Offloading senior housing properties is a vastly different experience for different types of sellers.
For instance, Class A properties, with their desirable locations, magnificent upkeep and strong demographics, can be an easy sell. But what’s the Class B, C or D senior housing owner to do?
With different buyers searching for different things—and with no industrywide consensus as to what “Class B” even means—Class B, C and D seniors housing owners looking to sell should understand the realities of the current market and that their pricing expectations won’t always be met, experts say.
There’s good reason why Class A properties are highly sought-after acquisition targets, brokers agree.
Many senior housing buyers are financial buyers, and they don’t have the wherewithal to stomach a turnaround situation or to reposition an asset, according to Kris Lowes, a senior associate at Chicago-based senior housing investment banking firm Evans Senior Investments (ESI). These buyers want immediate yield and immediate performance—in other words, they want Class A properties.
“There’s just a wider pool of buyers for Class A properties,” Lowes tells Senior Housing News. “Class B properties have a smaller pool of buyers because there’s not an immediate promise of financial results.”
There are more buyers interested in these high-performing properties even though they sell for higher prices than their Class B counterparts. Class A properties sold for approximately $243,300 per independent living unit and $248,500 per assisted living unit in 2015, according to Irving Levin’s SeniorCare Investor annual report. Class B properties, meanwhile, garnered only $72,900 per unit for independent living and $138,300 per unit for assisted living that same year.
Like Class A properties, Class C and Class D properties are easy to spot; they’re the turnaround properties that need a lot of work. But different people define Class B in different ways, ESI founder and President Jason Stroiman tells SHN points out.
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“To me, Class B is a nice building in a B market, or a mediocre building in an A market,” he tells SHN.
These Class B properties are more likely to be purchased by players that already have properties in the area, Lowes explains.
“When selling Class B properties, you’re going to be more focused on the region, and determining if other owner-operators in the region want to add another property to their portfolio,” he says.
Still, a lot of senior living owner-operators are highly brand-conscious, which influences their decision to acquire properties that aren’t best-in-class, Stroiman says.
“Some don’t want to own a building that they consider to be Class B, or one that has very visible signs of obsolescence,” he says. “They want to be the best-in-class in their markets.”
Coming to grips with reality
All hope isn’t lost for owners looking to sell less-than-Class-A properties, brokers agree—but they’ll have to correct some of their misconceptions and come to terms with the realities of their properties first.
Owners looking to sell their Class C or Class D assisted living properties, for example, often experience a “huge disconnect between value and expectations,” Joshua Jandris, a senior director at Institutional Property Advisors (IPA), tells SHN. IPA is a division of national brokerage firm Marcus & Millichap specializing in serving institutional and major private real estate investors.
“You look at the owners of C and D assisted living, and everything they read, they think they have a 7.5- or 8-cap property,” he says. “They think that their property is worth between $225,000 and $350,000 per unit.”
In reality, it’s become really tough to sell less desirable assisted living properties—especially if they don’t have cash flow, according to IPA Executive Director Mark Myers.
“I’m talking about a C+ or B- assisted living building, built in the 70s, that doesn’t have cash flow,” he tells SHN. “It’s even tougher if the seller is not an absentee seller, and they’re trying their best.”
So, how should sellers actually approach the process, then? By going in open-minded, Jandris advises.
“Listen, this is a cash flow business,” Jandris says. “I would not fall in love or subscribe to anything per unit or per bed-related. It is simply a by-product of a cash flow valuation.”
Price per bed or per unit is basically nothing more than an ancillary pricing metric, Jandris explains.
“If anything, it may act kind of like the guardrails on a deal,” he says.
As transactions go, the sellers of Class A properties will probably always have it easy.
“There’s really no ceiling on price per unit if the investment makes sense financially and provides a good return,” Myers says. “Class A sells for the sky’s the limit on pricing. Quality always sells.”
Written by Mary Kate Nelson