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PREPARED FOR
VALUATION OF SENIORS HOUSING PROPERTIES
By: Zach Bowyer, MAIJuly 28, 2015
2 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis
Income Approach
Sales Comparison Approach
Allocation of the Going Concern
Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
3 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWIndependent Living Community (ILC)
4 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWAssisted Living Residence (ALR)
5 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWSkilled Nursing Facility (SNF)
6 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWContinuing Care Retirement Community (CCRC)
7 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Shelter ActivitiesTransport, Laundry
MealsBasic Care Services
ADL Care Services
Specialized MC
Long-Term Chonic Care
55+
IL
AL
MC
NC
Source: NIC Investment Guide
Real Estate Component Services Component
Real Estate Component Services Component
Real Estate Component
Real Estate Component Services Component
Real Estate Component Services Component
Summary of Property Types
Resident Choice Relative Influence Relative Choice Doctor Choice
8 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Implied Market ValuesINDUSTRY OVERVIEW
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Seniors Housing Hotels Apartments
Billi
ons
Skilled Nursing
Assisted Living
Independent Living
Source: NCREIF & NIC
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Number of Publicly Announced AcquisitionsINDUSTRY OVERVIEW
Source: The Senior Care Acquisition Report, 20th Edition, Irving Levin $ Assoc.
0
50
100
150
200
250
300
350
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
10 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Volume of Publicly Announced Acquisitions (Billions)INDUSTRY OVERVIEW
Source: The Senior Care Acquisition Report, 20th Edition, Irving Levin $ Assoc.
$0
$5
$10
$15
$20
$25
$30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
11 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Capitalization Rate Trends & OutlookINDUSTRY OVERVIEW
Source: NIC, Senior Care Investor, and CBRE Econometric Advisors
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.0019
97.4
1998.4
1999.4
2000.4
2001.4
2002.4
2003.4
2004.4
2005.4
2006.4
2007.4
2008.4
2009.4
2010.4
2011.4
2012.4
2013.4
2014.4
2015.4
2016.4
2017.4
2018.4
2019.4
Seniors
SNF
Multifamily
10Y T‐Bond
FORECAST
12 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Property Level ReturnsINDUSTRY OVERVIEW
0
2
4
6
8
10
12
14
16
18
1 Year 3 Years 5 Years 8 Years
Seniors Housing
Apartment
Retail
Industrial
Office
Total
Source: NCREIF & NIC
% L
ever
ed R
etur
ns
13 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWDemographic Trends
Source: CBRE Econometric Advisors , Claritas
14 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEWDo the MathAverage Age of NEW AL resident (84) – Age of Leading-Edge Baby Boomer (67) = 17 Years
15 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Seniors Housing Demand Vs. SupplyINDUSTRY OVERVIEW
Source: NIC MAP and US Census Bureau
16 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
National Operating TrendsINDUSTRY OVERVIEW
Source: NIC MAP
17 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Occupancy Trends vs. Home ValuesINDUSTRY OVERVIEW
Source: NIC MAP and CBRE Econometric Advisors
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
0.82
0.84
0.86
0.88
0.9
0.92
0.94
Occup
ancy IL, Stand Alone
AL, Stand Alone
All CCRC
Home Values
18 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview Market Analysis
Income Approach
Sales Comparison Approach
Allocation of the Going Concern
Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
19 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Appraisal ProcessVALUATION OVERVIEW
Definition of the Problem
Scope of Work
Data Collection and AnalysisMarket Analysis
Highest and Best Use
Application of Approaches to ValueIncome Approach
Sales Comparison ApproachCost Approach
Reconciliation of Value Indicators and Final Value Opinion
Report Defined Value OpinionsAllocation of the Going Concern
20 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Approaches to ValueVALUATION OVERVIEW
Income Approach• The underlying operations of the business are what drives overall value of the real estate• Most appraisals will assume experienced and capable management• Utilized as primary determinant of value
Sales Comparison Approach• Primarily utilized to extract market pricing and a test or reasonability for the conclusions
derived from the income approach• Utilized Paired Sales, NOI Analysis, and EGIM Analysis• Comparables are selected from a regional if not national geography
Cost Approach• Least reliable and often omitted• Primarily utilized as a method of allocating the Going Concern or project feasibility
21 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis Income Approach
Sales Comparison Approach
Allocation of the Going Concern
Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
22 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Quantifying Net Market DemandMARKET ANALYSIS
A Primary Market Area (PMA) can be identified by a radius, node(s), submarket(s), zip code(s), county(s) or township(s), or any variety of such defining terms.
