Marketplace Update

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Covid Lockdowns Affect on School Business and Real Estate Value

Many of BR’s clients from around the country, lenders, Private Equity Groups, and other industry participants have asked us over the last 60-90 days about the affect we were seeing on school businesses and real estate values caused by the Covid lockdowns and the tremendous shocks to the national economy. The typical second question we get from our clients (most of whom BR has provided value estimations for over the years) is, “will I ever recover the full value that your last estimate showed for our business and real estate”?

The genuine response to these questions is that nobody knows a precise answer at this point in time because of the new operating risks and governmental intervention in our private businesses’ ability to operate… and certainly we all have concern about a probable second wave of Covid in the colder months ahead and government required closures resulting therefrom. Unfortunately, the operative condition for our industry is “Continued Uncertainty”…[there is good news coming below— just keep reading!]

Bailey Routzong’s Advice

To simplify the details of our advice to clients regarding coming risks that could impair their asset values we focus on just three, as follows:

  1. The affect on a school’s customer base if that school experiences multiple closures because of Covid… unfortunately we have several clients who have already been hit by this.
  2. Does local or state government continue to limit total occupancy versus prior levels or make changes to prior regulations that would limit a school’s revenue and therefore market value?
  3. Will economic conditions (much higher unemployment numbers) lessen demand for services or cause families to find other, less expensive sources of care, and therefore keep operators from refilling spaces to prior occupancy levels/revenues/earnings?

Now, here’s that BR good news we promised!

Obviously no industry source has yet determined how owners’ asset values have changed because that kind of statistical data is probably years away. However, BR has our own anecdotal information based on our daily activity in the marketplace, and this anecdotal experience we think is positive news for school operators. First, even though the large operating companies in the industry have been on the sidelines since March, they are beginning to at least consider possible school acquisitions again. It’s too early to tell what each of these companies’ determination is about current values versus pre-pandemic values, but companies in this group that we have recently presented acquisition opportunities to are not looking to just make “low ball” offers to our clients (of course these companies know that BR would never accept that type offer for presentation to our clients).

BR has also sourced a significant number of other type buyers to supplement the national operators’ acquisition appetite, and we report that this group of players have only adjusted their value expectations at what we consider a modest level. Of course every acquisition transaction is specific to that school’s marketplace profile and operating performance. All of these buyers’ value expectations do assume that the subject school will have refilled its enrollment to near pre-pandemic levels.

BR is just as busy with transaction dealings as we were pre-pandemic. Frankly, quite a few of our clients have decided that “enough is enough”, and we are working diligently each day to return the greatest portion of their pre-pandemic asset values. It’s not easy, and we have had to create some new transaction structures to make it work… but it’s happening!

As just one example… BR closed a transaction this month for a client whom we had last provided a valuation estimate in 2018. Because of the positive cooperation of this client, who wanted to exit at the earliest possible date, we were able to create a new transaction structure that allowed this client to exit both her business and real estate at a value at almost the 2018 estimate. This client was greatly rewarded for her decision to take action and is now free of all the business and financial “uncertainty” she had been facing!

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