HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE By: Zach Bowyer, MAI August 4, 2014 PREPARED FOR
PRESENTATION OVERVIEW How to Appraise an Assisted Living Residence Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 2 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Summary of Property Types Shelter Activities Transport, Laundry Meals Basic Care Services ADL Care Services Specialized MC Long-Term Chonic Care 55+ IL AL MC NC Real Estate Component Real Estate Component Real Estate Component Real Estate Component Real Estate Component Services Component Services Component Services Component Services Component Source: NIC Investment Guide Resident Choice Relative Influence Relative Choice Doctor Choice 3 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Independent Living Community (ILC) 4 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Assisted Living Residence (ALR) 5 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Skilled Nursing Facility (SNF) 6 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Continuing Care Retirement Community (CCRC) 7 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Implied Market Values Billions 1,400 1,200 1,000 800 Skilled Nursing 600 Assisted Living Independent Living 400 200 0 Seniors Housing Hotels Apartments Source: NCREIF & NIC 8 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Transaction Volume 1Q 2008-3Q2013 $12 $10 User/Other Public Private Institutional $8 $6 $4 $2 $0 2008 2009 2010 2011 2012 2013 Source: The Senior Care Investor 9 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Property Level Returns 18 16 14 % Levered Returns 12 10 8 6 Seniors Housing Apartment Retail Industrial Office Total 4 2 0 1 Year 3 Years 5 Years 8 Years Source: NCREIF & NIC 10 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Capitalization Rate Trends 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: The Senior Care Investor 11 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Average Price Per Unit (AL & IL) $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: The Senior Care Investor Average Price Per Unit (AL and IL) 12 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Publicly Announced Seniors Housing Acquisitions 1994-2013 250.0 200.0 150.0 100.0 50.0 0.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: The Senior Care Investor Number of Publicly annonced deals 13 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW 2014 2H Investor/ Developer Survey Source: CBRE Valuation & Advisory Services 14 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW 10-Year Treasury Vs. Seniors Housing Cap Rates Source: NCREIF 15 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Capitalization Rate Trends & Outlook Source: NIC MAP and US Census Bureau 16 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Demographic Trends Source: CBRE Econometric Advisors, Claritas 17 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Do the Math Average Age of NEW AL resident (84) Age of Leading-Edge Baby Boomer (67) = 17 Years 18 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Seniors Housing Demand Vs. Supply Source: NIC MAP and US Census Bureau 19 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INDUSTRY OVERVIEW Inventory Growth as % of Stock 10% 8% 6% 4% During the last supply wave, supply growth exceeded 8%, nearly bankrupting the industry Jump in inventory resulting from current elevated construction levels, but still moderate relative to peak 3.1% 2% 0% Source: Green Street Advisors, NIC MAP 20 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW How to Appraise an Assisted Living Residence Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 21 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 of Defined Value Opinions Allocation of the Going Concern 22 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 23 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
