When Looking for a Senior Living Acquisition, We Take a 4 Prong Approach
1. Overall Geography: Identify markets that have long-term sustainable growth trends. What we mean is the ratio of seniors that need care to the available beds. There should be two seniors who are financially stable and at care level for every one bed in the area.
2. Target specific facilities: When a potential acquisition comes across our desks, one of the first things we look for is the facility’s occupancy report. Facilities with a relatively strong 3+ year occupancy rate that is optimally trending upward, gets our attention. We look for performance ratios that are typical for the industry, meaning we don’t want a facility that is underperforming because that might be indicative of a systemic problem.
However, we also don’t necessary target facilities that are over performing as this might indicate unsustainable activities (i.e. management cutting staff to save money which may lead to lower occupancy down the road) or could also indicate a misleading report.
3. Utilize our thorough Due Diligence Process including:
a) Environmental Survey
b) Building condition report
c) Operational Review: Performance verification and opportunity analysis
d) Thorough Legal Assessment
4. Team Assessment: this is the time our team asks ask the hard questions:
a) Does this facility meet our financial obligations of an 8 cap rate or higher?
b) How has the facility fared with our Due Diligence Process?
c) Is the seller open to a Vender Take Back (VTB)? Obtaining a VTB shows that the vender is committed and encourages transparency and accountability.
In addition, as we go through the transition process, in our experience, it is the seller who is willing to take a VTB who is often motivated to ensure a smooth and effective transition as the seller continues to be invested in the success of the facility.
d) Is the final purchase price and all closing costs less than the appraised value? This provides an external discipline to our acquisition process and helps in negotiating the price in an advantageous way.
Using this approach, we renegotiate the price based on our Due Diligence Process and the 4 strategies above.