Underwriting Senior Living Investments

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By Scott McCorvie | CEO, Enhance Senior Living

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

Underwriting Senior Living Investments

As demonstrated in some of the latest senior living acquisitions and announced development deals, there are a lot of new entrants into the industry. I’m sure these groups are well versed in underwriting commercial real estate, but how much do they understand about the specialized senior living niche? In this article, I’ll dive into the top underwriting strategies to consider before committing any capital to a senior living real estate investment.  

The first, and most important segment to underwrite, is the operator, or management company. I want to understand the manager’s senior living history, past experience, senior and local leadership teams, staffing strategy, geographic concentration, acuity mix, marketing systems, litigation history, current and future capital partnerships, community ownership, and future growth plans. I want to know how many similar buildings they own and/or operate, and their performances. If it’s a new development, or turnaround community, I want to make sure the management is part of the overall plan, and compensated for the value creation (not a straight management fee). Last, I want to really dive into the culture of the management, and see if this culture transfers to the residents and staff. Every time I underwrite an operator, I’m looking for a long-term partner, and not just a one-time deal.

If the management checks all the boxes, I’ll dive into the financials. I want to look at least three years of operating history, the past few monthly rent rolls, as well as the past several months of payroll statements (position, FTEs, and wages). I want to understand the revenues and expenses on a per-resident-day basis, and look for opportunities of growth or conservation. I’ll then compare the revenues and expenses per department on a per unit and per resident basis to other communities with similar size, acuity, and geography. I place little to no weight on a sellers or broker’s proforma, but I spend a good amount of time working with the new manager on their year one proforma/budget (including any marketing and staffing changes). I want to make sure everyone is on the same page of future performance, before the capital is deployed. Last, I want to get a solid understanding on any development/redevelopment costs, timelines, and financial impacts.

The next segment I’ll spend ample time on is underwriting and understanding the local market. I’ll look at the calculated supply/demand, penetration rates, and unmet beds from any recently completed appraisals or market studies. I’ll call the local planning board to discuss any applications for new senior living development. I’ll look at household incomes and house values in the immediate area, as well as survey the adult children demographics in the overall market. I’ll utilize NIC MAP (if market is covered) as well as other senior living reporting agencies to analyze occupancies, absorption, rates, and rate growth on a macro and micro level. Last, I’ll spend most time understanding each competitive community in the market. I want to know how my community ranks to each competitive community in terms of price, service, quality, amenities, location, and reputation.

If all the previous three segments check out, I’ll finally spend some time on the actual real estate. I’ll want to know the year it was built, renovated / converted, and spend time understanding the unit count, unit square footages, amenities, dining room size(s), offered amenity rooms, hallway sizes, acuity room locations, courtyards, parking, traffic flow, nurse call system, FF&E / flooring replacement history, A/C systems, etc. I’ll want to meet with the Executive Director to discuss desired unit types, amenity room utilization, and any ‘wish list’ items. I’ll also want to dig into the past several years of capital expenditures, along with the current cap ex budget, to get a realistic plan for the future. Last, I’ll spend time understanding the current and future technology implementation at the community.  

Overall, there are many things to consider and underwrite before making any senior living investment decision. However, applying some of these senior living strategies can help ensure your senior living investment is a success. If you want 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 Services at Enhanced Senior Living.

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

Is Stand-Alone Memory Care a Good Investment? Part 1

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By Scott McCorvie | CEO of Enhance Senior Living

Learn more about tailored senior living investment solutions at Enhance Senior Living.

Memory Care is the newest product type in senior living, and due to its specialized care and higher potential yield, it quickly grabbed the attention of many senior living investors. And, with the inflated rent per square foot, stand-alone memory care development quickly began booming across the United States. However, upon talking to various developers, investors, and lenders, I quickly realized there was a lot of misconception about the risks and operational volatility associated to stand-alone memory care. So, in this two-part series, I’ll summarize the history of memory care, discuss some of the benefits and amenities, and analyze some of the potential risks and volatility concerns inherent in this type of product.

The memory care product was born in the mid-to-late 1990s, as the second generation of assisted living product was quickly booming across the United States. Owners, operators, and families quickly realized that the resident’s care was beyond the scope of traditional assisted living (primarily due a residents unsafe wandering), but did not want to move their family member into a secured wing of an older skilled nursing facility. Therefore, the memory care product was born. Assisted living communities began ‘securing’ one of their wings as a ‘dementia unit’ and added specialized nursing staff to help with the increased care. These units had a separate pricing model, as they required a different level of care.

Securing against resident wandering was a necessary first step, but communities quickly realized that other amenities and programming could be added to enhance the overall quality of life and attract new residents. To help keep the unit pricing down, the majority of the offered memory care units were semi-private or companion suites and were located within a secured first floor wing of an assisted living community. Other memory care amenities were quickly added including a central lounge, activity center, serving kitchen, specialized dining room, separate nurses’ station, and enclosed courtyard / walking path. Specialized staffing and programming was focused on cognition improvement, and ‘memory stations’ (vintage photographs, clothing, buttons, tools, etc.) were added around the secured unit to help maintain and improve memory function.