VALUATION OVERVIEW Property Rights Appraised Seniors housing is primarily valued based on the fee simple interest of the going concern, which is the premise of this presentation. Leased Fee valuation is summarized in the Allocation of Going Concern. Going Concern: A going concern is a business having the ability to continue functioning as a business entity in the future. In accounting, a business is considered to be a going concern if it is likely to continue functioning 12 months into the future. One of the premises under which the total assets of a business can be valued; the assumption that a company is expected to continue operating well into the future (usually indefinitely). Under the going-concern premise, the value of the tangible assets and the value of the intangible assets, which may include the value of excess profit, where asset values are derived consistent with the going-concern premise. Land Real Estate FF & E Business or Enterprise Value Business (Enterprise) Value: The value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled workforce, working capital, trade names, franchises, patents, trademarks, contracts, leases, customer base, and operating agreements. Real Estate Tax Assessments are typically based in the tangibles. Source: Dictionary of Real Estate Appraising, 5th Edition, The Appraisal Institute, Chicago, IL, page 98 24 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
VALUATION OVERVIEW Ownership Structure Identifying the correct ownership structure can often be complicated, yet essential in identifying the proper ownership rights. Real Estate Owner Operating Entity Subject Related Parties (therapy, home care, etc) Management Co. REIT Sale/ Leaseback with RIDEA structure Leased Fee or Fee Simple? - Arm s Length Transaction? 25 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW Seniors Housing Valuations & Trends Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 26 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 27 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition The reported market statistics for the subject s specific property type respective to the NIC MAP Primary Market Average, and the identified MSA for the subject are summarized as follows. 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 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 MARKET PENETRATION 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 28 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition 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. 29 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition A demand coverage analysis can serve as a more calculated way of understanding specific supply and demand characteristics of a primary market area. This method begins by identifying the age and income qualified portion of the population. Whereas the penetration analysis utilizes the 75+ population, this analysis utilizes the 65+ population. Though it is not typical for people between the ages of 65 to 74 to require ADL (Assistance with Activities of Daily Living) services, this demographic is included in this analysis. Hence, this analysis considers the 65 to 85+ age cohort as age-qualified demand. In order to understand the base income requirement, the minimum rent charged for each care level from a competitive set should be utilized. The base rent represents the lowest rent charged in the market, respective of the subject s property type, which is utilized to income-qualify the population based. DEMAND BY POPULATION SEGMENT 2014 AL 65-74 Population 30,453 75-84 Population 16,023 85+ Population 8,319 Age Qualified Population 54,795 2019 AL 65-74 Population 41,510 75-84 Population 18,789 85+ Population 8,819 Age Qualified Population 69,118 Source: Compiled by CBRE BASE INCOME REQUIREMENT AL Base Market Rent (Monthly) $3,050 Base Market Rent (Annual) $36,600 Allocated % of Annual Income 80.00% Indicated Base Income Retuirement $45,750 Average Home Value $297,851 Estimated Equity @ 75% of Home Value $223,388 Rate of Return 4.00% Home Equity Contribution $8,936 Adjusted Income Requirement $36,814 Concluded Base Income Requirement $35,000 Source: Compiled by CBRE 30 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition The next step is delineating the income qualified portion of the age qualified population. As Claritas only reports income levels by households, a household to population factor must be applied. According to the Assisted Living Federation of America, 76.60% of the seniors population are widowed, or living alone prior to moving in to an assisted living residence. The final step in estimating demand is delineating the percentage of the age and income population that will require care, respective of the subject property type. The U.S. Department of Health and Human Services reports the percentage of the population requiring care levels respective of each type of seniors housing property type. These factors have been applied to the previously determined age and income qualified cohort as follows: AGE AND INCOME QUALIFIED DEMAND 2014 AL Income Qualified 65-74 Population 11,943 65-74 Required Care Factor 3.20% 65-74 Age/ Care Qualified Demand 382 Income Qualified 75-84 Population 5,240 75-84 Required Care Factor 