Dumb Money

Senior Housing News reporter, Tim Mullaney, recently did an interview with Capital One’s Imran Javaid, managing director of healthcare and specialty finance, and Keith Kodrin, senior director of healthcare real estate (http://bit.ly/1Px3h59) discussing the idea of “Dumb Money” in the senior housing acquisition market.   It reminded me of the advice from Warren Buffet, the world’s greatest investor, to “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” (1) because if there really is dumb money in the market looking to buy, wouldn’t it make sense for a seniors housing Owner to consider selling into the momentum?

The first of my three premises I talk with clients about when they ask about the best time to sell, is #1 – Sell when the market is ready.  Meaning that there is money in the market with Buyers having the willingness and ability to pay the highest prices.  For nursing home owners, we’ve seen Cap Rates improve from 12.4% to 11.8% from calendar year 2014 to the rolling 12-months ending 9/30/2015. (2)  That is 60 basis points in less than a year.  So, for each $100,000 of NOI (Net Operating Income), the market increased the value of a facility from $806,000 to nearly $850,000.

What that means for nursing home owners, is that just by keeping your same operating margins, the market value of your facility increased by nearly $45k for every $100k in operating profitability.  For a facility with $1,000,000 NOI, the market delivered an additional roughly $400,000 in value to your business.

But then the question is how long will the improved Cap Rates last?

I believe that when interest rates rise, it will cause Cap Rates to rise as well because Cap Rates represent an investor’s return on money.  The more an investor has to pay the bank’s interest payments, the less the investor has to pay the Seller at closing.  Most people I talk with in the industry don’t feel it is a completely 1:1 ratio, but the Cap Rates and Interest Rates are inextricably linked together and when one rises, the other, over time, will also necessarily rise.

One may say that with Cap Rates improving for sellers and the open admission of “dumb money” in the acquisition market, Buyers may be said to be exhibiting greedy behaviors.  For owners considering the idea of selling, the “trick” may be to follow Warren Buffet’s advice and to… “be fearful when others are greedy” and to cash out at the best of times instead of waiting too long for rising interest rates to reduce the acquisition market’s exuberance.

If you would like to confidentially discuss your senior living business options, please feel free to contact me at (614) 915-8835 or cfoley@SeniorsFamily.com

(1) https://www.goodreads.com/author/quotes/756.Warren_Buffett
(2) http://seniorcare.com/2015/10/acquisition-market-indicators/