With the increased knowledge of the new memory care product, families quickly began moving residents into these secured units, and memory care occupancy increased across the United States. With the greater number of semi-private units, developers quickly realized a full memory care unit (two semi-private beds combined), could receive $9,000 - $12,000 in rent versus the traditional assisted living of $3,000 - $6,000. Additionally, the net income per constructed square foot was much higher due to the minimal amount of common area. Although nursing care and operating expenses are higher in the memory care units, the potential yield on construction cost was extremely attractive to many developers. Thus, the creation of the stand-alone memory care community was born. The stand-alone memory care community began massive development across the United States in the mid-2000’s. The design could be standardized and generally consisted of 40-60 beds (primarily semi-private units) around a central courtyard. The same design could be replicated in many markets — saving the developer in timely and expensive architecture and design costs.  

Although the potential yield is much higher than other senior living product types, is stand-alone memory care a good investment? What are some of the benefits, along with some of the risks in underwriting and investing in stand-alone memory care? Do the current cap rates reflect this risk? Is there anything that an owner/operator can do to help mitigate the risks? In my next segment, I’ll answer these questions, along with some others, as I dive deeper in things to consider before investing in stand-alone memory care

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

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

Senior Living Portfolio Premium

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By Scott McCorvie | CEO, Enhance Senior Living

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

Senior Living Portfolio Premium

During discussions with varying senior living owner/operators and smaller investment groups about their exit strategy, I hear the phrase, “portfolio premium” thrown around a bunch. But, I question if these groups really understand the methodology behind the portfolio premium, and how to truly maximize this premium within the senior living industry. So, in this article, I’ll analyze the methodology behind the premium, and discuss ways to maximize the premium.

The portfolio premium is really based on the economic theory of economies-of-scale, along with the acquisition and investment appetite of the larger, listed healthcare REITs. Each acquisition takes 60-120 days of negotiation, legal documentation, capital sourcing, and due diligence to close. The amount of man hours, energy, and dollars spent on a single-asset acquisition varies very little to a larger 10-asset portfolio acquisition. Therefore, the portfolio premium partially reflects all the time and energy used in developing and/or acquiring single assets to ultimately sell in a single transaction to a larger investment group.

Additionally, the acquisition appetite of the larger healthcare and investment groups can alter the premium. Investment groups grow through new acquisitions and development investments. However, when an investment group has $20-30 Billion in assets under management, they need to make larger portfolio acquisitions (hundreds of millions) to really move the needle. And, since the larger healthcare REITs have the lowest cost-of-capital of healthcare real estate investors (can create new equity and bond offerings), they can afford to pay the highest prices and obtain the same return hurdles as investment groups with a higher cost-of-capital.

Now, both proceeding theories are not unique to senior living, as they are utilized in all institutional commercial real estate investment strategy. However, senior living does have some unique attributes that can really impact the portfolio premium. Besides physical attributes like size, market, design, and quality of the assets, additional portfolio premium variables are geographic clusters, operator/management selection, and operating/legal structure. Healthcare REITs and investment groups typically already have relationships with operators/managers, and like the ability to change the management (if desired) post acquisition to groups already in their portfolio. And, since it’s not as efficient for senior living managers to operate a single-asset outlier to their geographic concentration, it’s most appealing to have clusters of 3-5+ properties in any given geographic zone. Additionally, since it’s always disruptive and risky to change management, having institutional-quality management/operators in-place, is always desired. Last, the portfolio premium can be impacted by the cross-collateralization of the lease and/or management structure.   

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

Is Senior Living Even Real Estate?

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By Scott McCorvie | CEO, Enhance Senior Living

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

Is Senior Living Even Real Estate?

I laugh sometimes when I talk with different investment groups trying to enter the industry. They rattle off all types of ad-hoc numbers and calculations from complex spreadsheets, and quote different terms and sophisticated verbiage from varying market studies. Now, I’m not saying that accurate investment proforma models and thoughtful market studies are not valuable tools, but I wouldn’t go “all-in” just because the investment model returns look good, or the calculated supply / demand analysis shows unmet beds. 

In fact, I sometimes question if senior living is even real estate? Sure, location is key, and building design, construction quality, and offered amenities are all very helpful, but to have a successful senior living community, you need to think far beyond typical commercial real estate metrics. I know some developers new to the industry think, we’ll just add any manager you want at 5%, and we'll lease it up in 12 months. Voila! Sure, this manager mentality may work for office, industrial, retail, multifamily, and even hospitality, but senior living is in a whole different class. 

Over the past 15 years, I’ve worked on successful senior living projects, and not-so-successful senior living investment projects. The single most important variable came down to one thing – the operator. The operator is so crucial for the overall success of any senior living investment. I can't stress this enough. I’ve changed operators on senior living investments without ever touching the real estate, and experienced almost immediate and dramatic financial results. This would not be the case for any of the other commercial real estate classes.

One very successful regional operator once told me during a property tour, “Scott, I wouldn’t let the real estate get in the way of a successful community.” And, this is so true! It’s way more than just ‘sticks and bricks,’ but it’s really about the resident care, programming, and overall reputation that drives a community's success. Strong word-of-mouth referrals are still the best and largest marketing source, and this does not cost one cent in the marketing budget. Overall, investment groups need to think beyond the real estate, and focus on successful operator partnerships that continually improve quality of care, create engaging programming, and cater to the overall resident satisfaction.

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