Which exit do you underwrite, a multiple of care earnings or what the house is worth as a house

Question

I am underwriting a 10-bed conversion and the exit assumption is doing more work than anything else in the model, so I want to see how this room handles it.

Version A, real estate exit. I hold the house, and at year seven I value it as a large single family home in that submarket with an adjustment for the conversion work. Some of that work helps a residential buyer, the wider doorways and the bathroom count. Some of it hurts, the nurse call wiring and a bedroom count that reads institutional. Conservative, and it ignores the operating business I spent seven years building.

Version B, business exit. I value it as a going concern, care earnings times a multiple, sold to a regional operator or a small fund. That is how the trade actually happens in this sector and it produces a much larger number. It also assumes a buyer exists in that market at that time, that the license transfers or the buyer can get their own, and license transferability on a change of control varies by state and is a question for a healthcare attorney in that state.

Version A makes deals fail my screen. Version B makes almost anything clear it, which makes me suspicious of it.

What do you actually put in the terminal value line?

omar_haddad · Answer

Be careful assuming the conversion helps a residential resale. On a 10-bed you are usually into sprinklers, a second egress stair, commercial hood, sometimes a ramp that eats the front yard. The sprinkler retrofit quote on a 1,900 square foot ranch I scoped last year came back at 38k. 38k, on a house worth 300.

A family buyer does not pay one dollar for any of that. Several of those items actively read as a former care facility, and buyers price that as a question mark. So version A should probably be residential comps minus something, not plus.

derekj19 · Answer

The part that interests me is that version B is really two assets sold together, the building and the care company. Those can separate. An operator buying your earnings might prefer to lease the house and pay you for the business, or the reverse.

If you underwrite them separately you can see which half carries the value. My guess is that after seven years the earnings stream is worth more than the improved house, which means the license transfer question @sextant raised is the whole exit.

karen_whitfield · Answer

I put the residential number in the model and treat the business sale as upside I do not spend in advance. Deals that only work on version B are deals that need a buyer to show up on schedule, and buyers do not show up on schedule.

Which exit do you underwrite, a multiple of care earnings or what the house is worth as a house

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