We define a PMA as representing where approximately 80% of the residents currently occupying the subject resided prior to moving in to the subject property.
In analyzing a market, CBRE employs two quantitative methods, each independent of the other
1. Penetration Analysis• Competitive Supply / Age Qualified Households • Simple, yet allows for apples-to-apples comparison to other markets• Requires comparable local, regional, and national data-points to understanding of the extracted rate• The penetration must be considered with occupancy to properly understand full meaning• Used to determine market depth and impact of future supply on current market balance
2. Demand Coverage Analysis• Delineates PMA by age and income qualified population• Recognizes healthcare or ADL (Activities of Daily Living) requirements specific to each care level• Identifies Net Demand in terms of actual number of units by property type• Identifies impact of state subsidies and +/- net immigrations outside market norm• PMA specific
Dummy Factors, Apples-to-Apples, Accurate Inputs, Boots on the Ground
23 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Penetration AnalysisMARKET ANALYSIS
SENIORS HOUSING MARKET STATISTICSCategory Subject's PMA Subject MSA MAP Primary
Assisted Living
Stabilized/Average Occupancy 87.39% 92.20% 90.40%
Average Monthly Rent $4,726 $4,251 $4,304
Property Count 22 54 2,545
Inventory (Units) 1,746 4,686 200,044
Construction (Units) 90 526 10,750
Projected 3-Year Inventory Growth 5.15% 2.40% 2.10%
Penetration 10.30% 5.70% 4.80%
Source: NIC MAP
2014 2019
Assisted Living
Age Qualified Households (75+) 16,949 19,280
Total AL Supply 1,746 1,836
Indicated AL/MC Penetration Rate: 10.30% 9.52%
Compiled by CBRE
MARKET PENETRATION
24 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Penetration AnalysisMARKET ANALYSIS
Penetration Rates Alone Have Multiple Meanings:
Low Penetration/ High Occupancy: Local population is accepting the subject’s product type, significant roomfor expansion, higher than typical ratio of residents emanating from outside the defined PMA. Expect strongoccupancy levels, stable rent growth, and healthy absorption for proposed properties. Most favorable.
Low Penetration/ Low Occupancy: Local population is either not accepting the subject property type or aretraveling outside the defined PMA to obtain their respective needs. Market opportunity does exist, but will likelyrequire additional marketing efforts in order to achieve a stabilized occupancy level.
High Penetration/ High Occupancy: Equally as attractive as low penetration with low occupancy. Competitivemarket, yet presumes the local population is generally receptive and well educated with the respective propertytype. Requires less marketing efforts in terms of product education, but may require more resources from anoverall competitive standpoint or the offering of something unique to the market, such as superior quality oraffordable rents. Prevalence of state subsidies are also common in this market (MA).
High Penetration/ Low Occupancy: This combination is the least favorable and depicts a saturated market.Decreasing rental rates, prevalence of concessions, and less than favorable occupancy can be expected.
25 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Demand Coverage AnalysisMARKET ANALYSIS
2014 AL
Total Demand 1,181
Frictional Vacancy 12.61%
Total Adjusted Demand 1,352
Total Supply 1,746
Net Surplus Demand (Units) -394
Market Balance Over Supply2019 AL
Total Demand 1,437
Frictional Vacancy 12.61%
Total Adjusted Demand 1,644
Total Supply 1,836
Net Surplus Demand (Units) -192
Market Balance Over Supply
Compiled By: CBRE
DEMAND COVERAGE
26 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis
Income Approach Sales Comparison Approach
Allocation of the Going Concern
Flags and Considerations for Assessment Purposes
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
27 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
General OverviewINCOME APPROACH
The income capitalization approach reflects the subject’s income-producing capabilities.