8.10% 75-84 Age/ Care Qualified Demand 424 Income Qualified 85+ Population 1,992 85+ Required Care Factor 18.80% 85+ Age/ Care Qualified Demand 375 Total Age/ Care Qualified Demand 1,181 2019 AL Income Qualified 65-74 Population 16,218 65-74 Required Care Factor 3.20% 65-74 Age/ Care Qualified Demand 519 Income Qualified 75-84 Population 6,272 75-84 Required Care Factor 8.10% 75-84 Age/ Care Qualified Demand 508 Income Qualified 85+ Population 2,181 85+ Required Care Factor 18.80% 85+ Age/ Care Qualified Demand 410 Total Age/ Care Qualified Demand 1,437 Care Factor Source: U.S. Department of Health and Human Services Compiled By: CBRE 31 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition Once an adjustment for frictional vacancy is applied, the adjusted demand can be applied to the indicated supply. The difference between the adjusted demand and market supply yields the net surplus in demand. This calculation is summarized below. 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 Over Supply 2019 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 32 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition The above analysis only applies to the overall assisted living market. As a portion of the subject s assisted living units will be utilized as memory care, specific demand characteristics relative to standard assisted living and memory care must be further understood. MEMORY CARE DEMAND COVERAGE 2014 2019 Total Demand - AL and MC 1,181 1,437 MC Utilization Ratio 42.00% 42.00% Total Demand - MC 496 604 Frictional Vacancy 7.70% 7.70% Total Adjusted Demand - MC 537 654 Total Supply - MC 269 359 Net Surplus Demand (Units) 268 295 Market Balance Under Supply Under Supply Compiled By: CBRE 33 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
MARKET ANALYSIS Case Study Proposed Memory Care Addition Market Conclusion? A penetration analysis and a demand coverage analysis were performed. Each analyses is independent of the other, with each yielding similar conclusions. Based on this analysis, the overall assisted living market is considered to be highly competitive and slightly saturated. However, there does appear to be significant unmet demand for Memory Care. This analysis does conclude that sufficient market demand does exist to support the proposed Memory Care addition. As detailed above, net demand actually increases with the addition of the subject and the other memory care property that is currently under construction. The location of the subject with favorable economic and population trends, along with superior physical and operational attributes, being located adjacent to an existing independent and assisted living community (Harvard Square) suggest that the subject will capture the appropriate share of the market to obtain a stabilized occupancy level above, or at the high end, of current market indications for stabilized memory care properties. 34 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW How to Appraise an Assisted Living Residence Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Flags and Considerations for Assessment Purposes 35 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 36 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Revenue Projections Assisted living revenue is typically derived from the following sources: Base monthly rent - All inclusive or Base + LOC services - Typically includes meals and utilities - Primarily Private Pay - Some states offer Medicaid/ Affordable - GAFC and SSI in MA (flat rates) - Detailed rent roll is essential Activity of Daily Living Services (ADLS) - Billed based on levels (LOC), or a la carte Community Fee Second Resident Fee Other Income - Late fees, transportation, other add-on s Reporting Year OPERATING SUMMARY CBRE Stabilized Estimate Units/ Beds Occ. AMR Res Days Assisted Living 82 96% 5,473 28,733 Memory Care 52 96% 6,402 18,221 Total 134 96% $5,834 46,954 Total % EGI $/Unit $/RD Income Assisted Living Rent 5,385,900 54.3% $40,193 114.71 Memory Care Rent 3,994,560 40.2% $29,810 85.07 Level of Care Fees - 0.0% 0 0.00 Second Resident Fees 185,242 1.9% 1,382 3.95 Community Fees 219,974 2.2% 1,642 4.68 Other Income $140,861 1.4% 1,051 3.00 Effective Gross Income $9,926,536 100.0% $74,079 $211.41 37 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Operating Expense Projections CBRE Subject Operations Exp. Comps Operating Expenses Stabilized 2014 Budg. 2014 T-12 2013 Actual 2012 Actual Min. Max. Avg. Real Estate Taxes 11.04 11.24 10.97 11.74 25.02 7.42 10.09 8.91 Property Insurance 1.89 1.83 1.96 1.95 5.82 1.40 