How to do it... Finance
Obtaining capital to keep one's long-term care operation running smoothly and improving is always a challenge. But there are times when an operator should consider going in the other direction — exiting the market. This special article offers expert insight on how to gauge when it's time to sell or consider selling.
1 There are three key indicators that providers must realize lenders are examining, says Joseph C. McCarron Jr., principal at Capital Care Associates.
“Capital providers are underwriting management competency, performance history and integrity of business plans responsive to the changing environment,” he notes. Deficit in any of the areas can point a provider to the “exit” aisle.
2 Dependence on govern-ment reimbursements is not desirable, McCarron adds.
“Providers need to be proactive, anticipating circumstances that may activate outside constituents and timely detection with management actions responsive to them,” he advises.
3 Others break it down into succinct sub-topics to analyze. For example, changes in the: market, financing, company's strategy or internal situations.
“If a property's surrounding community changes radically, it may be that the cost of redeveloping the facility exceeds the potential to recover the costs in higher rents,” says Amy Gilfillan, senior director of sales at Provista.
If a provider wants to shift focus to something such as memory care, for which the current structure might not be well suited, it also can be a good time to sell,” Gilfillan says. Similarly, if it is a family-owned business, and death, divorce or some other movement alters internal relationships, it might be time to divest.
Steve Kennedy, a senior vice president at Lancaster Pollard, agrees that a change in mission, management turnover, market demographics or a weak balance sheet could compel a sale. This could bring in an investor positioned to better help the residents, and it could give the seller liquidity to make a new investment.
4 For Mark Kaczmarczyk, managing director — finance and capital markets at Aviv REIT, finding an exit strategy comes down to two key indicators: weak market conditions and low-quality real estate.
“If the real estate is in need of improvement and the market is deteriorating, an exit strategy would often be the prudent decision,” Kaczmarczyk says. “When the market does not support additional capital improvements, it will put the facility at a further disadvantage due to cost of capital.”
5 There are four scenarios that Jeff Binder, principal and managing director at Senior Living Brokerage Inc., points to as possible sales starters. If there is no clear-cut successor within the family, independent owners often look to sell “sooner rather than later.” An owner also might be more inclined to sell rather than incur new debt if a term loan comes due and additional equity would be needed.
Then there is the “enough is enough” factor, as Binder calls it. If a state program is slow to pay and lenders won't wait, operators might have to dip into personal reserves to extend facility cash flow.
Some veteran operators also may “sense when a political wind is blowing in a direction potentially detrimental for their business” and want to get out, Binder notes.
6 Beyond those already mentioned, other factors that might trigger sale thoughts, says F. Donald Kelly III, director, CapitalSource Bank, Healthcare Real Estate, are an operator's desire to achieve or maintain a certain size or scale, as well as pending needs for costly upgrades in physical plant or technical areas.
7 It's said the best time to look for a job is when you have one. The same principle applies when contemplating a change in facility ownership.
“The best time to sell is when you don't have to,” counsels Bill Wilson, senior vice president at Lancaster Pollard.
“Demonstrate the property has a viable market, and a larger purchaser will still see an opportunity to add value either through existing infrastructure or a lower cost of capital.”
Mistakes to avoid
--Waiting too long to analyze your options so a sale process begins too late.
--Not remaining a good student of your market so you can anticipate market conditions and changes.
--Letting conditions deteriorate too far so that a sale becomes unnecessarily difficult and complicated.