Class B seniors housing properties tend to sell for lower amounts per unit than Class A senior housing properties, which, by definition, have a higher asset quality, better operational performance and are in a more desirable physical location.
Class A properties, in fact, sold for about $248,500 per assisted living unit and $243,300 per independent living unit in 2015, according to Irving Levin’s SeniorCare Investor annual report. Class B properties, meanwhile, garnered only $138,300 per unit for assisted living and $72,900 per unit for independent living that same year.
But there are ways to minimize the pricing differences between the two classes of properties, claims a new report from Greystone Real Estate Advisors, a New York-based real estate lending, investment and advisory firm that specializes in the sales and acquisitions of senior housing properties.
As it turns out, owners of Class B seniors housing properties can position their assets for pricing success—and they shouldn’t have to worry too much about finding a buyer.
Maximizing pricing potential
By analyzing the strengths and weakness of a Class B property—whether they be in asset quality, physical location or operational performance—owners can take steps to minimize those weaknesses or boost those strengths and edge closer to their pricing goals, Greystone’s June 2016 Seniors Housing Market Trend Report says.
For instance, if a Class B property is in an undesirable physical location, its owner can add care services to capture additional market share and boost revenue, the report says. This can involve adding memory care units to an independent living or assisted living community, or building independent living cottages on campuses that were previously exclusively assisted living and memory care.
The owner of a Class B property in an undesirable location can also group the property in a portfolio of other properties that are for sale and are in more attractive locations.
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“Buyers will often overlook the location challenges of one property in a portfolio if the remaining properties are situated in strong areas,” the report says.
If a Class B property is an older asset, or of low-quality, its owner can revamp its common areas, renovate individual units or refresh the building’s exterior, the report suggests. The owner should also focus on making sure the property is stabilized, as stabilized properties draw more institutional buyers.
In 2015, stabilized communities–which have an occupancy of 85% or more–garnered a higher price per unit than un-stabilized properties, the report notes.
Still, there is a larger number of overall buyers seeking value-add opportunities, Greystone says. Public REITs are beginning to be more picky, and have recently been more drawn to stabilized properties, which are easier to sell at a higher price—but not all buyers can be competitive at such a high price.
“This migration of the buyer pool has opened the door for groups who have historically missed out on buying opportunities to get into the game,” the report says.
Value-add properties, meanwhile, generate higher returns; often, a new buyer is confident that they can control expenses and increase census. These buyers see different opportunities to better the community, or may see an opportunity to buy a property below replacement cost.
Additionally, it’s always a good idea to make sure Class B properties on the market have a strong operator, as well as a dedicated and experienced staff with low turnover, the report adds. These factors serve as differentiators for older Class B properties, or for those in bad locations.
A buyer for every seller
For the most part, public and non-traded real estate investment trusts (REITs), as well as large institutional private equity firms, act as the buyers for Class A properties.
“This type of buyer is typically interested in assets of this caliber due to the higher certainty of transaction execution,” the report explains.
The buyers of Class B properties, meanwhile, are typically regional owner/operators, family-owned companies, smaller private equity firms and non-traded REITs.
No matter what you’re selling, someone will bite, Greystone concludes.
“Regardless of what type of property a seller wants to market, there is typically at least one type of buyer looking to acquire your asset,” the report says.
Written by Mary Kate Nelson