6.65 3.45 Electricity 5.04 5.30 4.78 5.04 14.74 4.60 6.24 5.16 Natural Gas 2.54 1.69 3.38 1.56 3.75 1.35 1.68 1.51 Water & Sewer 1.22 1.30 1.14 1.20 1.70 0.25 0.71 0.41 Admin & General 6.02 5.67 4.36 6.02 17.77 3.30 8.54 6.08 Bad Debt 0.25 0.51 0.00 0.26 0.67 0.00 0.01 0.00 Admin Payroll 6.87 7.57 6.16 7.28 22.60 5.45 7.96 6.81 Advertising 2.00 2.07 0.23 6.62 27.38 3.49 4.76 4.25 Advertising Payroll 5.05 5.05 4.62 7.73 18.78 2.29 4.40 3.09 Culinary Food 11.81 10.03 13.60 8.63 10.42 5.88 8.18 7.13 Culinary Supplies 2.46 0.96 3.95 1.15 3.99 1.07 1.45 1.21 Culinary Payroll 13.60 13.98 13.23 14.07 23.26 3.17 11.76 8.19 Laundry & Housekeeping 0.16 0.13 0.16 0.10 0.21 0.47 0.81 0.61 Laundry & Housekeeping Payroll 4.00 3.76 4.87 3.59 7.95 2.32 6.03 3.85 Resident Care 0.50 0.05 0.94 0.99 0.98 0.19 0.50 0.40 Bed Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Therapy Type A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Therapy Type B 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Resident Care Payroll 9.00 7.25 6.22 6.20 12.43 8.32 12.01 10.17 Maintenance 4.60 3.60 7.68 6.09 7.41 3.12 8.56 5.36 Maintenance Payroll 5.50 6.47 5.40 6.11 13.05 1.40 2.32 1.76 Program & Rec 3.25 3.28 4.04 3.72 7.69 0.35 2.21 1.02 Program & Rec Payroll 4.50 4.43 3.57 4.20 11.21 2.64 12.48 8.55 Employee Payroll 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Payroll Taxes 4.50 4.44 5.13 4.56 9.28 3.34 5.06 4.41 Benefits 6.25 5.72 8.51 4.73 13.42 3.52 9.91 6.22 Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SubTotal 112.05 106.33 114.90 113.54 259.53 104.84 112.41 109.37 Exp Ratio 58.67% 56.44% 61.05% 71.34% 145.01% 59.06% 62.88% 60.65% 38 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH OPERATING SUMMARY Reporting Period 2012 Actual (Seller) Year 1 (Buyer) Year 2 Stabilized (Buyer) Beds Occ. AMR Res Days Beds Occ. AMR Res Days Beds Occ. AMR Res Days Total 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 Skilled 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 25.60 Ancillary Charges 32,436 0.4% 270 0.97 124,885 1.1% 1,041 3.29 124,885 1.1% 1,041 3.11 Effective 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 Expenses Real Estate Taxes $131,274 1.5% 1,094 $3.93 $137,822 1.3% 1,149 $3.63 $137,822 1.2% 1,149 $3.43 Property Insurance 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 Advertising & Leasing - 0.0% 0 0.00 120,000 1.1% 1,000 3.16 120,000 1.0% 1,000 2.99 Resident 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 90.00 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 Other 347,794 3.9% 2,898 10.42 350,000 3.2% 2,917 9.22 350,000 3.0% 2,917 8.72 Operating 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 $14.57 Reserves 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 39 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Case Study Passive vs. Active Management Skilled Nursing Facility Property Summary Year Built 1973 Beds 120 Care Level SNF Purchased $6,000,000 Date June 2013 2012 NOI $273,006 Buyer Y2 NOI $2,623,908 120-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 MA, NY, NJ, and PA and looking to expand their presence in New England. 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. 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 close proximity 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 an additional $3mm and offer more sub acute rehab services. Seller s goal - retire. 40 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Case Study Revenue Projections Occupancy Census Mix Subject Comps NIC Metro 76.00% 91.00% 90.10% 100% 80% 60% 8% 8% 9% 8% 17% 21% 19% 22% 14% 11% 13% 13% Other Medicare NIC 31 Buyer 91.40% 92.00% 40% 20% 61% 60% 59% 57% Private Medicaid Current 85.00% 20% 40% 60% 80% 100% 0% Subject Comps Buyer Current Daily Private Pay Rates Effective Gross Income Per Resident Day Subject $265 $300 Comps $363 $250 NIC Metro NIC 31 $278 $375 $200 $265 $262 $296 $273 $293 $293 Buyer $320 $150 Current $270 $100 $150 $200 $250 $300 $350 $400 $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 41 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Case Study Expense Projections and NOI Operating Costs Per Resident Day (PRD) Expense Ratio (Before Mgt Fee & Reserves) Subject Comp Min. $204.39 $255.51 100% 80% Comp Max. $240.32 Comp Avg. $228.06 Buyer $211.92 Current $253.12 $100 $150 $200 $250 $300 $350 Profit Margin (Before Mgt Fee & Reserves) 60% 40% 97% 78% 81% 83% 72% 84% 20% 0% Subject Comp Min. Comp Max.Comp Avg. Buyer Current NOI PRD (Before Mgt Fee & Reserves) Subject 3.60% Comp Avg. 17.80% Comp Max. 22.40% Comp Min. 