The 'active management' component is viewed as adding incremental risk and complexity versus the conventionalcommercial real estate asset classes, which translates into higher return expectations by investors
- Property Management will “make or brake” market value
Market value appraisals involving not-for-profit or government, and poor operators should reflect the likely buyers’perspective, and in most cases, that would be from the perspective of for-profit entities, which may take a differentview of future operations
Proper rental comparables and operating expense comparables are essential in achieving accurate underwriting
- Per resident day is the most accurate unit of measure for underwriting purposes- % of EGI can have multiple meanings depending on property specific operating format and should only be used
as a secondary test of reasonableness
The direct capitalization method is the most commonly used in deriving an estimate of market value per this approach
The market derived capitalization rate is applied to the subject’s stabilized EBITA, which includes replacementreserves and management fees
- Management Fee – 3% to 7% of EGI- Replacement Reserves - $350 to $650 per unit, annum
28 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Case Study – Passive vs. Active ManagementINCOME APPROACH
Skilled Nursing Facility
120-bed, purpose built skilled nursing facility, developed in 1973, secondgeneration family owned and operated.
Good quality property in average condition. Excellent bones and design.
Buyer was regional owner-operator with properties surrounding states andlooking to expand their presence in within subject state.
Buyer contacted the seller directly. No broker on deal.
Above market operating expenses. Did not use part time staff - paid overtimeto full employees.
Below market occupancy and quality mix- recognized by seller.
Below market private pay rates – recognized by buyer.
Not maximizing Medicare utilization.
Favorable rated market by NIC MAP in high barrier to entry location in closeproximity to a number of hospitals.
Seller executed with buyer due to comfort level and trust.
Buyer’s short term goal to increase operating efficiencies. Invest anadditional $3mm and offer more sub acute rehab services.
Seller’s goal - retire.
Property SummaryYear Built 1973
Beds 120
Care Level SNF
Purchased $6,000,000
Date June 2013
2012 NOI $273,006
Buyer Y2 NOI $2,623,908
29 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACHOPERATING SUMMARY
Reporting Period
Beds Occ. AMR Res Days Beds Occ. AMR Res Days Beds Occ. AMR Res DaysTotal 120 76% $6,111 33,384 120 87% $7,489 37,979 120 92% $8,074 40,150
Total % EGI $/Unit $/RD Total % EGI $/Unit $/RD Total % EGI $/Unit $/RDIncome
Skilled Nursing Private Pay $1,245,924 14.1% 10,383 $37.32 $1,635,200 15.0% 13,627 $43.06 $1,752,000 14.9% 14,600 $43.64Skilled Nursing Medicaid 4,094,967 46.4% 34,125 122.66 4,578,034 42.0% 38,150 120.54 4,439,147 37.8% 36,993 110.56Skilled Nursing Medicare 2,960,407 33.5% 24,670 88.68 3,749,280 34.4% 31,244 98.72 4,407,375 37.5% 36,728 109.77Skilled Nursing Insurance 497,965 5.6% 4,150 14.92 822,256 7.5% 6,852 21.65 1,027,694 8.7% 8,564 25.60Ancillary Charges 32,436 0.4% 270 0.97 124,885 1.1% 1,041 3.29 124,885 1.1% 1,041 3.11Effective Gross Income $8,831,699 100.0% $73,597 $264.55 $10,909,655 100.0% $90,914 $287.25 $11,751,102 100.0% $97,926 $292.68
