VALUATION OF SENIORS HOUSING PROPERTIES
By: Zach Bowyer, MAI
July 28, 2015
PREPARED FOR
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Independent Living Community (ILC)
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Assisted Living Residence (ALR)
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Skilled Nursing Facility (SNF)
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Continuing Care Retirement Community (CCRC)
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Summary of Property Types
Shelter
Activities
55+
Real Estate Component
IL
Real Estate Component
AL
Real Estate Component
MC
Real Estate Component
NC
Real Estate Component
Transport,
Laundry
Basic Care
Services
Meals
ADL Care
Services
Specialized
MC
Long-Term
Chonic Care
Services Component
Services Component
Services Component
Services Component
Source: NIC Investment Guide
Resident Choice
Relative Influence
Relative Choice
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Doctor Choice
VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Implied Market Values
Billions
$1,400
$1,200
$1,000
Skilled Nursing
$800
Assisted Living
$600
Independent Living
$400
$200
$0
Seniors Housing
Hotels
Apartments
Source: NCREIF & NIC
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Number of Publicly Announced Acquisitions
350
300
250
200
150
100
50
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: The Senior Care Acquisition Report, 20th Edition, Irving Levin $ Assoc.
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Volume of Publicly Announced Acquisitions (Billions)
$30
$25
$20
$15
$10
$5
$0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: The Senior Care Acquisition Report, 20th Edition, Irving Levin $ Assoc.
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Capitalization Rate Trends & Outlook
16.00
14.00
12.00
10.00
FORECAST
Seniors
8.00
SNF
Multifamily
6.00
10Y T‐Bond
4.00
2.00
2019.4
2018.4
2017.4
2016.4
2015.4
2014.4
2013.4
2012.4
2011.4
2010.4
2009.4
2008.4
2007.4
2006.4
2005.4
2004.4
2003.4
2002.4
2001.4
2000.4
1999.4
1998.4
1997.4
0.00
Source: NIC, Senior Care Investor, and CBRE Econometric Advisors
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Property Level Returns
18
16
14
% Levered Returns
12
Seniors Housing
Apartment
10
Retail
Industrial
8
Office
Total
6
4
2
0
1 Year
3 Years
5 Years
8 Years
Source: NCREIF & NIC
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Demographic Trends
Source: CBRE Econometric Advisors , Claritas
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Do the Math
Average Age of NEW AL resident (84) – Age of Leading-Edge Baby Boomer (67) = 17 Years
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Seniors Housing Demand Vs. Supply
Source: NIC MAP and US Census Bureau
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
National Operating Trends
Source: NIC MAP
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INDUSTRY OVERVIEW
Occupancy Trends vs. Home Values
$240,000
0.94
$220,000
0.92
$200,000
Occupancy
0.9
$180,000
IL, Stand Alone
AL, Stand Alone
0.88
$160,000
All CCRC
Home Values
0.86
$140,000
0.84
$120,000
0.82
$100,000
Source: NIC MAP and CBRE Econometric Advisors
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
VALUATION OVERVIEW
Appraisal Process
Definition of the Problem
Scope of Work
Data Collection and Analysis
Market Analysis
Highest and Best Use
Application of Approaches to Value
Income Approach
Sales Comparison Approach
Cost Approach
Reconciliation of Value Indicators and Final Value Opinion
Report Defined Value Opinions
Allocation of the Going Concern
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
VALUATION OVERVIEW
Approaches to Value
 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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MARKET ANALYSIS
Quantifying Net Market Demand
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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MARKET ANALYSIS
Penetration Analysis
SENIORS HOUSING MARKET STATISTICS
Category
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
22
54
2,545
1,746
4,686
200,044
90
526
10,750
5.15%
2.40%
2.10%
10.30%
5.70%
4.80%
Property Count
Inventory (Units)
Construction (Units)
Projected 3-Year Inventory Growth
Penetration
Source: NIC MAP
MARKET PENETRATION
2014
2019
16,949
19,280
1,746
1,836
10.30%
9.52%
Assisted Living
Age Qualified Households (75+)
Total AL Supply
Indicated AL/MC Penetration Rate:
Compiled by CBRE
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MARKET ANALYSIS
Penetration Analysis
Penetration Rates Alone Have Multiple Meanings:
Low Penetration/ High Occupancy: Local population is accepting the subject’s product type, significant room
for expansion, higher than typical ratio of residents emanating from outside the defined PMA. Expect strong
occupancy 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 are
traveling outside the defined PMA to obtain their respective needs. Market opportunity does exist, but will likely
require additional marketing efforts in order to achieve a stabilized occupancy level.
High Penetration/ High Occupancy: Equally as attractive as low penetration with low occupancy. Competitive
