High acquisition prices and low interest rates won’t last forever in seniors housing
By Ryan Saul
As a broker, I am frequently asked if now is the right time to sell. Most owners are aware the market is favorable for sellers, but few actually know their current value.
The biggest challenge for my company, Senior Living Investment Brokerage (SLIB), is not convincing owners that the time is right to sell. Rather, it is getting in the room with them to put together a confidential proposal that determines their current market value.
The M&A market and leading indicators make a strong case. The seniors housing market is very aggressive right now. Pricing and deal volume is at an all-time high. When looking at seniors housing — characterized as assisted living/memory care and independent living — pricing has increased significantly over the past few years.
According to the “Senior Care Acquisition Report, 20th Edition,” published by Irving Levin Associates, the average price per unit increased from just over $100,000 per unit to around $200,000 per unit in the last five years. The low cost of capital and significant demand for seniors housing, in addition to aging demographics, has caused pricing to skyrocket in a short period of time.
Institutional capital is turning to seniors housing as a resilient segment to put its money to work. In addition, many regional companies are well capitalized with multiple debt and equity sources to make strategic acquisitions.
Our sales mirror the national statistics. SLIB’s highest price-per-unit sale in 2010 was $171,000, while in 2014 the highest price per unit rose to $298,000. That is a 74 percent increase in top-end sales from 2010 to 2014. In addition to the strong market indicators, our firm’s strategic marketing platform has yielded double the number of qualified written offers on our inventory of exclusive listings over the last five years.
The Senior Care Acquisition Report actively tracks all publicly announced transactions nationwide. The chart below shows the upward momentum experienced in the last several years in transaction dollar volume. The price per unit mentioned above and total transaction dollar volume are two strong indicators of where seniors housing has come and where it is headed.
Are valuations due for a slowdown?
While we can’t say with certainty whether the market can continue its current trend and pace, many factors today indicate the industry will see valuations level off. Rising interest rates and new construction will likely contribute to the end, or tempering, of the rise.
But we don’t foresee the market cooling off too much in the near future. In fact, the inventory of communities on the market remains scarce compared with the strong demand, which continues to fuel the rise in pricing.
Buyers are aggressively seeking opportunities for acquisition before interest rates increase. Our offerings receive local, regional and national attention, yielding multiple offers with aggressive pricing and terms.
While we have proven the market is strong, there are a number of owners that have not established a defined timetable to sell.
We meet with many owners that have a five- to 10-year horizon to sell, but when they are educated on current market valuations they quickly discover they can achieve a premium today and expedite their timetable. If sellers aren’t ready to fully exit the business, hiring a quality firm to negotiate a sale-leaseback with a REIT and/or private equity group is an alternative way to achieve investment objectives.
The first step in deciding if now is the right time to sell is to determine the market value of your asset. We gather a small amount of community-specific data (financials, rent roll, unit breakdown, and physical plant information). Upon receipt of the information, it typically takes three to five days to complete a comprehensive analysis.
If, after a confidential proposal, it is determined now is the right time to sell and your objectives can be met, the following timeline outlines what to expect during the marketing phase:
– Marketing period. This begins with the execution of an exclusive representation agreement and concludes with the execution of a letter of intent (LOI). The confidential marketing period typically takes four to six weeks.
– Preparation. This takes one week as we compile a qualified buyer list, develop an offering memorandum and organize a team for assignment.
– Marketing commencement. It takes two weeks to call buyers, execute confidentiality agreements and, finally, disseminate the offering memorandum.
– Execution. This process takes two to three weeks to respond to buyer questions and requests, establish expectations and receive pricing feedback and LOIs.
– Start of closing. Closing begins with the execution of a LOI and concludes with the closing of the transaction. The closing period typically takes eight to 12 weeks.
– Contract. Over the course of two to four weeks we introduce deal terms with attorneys, negotiate the contract then execute that contract.
– Due diligence. During a four- to eight-week process, the buyer submits a due diligence request list. Due diligence materials are reviewed and third-party reports are ordered and completed.
– Transition and closing. During the final two to four weeks, the buyer lifts all contingencies and places a non-refundable deposit. The transition is planned and implemented.
No one has a crystal ball. We cannot predict if values will continue to rise, plateau or trail off. We can say with confidence that it is currently a seller’s market and a great time to explore a sale.
I would encourage owners that are on the fence with regard to selling their community to request a confidential proposal to determine the value of an asset and whether now is a good time to pursue a sale. Not only will it help determine if now is the right time to sell, but it will also help with your strategic business planning.
Ryan Saul is managing director at Senior Living Investment Brokerage Inc., a brokerage firm dedicated to representing sellers in the confidential sale of seniors housing communities. Focused on the sale of seniors housing since 2000, Ryan has completed over 250 transactions across 30 states. He specializes in private, public and not-for-profit representation.