8.60% Buyer 27.70% Current 16.00% 0% 5% 10% 15% 20% 25% 30% 35% $70 $60 $50 $40 $30 $20 $10 $0 $59 $60 $32 $36 $40 $8 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 42 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 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% 43 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Case Study II - Cradle to Grave Value Add Senior Living Property by Lincoln Street Capital Property Summary Year Built 1984 Units 130 Care Level Independent Living Purchased $5,250,000 Cap/ Carry $6,000,000 Sold $19,000,000 Return 20% IRR/ 37% Leverage 130-unit, purpose built seniors property, developedin1984, andoperatedas a seniors apartment building by a large, public REIT on a 3 rd party management contract basis. ADL (activity of daily living) services were provided a la carte through a 3 rd party healthcare provider due to HUD regulations. 57-units subsidized by Project Based Section 8, with remaining 73-units not income restricted (but rents were regulated by HUD). Deed was encumbered by a Land Use Restriction Agreement governed by HUD restricting all rents and fees charged for meals and services to be approved by HUD. Property was acquired with free and clear title, LURA was terminated, Project Based S8 was Noticed for Termination. 2007 NOI: $267,000 with Weighted Average Revenues/Occupied Unit/Month: $1,501 (Market Comps: $3,000+). Located in high barrier market, top NIC MAP rated, with competitive market occupancy averaging 98%. Rentswereconcludedtobe80-100%belowmarketonanimprovedbasis. HUD had not approved a rent increase since 1984. 44 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
INCOME APPROACH Case Study II - Results Acquisition March 2008 Reposition Program 2008-2013 Sale October 2013 Reposition Program 2014 (Per OM) $5.25mm ($40k/ Unit) $6mm in CapEx/ Carry $19mm ($146k/ Unit) $2mm 3mm CapEx 68% Occupied New Management Carlyle Group Add AL and MC $267,000 NOI Replaced Management 79% Occupied Reduce to 128 Units Rent Restricted Stalled Housing Market $1.23mm NOI Replace Mgt. $1,501 AMR Great Recession 73% Market Rent +$1.8mm Stabilized NOI Average Condition $2,508 AMR 3 rd Party Management 20% IRR/ 37% Leverage ROC 11% Post-Closing: The Operator has far greater influence over the outcome of the investment than the Investor believes or market supports. Christopher Arruda, Lincoln Street Capital, Managing Member 45 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 CCRC SNF Occupancy (4Q13) 92% 91% 89% 87.6% Average Length of Stay 29.2 Months 21.7 Months 71 Months 3.2 Months Total Revenues PRD $72.07 $151.55 $137.12 $268.93 Operating Expenses PRD $44.39 $104.67 $95.51 $232.23 Operating Margin 38.4% 30.9% 30.3% 13.6% Average FTE PRD 0.22 0.45 0.48 0.98 Debt Coverage Ratios 1.5 2.0 --- --- ROI (Unleveraged) 6.5% 8.6% --- 14.8% Change in OM (1994-2011) 29.37% 31.6% --- --- Source: NIC MAP, American Seniors Housing Assoc., & Irving Levin Assoc., CBRE Healthcare Investor Survey 46 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW How to Appraise an Assisted Living Residence Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 47 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 48 Does not include operating expenses in pricing Select EGIM for subject by analyzing expense ratio of subject respective of comparable set HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
SALES APPROACH Sales Comparison SENIORS HOUSING SALES ADJUSTMENT GRID Comparable Number 1 2 3 4 5 6 7 8 Transaction Type Sale Sale Sale Sale Sale Sale Sale Sale Transaction Date Feb-13 Jan-13 Feb-12 Jan-14 Oct-13 Sep-13 Feb-14 Nov-11 Year Built 2000 1999 2003 2009 2009 1999 2001 2009 No. Units 640 172 70 185 149 193 293 140 Adjusted Sale Price 1 $289,999,831 $72,000,000 $32,500,000 $71,250,000 $59,000,000 $63,500,000 $104,500,000 $69,500,000 Price Per Unit 1 $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $496,429 Occupancy 92% 90% 95% 98% 95% 97% 98% 93% NOI Per Unit $29,121 $27,218 $30,178 $25,810 $21,317 $20,234 $22,184 $33,508 OAR 6.43% 6.50% 6.50% 6.70% 5.38% 6.15% 6.22% 6.75% Adj. Price Per Unit $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $496,429 Property Rights Conveyed 0% 0% 0% 0% 0% 0% 0% 0% Financing Terms 1 0% 0% 0% 0% 0% 0% 0% 0% Conditions of Sale 0% 0% 0% 0% 0% 0% 0% 0% Market Conditions (Time) 0% 0% 0% 0% 0% 0% 0% 3% Subtotal - Price Per Unit $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $511,322 Location 0% 10% 0% 10% 10% 10% 10% 0% Project Size 0% 0% 0% 0% 0% 0% 0% 0% Age/Condition 10% 10% 10% 0% 0% 10% 10% 0% Quality of Construction 0% 0% 0% 0% 0% 10% 0% 0% Avg. Unit Size 0% 0% 0% 0% 0% 0% 0% 0% Project Amenities 0% 0% 0% 0% 0% 10% 0% 0% Parking 0% 0% 0% 0% 0% 0% 0% 0% Other 0% 0% 0% 0% 0% 0% 0% 0% Total Other Adjustments 10% 20% 10% 10% 10% 40% 20% 0% Indicated Value Per Unit $498,438 $502,326 $510,715 $423,649 $435,570 $460,622 $427,986 $511,322 1 Transaction amount adjusted for cash equivalency and/or deferred maintenance (where applicable) Compiled by CBRE 49 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