market, yet presumes the local population is generally receptive and well educated with the respective property
type. Requires less marketing efforts in terms of product education, but may require more resources from an
overall competitive standpoint or the offering of something unique to the market, such as superior quality or
affordable 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.
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
MARKET ANALYSIS
Demand Coverage Analysis
DEMAND COVERAGE
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
2019
Over Supply
Total Demand
1,437
AL
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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Flags and Considerations for Assessment Purposes
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
General Overview
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 conventional
commercial 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 different
view 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 replacement
reserves and management fees
- Management Fee – 3% to 7% of EGI
- Replacement Reserves - $350 to $650 per unit, annum
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
Case Study – Passive vs. Active Management
Skilled Nursing Facility
 120-bed, purpose built skilled nursing facility, developed in 1973, second
generation family owned and operated.
 Good quality property in average condition. Excellent bones and design.
 Buyer was regional owner-operator with properties surrounding states and
looking 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 overtime
to full employees.
 Below market occupancy and quality mix- recognized by seller.
Property Summary
 Below market private pay rates – recognized by buyer.
Year Built
1973
 Not maximizing Medicare utilization.
Beds
120
Care Level
SNF
 Favorable rated market by NIC MAP in high barrier to entry location in close
proximity to a number of hospitals.
Purchased
$6,000,000
Date
June 2013
2012 NOI
$273,006
Buyer Y2 NOI
$2,623,908
 Seller executed with buyer due to comfort level and trust.
 Buyer’s short term goal to increase operating efficiencies. Invest an
additional $3mm and offer more sub acute rehab services.
 Seller’s goal - retire.
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
OPERATING SUMMARY
2012 Actual (Seller)
Reporting Period
Total
Year 1 (Buyer)
Year 2 Stabilized (Buyer)
Beds
Occ.
AMR
Res Days
Beds
Occ.
AMR
Res Days
Beds
Occ.
AMR
Res Days
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
$/RD
Income
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
$43.64
Skilled 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
110.56
Skilled 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
109.77
497,965
5.6%
4,150
14.92
822,256
7.5%
6,852
21.65
1,027,694
8.7%
8,564
25.60
32,436
0.4%
270
0.97
124,885
1.1%
1,041
3.29
124,885
1.1%
1,041
$73,597
$264.55
$90,914
$287.25
Skilled Nursing Insurance
Ancillary Charges
Effective Gross Income
Expenses
Real Estate Taxes
$8,831,699 100.0%
$10,909,655 100.0%
$11,751,102 100.0% $97,926
3.11
$292.68
$131,274
1.5%
1,094
$3.93
$137,822
1.3%
1,149
$3.63
$137,822
1.2%
1,149
13,712
0.2%
114
0.41
13,772
0.1%
115
0.36
13,772
0.1%
115
0.34
Utilities
237,055
2.7%
1,975
7.10
283,330
2.6%
2,361
7.46
283,330
2.4%
2,361
7.06
Administrative & 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
35.44
0.0%
0
0.00
120,000
1.1%
1,000
3.16
120,000
1.0%
1,000
2.99
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
90.00
Ancillary Services
518,596
5.9%
4,322
15.53
550,000
5.0%
4,583
14.48
600,000
5.1%
5,000
14.94
Culinary Services
719,014
8.1%
5,992
21.54
607,360
5.6%
5,061
15.99
642,400
5.5%
5,353
16.00
Laundry & Housekeeping
516,977
5.9%
4,308
15.49
379,600
3.5%
3,163
9.99
401,500
3.4%
3,346
10.00
Repairs & Maintenance
138,760
1.6%
1,156
4.16
140,000
1.3%
1,167
3.69
150,000
1.3%
1,250
3.74
Program & Recreation
123,616
1.4%
1,030
3.70
140,000
1.3%
1,167
3.69
140,000
1.2%
1,167
3.49
Payroll Taxes & Benefits
780,541
8.8%
6,505
23.38
580,000
5.3%
4,833
15.27
625,000
5.3%
5,208
15.57
Property Insurance
Advertising & Leasing
Resident Care
Other
Operating Expenses
Net Operating Income
Management Fee ¹
-
350,000
$3.43
347,794
3.9%
2,898
10.42
350,000
3.2%
2,917
9.22
3.0%
2,917
8.72
$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
$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
$14.57
-
0.0%
-
$0.00
545,483
5.0%
4,545.69
$14.36
584,928
5.0%
4,874
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%
$2,273,527
20.8%
$59.86
$2,623,908
21,866
$65.35
Reserves for Replacement
2,275
$8.18
18,946
22.3%
Source: Property operating statements & buyer proforma
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
Case Study – Revenue Projections
Occupancy
Census Mix
Subject
100%
76.00%
Comps
NIC Metro
60%
90.10%
NIC 31
91.40%
Buyer
60%
8%
21%
19%
22%
14%
11%
13%
13%
Other
Medicare
Private
61%
60%
59%
57%
Subject
Comps
Buyer
Current
Medicaid
0%
80%
100%
Daily Private Pay Rates
Subject
9%
20%
85.00%
40%
8%
40%
92.00%
Current
20%
80%
91.00%
8%
17%
Effective Gross Income Per Resident Day
$300
$265
Comps
$363
NIC Metro
$250
$375
NIC 31
$200
