industry with the same Big Three title. Ventas and NHP will become the largest REIT later this year, if all goes as planned. This trend reflects the reality that the major REITs are being an increasingly dominant force within the Seniors Housing industry and are shaping market values with little help from other industry participants. HUD lenders remain the primary alternative financing source to REITs for acquisition deals and development funding. Conventional lending for developments and acquisitions primarily remains on the sidelines; as does many qualified and capitalized equity sources. Working with REITs on acquisitions is a key to successful dispositions for owners and growth for operators. To discuss trends and opportunities working with REITs you can contact Ryan Housekeeper of Tranquilium at 734-929-2250 and at ryanh@tranquilium.com.
Tranquilium Services
- Seek properties for institutional and individual investors
- Identify lead investor’s investment criteria
- Underwrite property providing analysis of assets’ strengths and weaknesses
- Form asset investment groups, utilizing the expertise of the Portfolio Team
Coordinate Dispositions For Sellers
- Underwrite property performance and develop an opinion of market value
- Utilize national lending contacts to determine financing options for the asset
- Present investment to contacts in national database of senior housing buyers
- Market Listings through KW Commercial, CoStar, CPIX and all affiliated services
Consulting For Developer and Landowners
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- Create report used to obtain investors and debt financing
Universal Services
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- Negotiate deal terms on behalf of client and close transactions nationwide
- Engage qualified 3rd party firms to complete due diligence on the asset
- Coordinate title, escrow and other closing requirements with appropriate experts
Seniors Housing: Market Feasibility Services
Tranquilium provides market study services for seniors housing. There are many land sites that landowners seek to sell with the belief that their land is well suited for a seniors housing facility. Oftentimes seniors housing is determined as the best use because other uses of the site are clearly not feasible. Seniors housing is considered to be more recession proof and in great demand as the Baby Boomer generation becomes the senior generation. True, Boomers are entering retirement in the thousands daily; although the case, Boomers are still young, between the ages of 46 and 64. The Assisted Living Federation of America reports the average assisted living resident is 86.9 years in age. The majority of residents of independent living are over 75 years old. The 75 to 84 age cohort is actually anticipated to decline over the next decade as the Silent Generation enters this cohort in smaller number then the Boomers will.
Tranquilium can help identify strong markets for seniors housing and provide feasibility analysis services for landowners and developers. For more information contact Ryan Housekeeper at 734-929-2250, ryanh@tranquilium.com.
Providing Seniors Housing Acquisition and Development Services
Tranquilium continues to provide seniors housing services to clients nationwide for developments and acquisitions. Currently the group is marketing an existing 82 bed assisted living facility in Granbury, Texas for sale. This facility was built in 2005 and totals approximately 56,324 square feet.
In addition, the group is coordinating a development project in the Houston area and seeks a management group for a high end assisted living development project in Reno, Nevada. Equity is available, if a credit-tenant is secured to operate the Reno facility through a lease agreement. Tranquilium is also seeking to coordinate a development team for a seniors housing development site in Murrieta, California. Other sites are currently in the process of being identified in Boise, ID and Shreveport, LA.
For more information on these projects and to discuss other opportunities to work with Tranquilium on seniors housing acquisition and development services contact Ryan Housekeeper at 734-929-2250, ryanh@tranquilum.com.
