Most owner/operators say they don’t intend to sell, they plan to ride out various business cycles and they’re not about to leave the senior living industry. Not-for-profit sponsors often assume they’ve been serving seniors for many years, and plan to be around for many more.
But developing a sound exit strategy doesn’t necessarily mean you’re actually planning to get out of the senior living business. It means you think it’s prudent to objectively evaluate your individual project or portfolio of properties to determine their true value and overall competitiveness, while identifying any potential weaknesses. Picture grooming your assets to get a very favorable response from a hypothetical buyer; it’s the acid test for financial viability and the best insurance for future survival, success and profitability.
Start by putting yourself in the shoes of a pragmatic buyer or cautious, risk averse lender. Factor in reality by answering these key questions for either individual communities or a consolidated portfolio: 1) How competitive would an objective third-party perceive your campus to be in two time frames: now, and over the next five years? 2) If a knowledgeable observer were scoring you and your competition on a scale of 1 to 10 for product, service, price and value, how would you measure up? 3) If you were on the other side of the negotiating table and about to purchase your community, what concerns would you have? 4) As a potential buyer of your community, are there any flaws or shortcomings that would require you to reduce your price? 5) Based on your answers to the first four questions, what should you change over the next 18 months?
Both the for-profit and not-for-profit industry sectors could be in for major wake-up calls as product life cycles shorten, consumers become more demanding, and savvy competitors (with sound exit strategies) sharpen their operations and market-responsiveness.
Keeping up with the changing market also means investing constantly in such things as advanced computer software, best practices, training and education, and capital equipment. Whether you are a self-contained, internally operated for-profit or not-for-profit organization, charge your community a management fee of approximately 5 percent of net revenues. This won’t hurt your financial profile, as lenders expect to see such an assessment as a normal line item under operating expenses.
CAP RATE CONSIDERATIONS
The key value indicator for your community is your net operating income. As an exit strategy, a buyer will generally look at your community as an income-producing “black box.” In today’s market, these potential buyers (or lenders) are likely to value your community at the Net Operating Income (NOI) level using a capitalization rate of approximately 6.5% to 8.0%, depending on the primary living arrangement — independent living versus assisted living.
SIMPLE RULE OF THUMB
This simple exit strategy rule of thumb for value indicates that using today’s cap rates, for every extra dollar of annual net operating income you realize, increases the value of your community by $15 or more. This can be accomplished by either enhancing revenues or decreasing expenses. Remember, cash flow is the “lifeblood” of your community; whether you are a for-profit having to answer to lenders and investors or a not-for-profit funding an ongoing charitable mission.
‘KNOW WHEN TO FOLD ‘EM’
There are many owner/operators who have not considered or do not realize that, all things considered, it might be appropriate to execute or at least plan an exit strategy. Kenny Rogers’ advice in his classic country and western song — “You’ve got to know when to hold ’em and know when the fold ’em.” — is certainly sound advice for some senior housing sponsors and owner/operators. Sometimes your smartest move is to get out of the game. But whether you plan to fold your cards soon or hold them for a very long time, always having a sound exit strategy is your ace in the hole.