Lifestyle Living: The hottest new segment in senior living

By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

Lifestyle Living is the fastest growing segment of senior living

There’s a new leader in the senior living spectrum that’s receiving the most attention. Although most refer to this segment as active adult, age-restricted apartments, or independent living light, I’ve coined a much better term for this emerging product -- Lifestyle Living.

Lifestyle living can best be described as unbundled independent living, or independent living without the inclusive dining and housekeeping services. As consumers are becoming more price conscious, unbundling the services provides potential residents with more flexibility and optionality in monthly pricing. It also provides more freedom and peace-of-mind for those seniors wanting to travel and dine-out at area restaurants. So, lifestyle living still maintains the design and programming concepts of traditional senior living, but without the construction, staffing, and operating expenses required to operate a community dining room and commercial kitchen.  

Active adult is not a new concept and has been wildly popular in master planned communities catering to the recent retirees – primarily as fee simple home ownership. I’m sure most of you have heard of The Villages, Margaritaville, or even Sun City Center.  These master planned communities revolve around a central clubhouse and include many amenities and socialization options targeted to the 55+ age population. The success has largely been due to these communities attracting residents seeking an upgraded social lifestyle, but with the ability to maintain their independence.

Age-restricted apartments are also not a new concept, as they’ve been around for decades. The concept behind this product has largely been due to reducing costs and required maintenance to residents living on a fixed income. Although most of these communities offer some amenities geared towards seniors, they typically do not offer the staffed programming and socialization options that attract so many residents to independent living.

So, why is this new lifestyle living product receiving so much attention? It’s largely due to two concepts: the average age for this type of resident is 72 (currently hitting the baby boomer demand spike), and independent living is now feeling much more like assisted living. In fact, due to the latest technologies and home healthcare options, the average age of an independent living resident has been steadily increasing – currently at 82. This provides a large gap to seniors wanting more socialization and lifestyle options, while maintaining their independence, and not yet ready to move into traditional senior living options. This age gap also matches what most stable lifestyle living communities report as the average length of stay, or 7-10 years. And, with this type of happy and consistent resident, these communities report much higher annual rent growth than any other real estate class.  

However, I would be cautious for any developer that wants to quickly jump into this new product. It still takes a lot of specific knowledge and ‘know-how’ to stabilize these types of communities. Specifically, understanding the correct supply/demand relationship, competitive market, desired amenities, appropriate design layout, unit sizing, effective operations and staffing, specialized programming, and specific sales and marketing strategies. Also, it takes a patient investor, as absorption is much slower than traditional senior living or any other residential real estate product (around five units per month). If you would like to learn more, be sure to subscribe to my podcast, The Inner Circle of Senior Living, or stay tuned for additional articles on this topic. To learn more about additional ways to enhance our senior living industry, be sure to subscribe to the podcast, The Inner Circle of Senior Living.

By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

enhanceseniorlivnig.com | seniorlivinginvestments.com | srgrowth.com | generationalmovement.com

Senior Living JV Investing

By Scott McCorvie | CEO, Enhance Senior Living

Learn more about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

Senior Living Joint Venture Investment

I get a lot of questions regarding different structures for seniors housing real estate investment. Most of you are probably aware of the traditional sale-leaseback, or sale-manageback (RIDEA) in seniors housing. But, with private equity groups dominating the transaction markets lately, there's a new focus on JV transactions. In this article, I’ll analyze the basic structure of the JV, waterfall cash flow distributions, and the pros and cons of the structure for seniors housing.

Just as the name states, a joint venture is a shared partnership between two or more entities within a single investment. The JV includes at least one Limited Partner (“LP”) and at least one General Partner (“GP”). The LP owns the majority position of the equity, and is typically an institutional investment group (REIT, Private Equity, Family Office, etc.). The GP will own a minority position in the equity, and is typically the seniors housing developer/operator. Together, the GP and LP will own 100% of the equity, with typical splits being 80/20, 90/10, or 95/5. This structure is frequently used for new development, but can also be used for acquisitions – especially when there’s material upside from improved operations, unit conversions, renovation, market reposition, etc.

So, why mess with the complexity of a JV structure for seniors housing? I’ll look at this from both the LP and GP perspective. For the LP, it creates less financial risk as they typically take a preferred position to the cash flow distribution (discussed later) from both operations and future sale. It’s also beneficial to the LP as it creates favorable alignment for the operator to be fully invested in the overall operations and bottom line (compared to a management fee arrangement). For the GP, it creates higher compensation for improved operations and value creation. It also gives the GP more control over major decisions like renovations, conversions, capital expenditures, management decisions, financing, and dispositions.  

