The rapid changes in the child care industry over the past several months have led to many conversations about finances, health and safety, remote learning and more. But one topic that we haven’t heard a lot about is child care real estate. It’s understandable why, given the financial constraints created by the COVID-19 pandemic. However, according to Kathy Ligon of HINGE Brokers, the situation for real estate buyers and sellers is actually more favorable than some might expect. In a recent webinar, Kathy went over the changes buyers and sellers are making to accommodate the shifting environment, as well as provided her predictions for the future of the market.
Before diving in, she emphasized the importance of staying positive and looking for ways to capitalize on the child care market’s evolution. “You need to focus on the opportunity,” said Kathy. “Take yourself back to where you were when you began this work in the child care industry, and re-evaluate how you can do it better, stronger and faster.”
To set the stage for the conversation, Kathy provided an overview of the current state of transactions for HINGE. She acknowledged that once the shutdowns began, there was an initial stall of the process of the eight transactions she had in flight. However, zero of those have cancelled their transactions and six are moving forward again. That appears to be in keeping with the national trends, as the majority of national buyers are keeping their deals under contract “warm,” with many beginning to re-engage. She also noted private equity groups are getting more aggressive in the space, so much so that even international PE firms are taking notice.
When looking at the buying space, Kathy said she’s seeing more interest in what she called “troubled assets.” Those include centers where the owners can’t navigate the complexity of today’s business or are personally vulnerable to the virus, as well as schools that struggled pre-COVID. However, there’s also a lot of interest in high quality rebounding assets, or those centers that have been able to quickly adapt to the changing environment and make headway back to pre-COVID financials.
From a selling perspective, Kathy said the process and value are less predictable. “We predict that national buyers will push for a pricing reset, meaning a decrease, but that remains to proven,” said Kathy. “But sellers aren’t without power – they can test the market to see what pricing level works, and they can always say no to low offers.”
In reviewing the buying/selling process, Kathy listed out the steps, changing some text to red to signify that the process for that step is changing.
- The LOI (letter of intent)
- Seller & Buyer Transition Team Items
- APA/PSA or Lease (attorney draws up)
- Buyer Licensing
- Staff and Parent Announcements
She then went through each step in detail and highlighted the items that will look different going forward.
The valuation will look the same, which includes reviewing the profit and loss statements and tax returns. However, the broker tours will change to accommodate social distancing requirements. Kathy’s team is looking at testing alternative systems like Google Glasses, which can offer a virtual tour experience that as close to real-life as possible. She said they’re also reviewing other software that allows for high-quality video tours.
During this step, it’s also important to begin diligence gathering. “This process is changing a little bit, as you’ll now see the addition of weekly recovery FTE (full-time employees) and revenue as compared to the same period last year,” Kathy said.
The final process in this step is to execute the listing agreement – Kathy didn’t anticipate any changes there.
The marketing step includes creating and approving the buyer list. That means listing potential buyers, evaluating the pros and cons of each one, and having the seller approve the buyer list. There’s also the creation of NDAs (non-disclosure agreements) for both the buyer and the seller, as well as information gathering for the offering memorandum. This will now include the addition of weekly recovery FTE and revenue as compared to the same period last year.
Receive LOI and Negotiate Offer
Kathy said to expect more structure during this step. “The question buyers will ask is how do I pay you on an asset that’s not fully recovered?” said Kathy. “To accommodate this, I anticipate the buyer will look at the percentage of the center’s recovery, say 70 percent, and agree to pay 70 percent of the agreed upon value. Then the buyer will pay the remaining 30 percent in the future, depending on the recovery.”
It’s no surprise that there are a lot of elements in the diligence step. Buyers will want to see a rundown of the corporate structure, facilities, the financial health of the company, the employees (hiring, culture, etc.), operations/purchasing, marketing, IT, legal and real estate.
This step will remain the same, taking the form of one of three agreements:
- Asset Purchase Agreement (APA)
- Purchase & Sale Agreement (PSA)
Given all the changes in licensing, Kathy has seen delays, but she said all signs point to a ramp-up to accommodate new growth. “I’ve heard inspectors are now coming into buildings at all hours to help speed up the backlog,” she said.
Staff & Parent Announcements/Closing
Closing is a time for celebration, and that’s when you’ll make announcements to staff and parents about the change.
Predictions for the Future
Before she closed the webinar, Kathy made a few predictions for the future of the industry. First and foremost, she has confidence there will be continued financial support. She also indicated early education will continue to be highly valued in the market.
“If you do a search of recent child care articles, they’re mostly positive,” said Kathy. “I actually think this new environment has helped increase the value and perception of child care.”
In addition, Kathy said there will be more “roll-up” opportunities, meaning more acquisitions, moving into dark buildings, etc. “No landlord wants an empty building, and no parent wants a lack of options in child care, so there are lots of opportunities out there if you’re looking to buy,” she said.
Finally, Kathy predicted the values in the industry will remain strong. “The industry will continue to be highly-regarded, and, if what I’ve heard from buyers over the last few weeks and what I’ve seen with regard to enrollments is any indication, I think we’re in pretty good shape.”
In closing, Kathy said, “I believe you can grow faster right now than you have in the past. In fact, I believe most child care centers will be close to recovered by September, and fully recovered, or even over-recovered by January.”
To view the webinar, click here.