$278
Buyer
$265
$320
Current
$296
$262
$273
$293
$293
Buyer
Current
$150
$270
$100
$100
$150
$200
$250
$300
$350
Subject
$400
Comp Min. Comp Max.Comp Avg.
“Subject “data points represent the seller’s 2012 Actual. “Current” represents the buyer’s October 2013 Actual
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
Case Study – Expense Projections and NOI
Operating Costs Per Resident Day (PRD)
Subject
Expense Ratio (Before Mgt Fee & Reserves)
100%
$255.51
Comp Min.
80%
$204.39
Comp Max.
60%
$240.32
Comp Avg.
$228.06
Buyer
40%
$211.92
Current
97%
78%
81%
83%
72%
84%
20%
$253.12
0%
$100
$150
$200
$250
$300
Subject
$350
Profit Margin (Before Mgt Fee & Reserves)
Subject
Comp Min. Comp Max.Comp Avg.
Buyer
Current
NOI PRD (Before Mgt Fee & Reserves)
$70
3.60%
$60
Comp Avg.
17.80%
Comp Max.
$50
22.40%
Comp Min.
$40
$30
8.60%
Buyer
$20
27.70%
Current
$0
0%
5%
10%
15%
20%
$32
$10
16.00%
25%
30%
$40
$36
$8
Subject
35%
$60
$59
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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
Case Study - Results
The “current” data points detailed in the following table represents four months of property operations
by the buyer.
At Purchase
(June 2013)
Current
(Oct 2013 Ann.)
Buyer’s Stabilized
$273,006
$1,108,218
$2,623,908
$6,000,000
$6,000,000
$6,000,000
CapEx & Cary
---
---
$3,000,000
Total Cost
---
$6,000,000
$9,000,000
N/A
$50,000/ Bed
$8,500,000
$71,000/ bed
$20,200,000
$168k/ bed
4.55%
18.47%
29.15%
NOI
Purchase Price
Indicated Value @
NIC Average Cap
Rate
Return on Cost
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
Summary of Operating Metrics
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.
IL
AL
SNF
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
0.22
0.45
0.98
35% - 45%
25% - 40%
10% - 20%
7.1%
7.7%
12.3%
$173,200
$173,200
$65,100
Occupancy (1Q15)
Average FTE PRD
Average Operating Margin
Capitalization Rate
Average Price Per Unit
Source: NIC , American Seniors Housing Assoc., & Irving Levin Assoc.,
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
CBRE Capitalization Rate Survey
Source: CBRE Seniors Housing Investor Survey
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
INCOME APPROACH
CBRE Capitalization Rate Survey
Source: CBRE Seniors Housing Investor Survey
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
SALES APPROACH
Summary of Methodologies and Analysis
Sales Comparison
NOI Analysis
EGIM Analysis
 Regional/ national comp set is
acceptable
 Provides most realistic pricing utilized
by market participants
 Easy to extract from market
 Adjustments are mostly qualitative and
challenging to support
 Infers all physical property and
locational differences
 Not utilized by market participants
 Utilizes regression analysis to
estimate a per unit/ bed indication
 Do not overlay NOI adjustments
37
 Does not include operating expenses
in pricing
 Select EGIM for subject by
analyzing expense ratio of subject
respective of comparable set
VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
SALES APPROACH
Net Operating Income Analysis
NET OPERATING INCOME ANALYSIS
$465,205
Comparable Sales
Subject Indication
$415,205
Trendline
Price per Unit
$396,517.13
$365,205
$315,205
$265,205
$215,205
$15,327
$20,327
$25,327
$30,327
NOI per Unit
Compiled by CBRE
38
VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
ALLOCATION OF THE GOING CONCERN
Methodologies
Cost Residual: The value of the business/intangibles are estimated by taking the market value of the subject
and deducting the estimated personal property, land and real estate property value. The remaining value
represents 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 value
and 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 the
management fee. The total value of the going concern is calculated with NO deductions for management fees
or reserves. The Concluded business value and FF&E are then deducted to get to the real estate only
allocation.
 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 with
the applied rate considered to be highly subjective
 Not utilized by market participants
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
ALLOCATION OF THE GOING CONCERN
Methodologies
Lease Coverage Analysis: A market derived lease coverage ratio is applied to the concluded net operating income for
the subject. The result is an indicated annual market lease payment for the subject. A net lease cap rate is applied to the
estimated 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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
ALLOCATION OF THE GOING CONCERN
Methodologies – Lease Coverage Analysis
LEASE COVERAGE ANALYSIS
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
ALLOCATION OF THE GOING CONCERN
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
42
$69,200,000
VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
PRESENTATION OVERVIEW
Valuation of Seniors Housing Properties
 Industry Overview
 Valuation Overview
 Market Analysis
 Income Approach
 Sales Comparison Approach
 Allocation of the Going Concern
 Final Considerations
43
VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
FINAL CONSIDERATIONS