ExpensesReal Estate Taxes $131,274 1.5% 1,094 $3.93 $137,822 1.3% 1,149 $3.63 $137,822 1.2% 1,149 $3.43Property Insurance 13,712 0.2% 114 0.41 13,772 0.1% 115 0.36 13,772 0.1% 115 0.34Utilities 237,055 2.7% 1,975 7.10 283,330 2.6% 2,361 7.46 283,330 2.4% 2,361 7.06Administrative & General 848,181 9.6% 7,068 25.41 1,330,361 12.2% 11,086 35.03 1,422,942 12.1% 11,858 35.44Advertising & Leasing - 0.0% 0 0.00 120,000 1.1% 1,000 3.16 120,000 1.0% 1,000 2.99Resident Care 4,141,173 46.9% 34,510 124.05 3,416,400 31.3% 28,470 89.95 3,613,500 30.8% 30,113 90.00Ancillary Services 518,596 5.9% 4,322 15.53 550,000 5.0% 4,583 14.48 600,000 5.1% 5,000 14.94Culinary Services 719,014 8.1% 5,992 21.54 607,360 5.6% 5,061 15.99 642,400 5.5% 5,353 16.00Laundry & Housekeeping 516,977 5.9% 4,308 15.49 379,600 3.5% 3,163 9.99 401,500 3.4% 3,346 10.00Repairs & Maintenance 138,760 1.6% 1,156 4.16 140,000 1.3% 1,167 3.69 150,000 1.3% 1,250 3.74Program & Recreation 123,616 1.4% 1,030 3.70 140,000 1.3% 1,167 3.69 140,000 1.2% 1,167 3.49Payroll Taxes & Benefits 780,541 8.8% 6,505 23.38 580,000 5.3% 4,833 15.27 625,000 5.3% 5,208 15.57Other 347,794 3.9% 2,898 10.42 350,000 3.2% 2,917 9.22 350,000 3.0% 2,917 8.72Operating Expenses $8,516,693 96.4% 70,972 $255.11 $8,048,645 73.8% $67,072 211.92 $8,500,266 72.3% 70,836 211.71
Net Operating Income $315,006 3.6% 2,625 $9.44 $2,861,010 26.2% 23,842 $75.33 $3,250,835 27.7% 27,090 $80.97
Management Fee ¹ - 0.0% - $0.00 545,483 5.0% 4,545.69 $14.36 584,928 5.0% 4,874 $14.57Reserves for Replacement 42,000 0.5% 350.00 1.26 42,000 0.4% 350.00 1.11 42,000 0.4% 350.00 1.05
Adjusted Operating Expenses 8,558,693 96.9% 71,322 $256.37 8,636,128 79.2% 71,968 $227.39 9,127,194 77.7% 76,060 $227.33
Adjusted Net Operating Income $273,006 3.1% 2,275 $8.18 $2,273,527 20.8% 18,946 $59.86 $2,623,908 22.3% 21,866 $65.35
Source: Property operating statements & buyer proforma
2012 Actual (Seller) Year 1 (Buyer) Year 2 Stabilized (Buyer)
30 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Case Study – Revenue ProjectionsINCOME APPROACH
Occupancy Census Mix
Daily Private Pay Rates Effective Gross Income Per Resident Day
61% 60% 59% 57%
14% 11% 13% 13%
17% 21% 19% 22%
8% 8% 9% 8%
0%
20%
40%
60%
80%
100%
Subject Comps Buyer Current
Other
Medicare
Private
Medicaid
$270
$320
$278
$375
$363
$265
$100 $150 $200 $250 $300 $350 $400
Current
Buyer
NIC 31
NIC Metro
Comps
Subject
$265 $262$296 $273 $293 $293
$100
$150
$200
$250
$300
Subject Comp Min. Comp Max.Comp Avg. Buyer Current
85.00%
92.00%
91.40%
90.10%
91.00%
76.00%
20% 40% 60% 80% 100%
Current
Buyer
NIC 31
NIC Metro
Comps
Subject
“Subject “data points represent the seller’s 2012 Actual. “Current” represents the buyer’s October 2013 Actual
31 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Case Study – Expense Projections and NOIINCOME APPROACH
Operating Costs Per Resident Day (PRD) Expense Ratio (Before Mgt Fee & Reserves)
Profit Margin (Before Mgt Fee & Reserves) NOI PRD (Before Mgt Fee & Reserves)
16.00%
27.70%
8.60%
22.40%
17.80%
3.60%
0% 5% 10% 15% 20% 25% 30% 35%
Current
Buyer
Comp Min.
Comp Max.
Comp Avg.
Subject
$8
$32
$59
$36
$60$40
$0$10$20$30$40$50$60$70
Subject Comp Min.Comp Max.Comp Avg. Buyer Current
$253.12
$211.92
$228.06
$240.32
$204.39
$255.51
$100 $150 $200 $250 $300 $350
Current
Buyer
Comp Avg.
Comp Max.
Comp Min.