SALES APPROACH Net Operating Income Analysis NET OPERATING INCOME ANALYSIS $465,205 $415,205 Comparable Sales Subject Indication Trendline $396,517.13 Price per Unit $365,205 $315,205 $265,205 $215,205 $15,327 $20,327 $25,327 $30,327 NOI per Unit Compiled by CBRE 50 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
SALES APPROACH EGIM Analysis EFFECTIVE GROSS INCOME MULTIPLIER ANALYSIS Sale No. Occupancy OER EGIM 2 90% 48.61% 7.9 4 98% 56.19% 6.54 5 95% 64.25% 6.64 7 98% 59.88% 6.45 Subj. 96% 57.41% 6.65 Compiled by CBRE 51 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
SALES APPROACH Single Asset Transactions Transaction Description Village at Proprietors Green, Marshfield, MA 149 units, IL and AL with MC, constructed in 2010 $59,000,000 or $396k per unit Closed December 2013 to AEW Capital Management 93% occupied yielding a 6.50% cap rate Stabilized operations Forge Hill and Inn at Robbins Brook, Franklin and Acton, MA 193 units, AL with MC, constructed 1999 and 2002 $63,500,000 or $329k per unit Closed November 2013 to Benchmark Senior Living JV with Health Care REIT 93% occupied yielding a 6.15% cap rate, stabilized operations Purchased by seller 2010 at $222k per unit, 8.00% cap (4.5% YoY) Longwood Place, Reading, MA 84 units, 63 AL and 21 MC, constructed in 1939 and converted to AL in 1990s $16,620,000, $19,870,000 (adjusted) adjusted or $236k per unit Closed March 2014 to regional developer/ owner/ operator. Seller was local operator 97% occupied yielding a 9.17% cap rate based on proforma, per reposition Reposition to add MC for operational value add strategy 52 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
SALES APPROACH Single Asset Transactions Transaction Description Standish Village at Lower Mills, Dorchester, MA 85 units, 72 AL and 13 MC. Constructed in 1880, renovated with addition in 1994 $15,550,000, or $183K per unit Closed Sept. 2013 to Healthcare REIT, operator (seller) remained in place 98% occupied yielding a 8.40% cap rate on proforma Sale/ Leaseback with RIDEA, high Medicaid (GAFC) mix, operational value add Bristol Portfolio Seven Properties 880 AL and MC units, constructed between 2000 and 2006 $290,000,000+ above market financing, or adjusted $453k per unit Closed Feb. 2013 to Engel Burman/ Harrison Street by Chartwell & Ingenia Communities 95% occupied yielding a 6.89% cap rate Portfolio was purchased from Engel Burman in 2007 for $290.5mm CNL Healthcare Portfolio 12 Properties 2,186 IL, AL, MC units Closed October 2013 $457.3mm or $210k per unit Replace Management Not stabilized at purchase 53 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW Seniors Housing Valuations & Trends Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 54 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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. Pretty 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 55 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
ALLOCATION OF THE GOING CONCERN Methodologies Lease Coverage Analysis 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 56 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 $69,200,000 57 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
PRESENTATION OVERVIEW How to Appraise an Assisted Living Residence Industry Overview Valuation Overview Market Analysis Income Approach Sales Comparison Approach Allocation of the Going Concern Final Considerations 58 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 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. 59 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 rations 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. = 60 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE 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 Valuation & Advisory Services - Please take full advantage of our platform 61 HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE ZACH BOWYER, MAI
For more information regarding this presentation please contact: Zach Bowyer, MAI Managing Director & Seniors Housing Practice Leader T +1 617 912 6878 zach.bowyer@cbre.com www.cbre.com