However, there are some things to consider before jumping into a JV arrangement. First, on both sides, the legal fees are much larger and can be much more time-consuming negotiating the documents. Also, the GP will need to provide 5-20% of the equity, which will be illiquid for the life of the investment. The GP, as partial owner, is also typically bound by the covenants and guarantees of the financing. There are also things to consider on the LP side. The LP, although majority owner, does not have absolute control over the investment and any future capital decisions (refinancing, disposition, etc.). Also, the LP typically cannot quickly change the operator if the performance goes south (assuming the GP is the operator).

And, the biggest question is how does the LP and GP split the cash flows from operations and value creation? This is the biggest risk mitigate for the LP and incentive for the GP. The JV documents will list out how the cash flow is distributed for both groups, and is typically structured as a “waterfall” with multiple tiers based on pre-determined financial metrics (“hurdles”). Each JV is unique, but the LP typically has a preferred position “pref”, and will receive all cash flow, or pari-passu (pro rata share) of cash flow until a predetermined investment hurdle is achieved (i.e., 8% equity return, 12% leveraged IRR, etc.). After the first hurdle is achieved, the GP will start receiving an unequal (larger) portion of the cash flow compared to their equity investment. This unequal distribution is referred to as their “promote” and will continue to increase as the financial performance increases. The waterfall usually contains multiple hurdles, with the GP receiving larger portions of the cash flow upon meeting each hurdle.  

Overall, JV structuring is present in all commercial real estate investing, but is predominant in seniors housing. This is largely due to the strong operational nature of the industry, and how critical it is to have the right operator (and fully aligned operator) to achieve maximum financial success.

To learn more about ways to enhance our senior living industry, be sure to subscribe to the podcast, The Inner Circle of Senior Living.

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By Scott McCorvie | CEO, Enhance Senior Living

Learn more about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

enhanceseniorlivnig.com | seniorlivinginvestments.com | srgrowth.com | generationalmovement.com

Joint Venture Investing in Senior Living

Per Resident Day Analysis

By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

Senior Living Per Resident Day Analysis

Whether you’re creating a proforma model with varying lease-up and stabilization scenarios, or comparing the operating performance between different assets and operators, you’ve probably heard the term, “Per Resident Day” (PRD).  The PRD metric is one of the most useful performance tools within the industry, and can be successfully leveraged to add value in a number of different situations. Within this article, I’ll analyze the actual PRD calculation, discuss why this industry tool is so useful, and demonstrate several ways it can be used to create value in everyday applications.  

Let’s start with the actual calculation. Just as it sounds, the PRD calculation is the actual hard revenue and expense line-items divided by the number of resident days in the period (month, quarter, year, etc.). The revenues and departmental expenses are easily identified within the financials, but what if you don’t know the number of resident days? Well, this can actually be estimated by taking the number of occupied beds in the period, adding an estimate (or ratio) for second residents (double occupied units), and multiplying this figure by the number of days. So, if you had 90 occupied beds in June, and typically 10% are double occupied, the calculation would be ((90+9) x 30) = 2,970 resident days. You would then take the monthly expense (i.e., raw food costs of $18,500) and divide by the number of days (2,970) to calculate the PRD ($18,500 / 2,790) = $6.23 raw food costs PRD.

So, why is this metric so important? One of the greatest advantages in this tool is the ability to compare the operational performance between properties with varying sizes (number of units) and occupancy. Obviously the expenses are going to be higher at a 100% occupied 120-unit AL/MC property compared to a 90% occupied 40-unit MC property, but how do the same departmental expenses compare on a PRD basis? The 40-unit property may be doing a more efficient job in expense management, and actually have a lower PRD expense indication than the larger property. Or, the smaller property may be doing an excellent job in dietary, but the housekeeping and nursing expenses are much higher PRD. Having a solid understanding of the PRD performance between properties is not only valuable in comparing performance, but can also be used to identify key areas of inefficiency and help create plans for future improvement. Linking this performance to industry reports (State of Seniors Housing, etc.) can provide dynamic industry benchmarking analysis and dashboard reports.

PRD assumptions are also very crucial in creating sophisticated senior housing proforma models. Analyzing the revenues and expenses on a PRD basis can show regressions and trends within the performance that can be utilized to more accurately project the go-forward performance. Linking the proforma model to the appropriate PRD assumptions can also provide a more precise sensitively and scenario analysis. Last, including the PRD variables with a multi-year staffing model, unit revenue matrix, and a monthly absorption can provide more in-depth forecast on future lease-up performance and stabilization. This can be crucial in accurately projecting the financial performance for new development, conversion projects, management transitions, and other lease-up scenarios.

Overall, the PRD metric is one of the more vital tools within the industry, and can be used within a number of applications.

To learn more about ways to enhance our senior living industry, be sure to subscribe to the podcast, The Inner Circle of Senior Living.

By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

enhanceseniorlivnig.com | seniorlivinginvestments.com | srgrowth.com | generationalmovement.com