Subject
97%78% 81% 83% 72% 84%
0%
20%
40%
60%
80%
100%
Subject Comp Min.Comp Max.Comp Avg. Buyer Current
“Subject “data points represent the seller’s 2012 Actual. “Current” represents the buyer’s October 2013 Actual
32 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Case Study - ResultsINCOME APPROACH
At Purchase(June 2013)
Current (Oct 2013 Ann.) Buyer’s Stabilized
NOI $273,006 $1,108,218 $2,623,908
Purchase Price $6,000,000 $6,000,000 $6,000,000
CapEx & Cary --- --- $3,000,000
Total Cost --- $6,000,000 $9,000,000
Indicated Value @ NIC Average Cap Rate
N/A$50,000/ Bed
$8,500,000$71,000/ bed
$20,200,000$168k/ bed
Return on Cost 4.55% 18.47% 29.15%
The “current” data points detailed in the following table represents four months of property operations by the buyer.
33 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Summary of Operating MetricsINCOME APPROACH
IL AL SNFOccupancy (1Q15) 91% 88.4% 87.9%
Average Monthly Rent $2,892 $4,264 - $5,833 $289/ Day
Average Length of Stay 29.2 Months 21.7 Months 3.2 Months
Total Revenues PRD $72.07 $151.55 $268.93
Operating Expenses PRD $44.39 $104.67 $232.23
Average FTE PRD 0.22 0.45 0.98
Average Operating Margin 35% - 45% 25% - 40% 10% - 20%
Capitalization Rate 7.1% 7.7% 12.3%
Average Price Per Unit $173,200 $173,200 $65,100
Source: NIC , American Seniors Housing Assoc., & Irving Levin Assoc.,
Per Resident Day (PRD) is the most accurate unit of measure when underwriting a seniors housing property type. Expense ratio, profit margin, and per unit indicators are all used as secondary measures.
34 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
CBRE Capitalization Rate SurveyINCOME APPROACH
Source: CBRE Seniors Housing Investor Survey
35 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
CBRE Capitalization Rate SurveyINCOME APPROACH
Source: CBRE Seniors Housing Investor Survey
36 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis
Income Approach
Sales Comparison Approach Allocation of the Going Concern
Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
37 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Summary of Methodologies and AnalysisSALES APPROACH
Sales Comparison
Regional/ national comp set is acceptable
Adjustments are mostly qualitative and challenging to support
Not utilized by market participants
Do not overlay NOI adjustments
NOI Analysis
Provides most realistic pricing utilized by market participants
Infers all physical property and locational differences
Utilizes regression analysis to estimate a per unit/ bed indication
EGIM Analysis
Easy to extract from market
Does not include operating expenses in pricing
Select EGIM for subject by analyzing expense ratio of subject respective of comparable set
38 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Net Operating Income AnalysisSALES APPROACH
NET OPERATING INCOME ANALYSIS
Compiled by CBRE
$396,517.13
$215,205
$265,205
$315,205
$365,205
$415,205
$465,205
$15,327 $20,327 $25,327 $30,327
Pri
ce p
er
Unit
NOI per Unit
Comparable Sales
Subject Indication
Trendline
39 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis
Income Approach
Sales Comparison Approach
Allocation of the Going Concern Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
40 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MethodologiesALLOCATION OF THE GOING CONCERN
Cost Residual: The value of the business/intangibles are estimated by taking the market value of the subjectand deducting the estimated personal property, land and real estate property value. The remaining valuerepresents the contribution of the business/intangibles.
Straight forward approach
Widely accepted and utilized in the appraisal industry
Utilizes estimates contained in the Cost Approach which is considered the less reliable indication of valueand often omitted due to various physical property attributes
Not utilized by market participants
Management Extraction: Business Enterprise Value is calculated based upon the capitalized value of themanagement fee. The total value of the going concern is calculated with NO deductions for management feesor reserves. The Concluded business value and FF&E are then deducted to get to the real estate onlyallocation.
Additional BEV is inherent in the operations, resulting in a possible omission of this allocation
Capitalization rates applied to the Management Fee are difficult to accurately extract from the market withthe applied rate considered to be highly subjective
Not utilized by market participants
41 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MethodologiesALLOCATION OF THE GOING CONCERN
Lease Coverage Analysis: A market derived lease coverage ratio is applied to the concluded net operating income forthe subject. The result is an indicated annual market lease payment for the subject. A net lease cap rate is applied to theestimated lease payment in order to obtain the value attributed to the real estate.