Understand the property specific operations and understand the market; understand where your
property fits in the market; current property trend lines may not be telling the whole story. There is
no one size fits all.

Have boots on the ground and take the time to speak with the competition. The most sophisticated
analysis 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 valued
with the client in the development of the scope of work and in the report. This should reflect actions
taken by market participants.

Multiple entities often control the total assets of the business. Ownership structure must be fully
understood in order to fully understand value appropriate cash flows.

Market value appraisals involving not-for-profit entities or governmental entities should reflect the
likely buyers’ perspective, and in most cases, that would be from the perspective of for-profit
entities, which may take a different view of future operations.

Comparable sales should be verified directly with source. Purchase price reported on deeds rarely
reflect the total consideration with only the allocated real estate value being reported.
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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 use
independent living sales to compare to memory care. This is even more critical SNF to assisted
and 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 what
we are taught as general commercial appraisers. Ie: size adjustments, expense ratios as an
indication of market operations.

Market participants do not contemplate the value by adding the value of the real estate to the
separate values of the tangible and intangible personal property; they focus on the overall value
which is derived by their expectations of cash flow and applied return requirement. In place cash
flow is considered, but often adjusted by the buyer for pricing purposes. The magnitude of the
adjustment will be reflected in the applied pricing rate(s).
=
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
FINAL CONSIDERATIONS
Seniors Housing Data Providers

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
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VALUATION OF SENIORS HOUSING PROPERTIES | ZACH BOWYER, MAI
For more information regarding this presentation please contact:
Zach Bowyer, MAI
Managing Director & Seniors Housing Practice Leader
T +1 617 217.6032
[email protected]
www.cbre.com