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.

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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 Cap Rates

If you're involved in the senior housing real estate industry, you’ve likely heard the term ‘cap rate’ more than once. But, what is a cap rate? And, how does it affect the value of a senior housing property? And last, what are some senior housing characteristics that can impact the cap rates?

Capitalization Rates (or Cap Rates) are one of the primary metrics used by investors in evaluating commercial real estate investments. In short, cap rates measure the relationship between the price (or value) to the expected annual income (cap rate = income / price). Therefore, given even income at a property, a lower cap rate indicates an investor is willing to pay more for a property with a higher cap rate indicating a lower price.

How does this affect value? As in algebra, as long as we know two variables, we can solve for the third. So, if we know (or can reasonably estimate) the expected annual income at the property and can derive an appropriate cap rate from similar market transactions, we can solve for the expected price, or value (value = income / cap rate). So, the expected price of a senior housing property can ultimately be derived from both the income and market expectations of the capital (cap rate).

However, what property characteristics contribute to the variance in cap rates? Like all investments, an investor requires a higher rate of return for taking on additional risk. Simply put, with all other things being equal, cap rates measure the perceived risk in an investment. So, what makes a senior housing real estate investment more or less risky? One of the major factors in senior housing risk relates to the acuity level. A lower-acuity independent living community is not licensed, and does not provide nursing services, so the risk of improper care (or losing an AL license) is much lower than a higher-acuity memory care or skilled nursing facility. Although the income might be higher at a memory care facility, resulting in a higher value per unit, the overall cap rate will be lower with level income. Accordingly, a property located in a larger market is deemed to have a larger demand and employee pool, and is perceived to be a lower risk to a similar property in a smaller, tertiary market.

There are many characteristics that can impact the perceived risk and cap rate at a property. In general, qualities that are perceived to have lower risk include larger markets, stabilized operations, larger property size (number of units), private pay reimbursement, newer construction, continuum of care, reputation of operator, and superior building quality. Alternatively, the risk is perceived to be higher (with higher cap rates) in smaller, tertiary markets, non-stable operations (lease-up or turnaround), smaller property size (less units), management transitions, government reimbursement (Medicare and Medicaid), older construction, and inferior building quality. In short, properties with the lower risk profile tend to trade for lower cap rates than similar property types with the higher risk profile.

Although there are many other macro-level influences on the cap rate environment (capital markets, interest rates, supply of equity/debt, etc.), the above attributes are a few of the micro-level attributes. Also, when a property's income stream is inconsistent, an investor may also use a discounted cash flow analysis to calculate the present value of the future income stream (with an appropriate risk-adjusted discount rate).

Learn more about ways to enhance our senior living industry by subscribing to the podcast, The Inner Circle of Senior Living.

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