Lease Coverage Ratios and Net Lease Cap Rates are easily and accurately extracted from the market
Only arm’s length leases should be utilized – no RIDEA
Know where FF&E fits in. Part of Lease or owned separately by tenant
Market lease coverage rations will range from 1.10 to 1.30 for IL and AL, and 1.50 to 2.00 for SNFs
Net lease cap rates typically fall 200 to 300 bps below a going concern cap rate, all else equal
Higher the coverage, higher the spread (lower risk)
Utilized by market participants
42 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Methodologies – Lease Coverage AnalysisALLOCATION OF THE GOING CONCERN
As Is on
April 18, 2014
Concluded Stabilized NOI $4,325,432
Divided Lease Coverage Ratio 1.20
Inferred Market Lease Payment (Absolute Net) $3,604,527
Absolute Net Lease Cap Rate 5.75%
Inferred Leased Fee/ Real Property Value $62,687,420
Concluded Market Value of the Going Concern $69,200,000
FF&E $963,125
Inferred Leased Fee/ Real Property Value $62,687,420
Indicated Business Value $5,549,455
LEASE COVERAGE ANALYSIS
As Is on
April 18, 2014
Real Property $62,687,420
FF & E $963,125
Business Value $5,549,455
Market Value of the Going Concern $69,200,000
ALLOCATION OF THE GOING CONCERN
43 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Industry Overview
Valuation Overview
Market Analysis
Income Approach
Sales Comparison Approach
Allocation of the Going Concern
Final Considerations
Valuation of Seniors Housing PropertiesPRESENTATION OVERVIEW
44 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
FINAL CONSIDERATIONS
Understand the property specific operations and understand the market; understand where yourproperty fits in the market; current property trend lines may not be telling the whole story. There isno one size fits all.
Have boots on the ground and take the time to speak with the competition. The most sophisticatedanalysis is useless of your inputs are not accurate, well researched, and properly understood.
The appraisal should identify the assets being valued and distinguish the assets not being valuedwith the client in the development of the scope of work and in the report. This should reflect actionstaken by market participants.
Multiple entities often control the total assets of the business. Ownership structure must be fullyunderstood in order to fully understand value appropriate cash flows.
Market value appraisals involving not-for-profit entities or governmental entities should reflect thelikely buyers’ perspective, and in most cases, that would be from the perspective of for-profitentities, which may take a different view of future operations.
Comparable sales should be verified directly with source. Purchase price reported on deeds rarelyreflect the total consideration with only the allocated real estate value being reported.
45 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
FINAL CONSIDERATIONS
Only the specific sub-property type should be utilized for comparable purposes. Ie: don’t useindependent living sales to compare to memory care. This is even more critical SNF to assistedand independent living sales, and applies to all comparable purposes (sales, operations, rents,etc).
Standard commercial adjustments do not always apply and may in-fact be counterintuitive to whatwe are taught as general commercial appraisers. Ie: size adjustments, expense ratios as anindication of market operations.
Market participants do not contemplate the value by adding the value of the real estate to theseparate values of the tangible and intangible personal property; they focus on the overall valuewhich is derived by their expectations of cash flow and applied return requirement. In place cashflow is considered, but often adjusted by the buyer for pricing purposes. The magnitude of theadjustment will be reflected in the applied pricing rate(s).
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46 VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
Seniors Housing Data ProvidersFINAL CONSIDERATIONS
NIC (National Investment Center for the Seniors Housing & Care Industry)
ASHA (American Seniors Housing Assoc.)
American Health Care Association
Irving Levin & Assoc.
- SeniorCare Investor
- Senior Housing News
- Annual SeniorCare Investor Report
CBRE Seniors Housing | Valuation & Advisory Services
- Annual Cap Rate Survey & Market Outlook
- Please take full advantage of our platform
For more information regarding this presentation please contact:Zach Bowyer, MAIManaging Director & Seniors Housing Practice LeaderT +1 617 [email protected]
www.cbre.com