What is the RIDEA structure?

By Scott McCorvie | CEO, Enhance Senior Living

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

What is the RIDEA Structure?

There’s been a lot of news lately about the RIDEA structure, but there seems to be some confusion on the make-up, utilization, and perceived benefits and risks of the structure. Within this article, I’ll examine the history of the RIDEA act, describe how it is typically utilized by REITs, and list some of the benefits and risks inherent within the design.

RIDEA (typically pronounced Rye-Dee-Uh, or Rye-Day-Uh) is an acronym that stands for the REIT Investment Diversification and Empowerment Act. This legislation was enacted in a REIT reform act of 2007 and allowed REITs to change the way they accounted for healthcare real estate income. Prior to this act, healthcare real estate investments had to be structured as leases (typically triple-net leases) with annual rent payments and escalations. The RIDEA act allowed REITs to participate in the actual net operating income, as long as there was an involved third party manager. The legal structuring includes creating Taxable REIT Subsidiaries (TRS), with an in-place lease between the landlord and tenant entities (both owned by the REIT).

How did this change the landscape of the industry? Instead of just underwriting a steady rent payment and annual escalation, REITs could analyze and underwrite larger shifts in operations and income. This is critical for value-add projects where there is material upside from enhanced operations and occupancy, and opened the door for REITs to expand their investment horizon (including joint venture structures).  Additionally, the underwriting mentality shifted from tenant credit profile and lease coverage analysis (net operating income / rent payment), to sophisticated operating underwriting proforma models, in-depth market analysis, and operator knowledge and industry experience.

So, what are some of the benefits of this structure? The main benefit is the ability for the REIT to invest in non-stable assets, and the opportunity capture increased annual income growth from enhanced operations. Instead of the standard 2-3% rent escalations in a triple-net lease structure, the REITs can benefit from the market rent increases (or rent adjustments), occupancy increases, and overall operational improvement and efficiencies. This has led to normalized income growth well above the 2-3% range. For example, during the second quarter of 2014, Ventas (VTR) reported their U.S. RIDEA portfolio (called their seniors housing operating portfolio) experienced income growth of 6.6% on a year-over-year, same-store basis. This is almost double the range of any typical escalation within a NNN lease investment. Another benefit is a hedge against inflation, as increased inflation will lead to larger increases in rental rates, operating expenses, and overall NOI. The Tenant/Manager can also benefit, as they do not need to assume the long-term liability, but still maintain favorable management fees from operations, as well as potential incentive management fees linked to superior performance.

But, there are also some additional risks. Along with the ability to greatly increase the operations, there is also a risk of decreased operations and income (no credit guaranteed rent). However, this can be partially mitigated by creating credit enhancements within the Management Agreement (to be discussed in a later article). These credit enhancements can also create favorable alignment between the REIT and Manager, as both are focused on maximizing operational efficiency and operating income.  Additionally, since the REIT is participating in the operations, there is additional risk of potential legal liability. There are also increased on-going operating costs, including a TRS income tax (from the difference in the TRS lease rent), as well as on-going capital expenditure investments to maintain a competitive advantage and appeal within the market. Last, it’s critical the REIT maintains a solid asset management platform, including constant monitoring of operating metrics, and a team experienced in seniors housing operations and market fundamentals.

Overall, the RIDEA structure has definitely changed the way REITs look at potential investments, and with effective underwriting, program implementation, and asset management, and coupled with traditional NNN investments, the RIDEA structure can positively enhance the income growth and overall returns of a seniors housing portfolio.

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

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

Underwriting Senior Living Investments

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 2

By Scott McCorvie | CEO of Enhance Senior Living

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

In the first segment of this two-part series, I discussed a brief history of the memory care product, as well as a summary of the programming and design benefits compared to traditional assisted living or a secured memory car wing. I also summarized a proforma analysis demonstrating how the yield-to-cost and total annualized return (IRR) is artificially high compared to other senior living product types. This inflated yield, along with decreased development timing and costs, spurred stand-along memory care development across the United States. However, even with the higher potential yields, is stand-alone memory care a good investment? In this article, I’ll dig deeper into the investment risks and mitigating factors to consider before investing in stand-alone memory care.  

One of the biggest misconceptions’ investors have regarding stand-alone memory care, is that it leases-up and maintains a stabilized occupancy like other senior living products. This is further from the truth. Memory care is the most immediate and need-based product in senior living, and the decision to move a loved one into memory care is made decisively and quickly. So, it’s difficult to maintain pre-opening and/or operating waiting lists like other senior living communities. Additionally, the memory care average length-of-stay is shorter than other senior living options (especially during flu season), which means it’s crucial to maintain a steady supply of new residents. However, stand-alone memory care is at a disadvantage here, as it does not have a supply of in-house residents, like communities offering a full continuum-of-care. The number of units/beds is also lower in stand-alone memory care, which elevates the risk of not covering debt service and/or fixed charges when there are a large number of discharges in a given month (and no waiting list). Stand-alone memory care is the only product type I’ve seen that can have dramatic downward shifts in occupancy in a single month.

So, these are all real risks to consider before investing in stand-alone memory care, but are there any ways investors can mitigate these risks? The simple answer is yes – with a strong, experienced operator. A strong stand-alone memory care operator will have ample experience marketing the niche design and specialized programming as key advantages to traditional senior living communities. Also, a good stand-alone memory care operator’s marketing program should focus on several key referral sources (Alzheimer’s Association, home healthcare agencies, local doctor groups, hospitals, etc.), and not need to rely on broader marketing strategies and in-house resident sources. A strong operator should also always have a daily pulse on occupancy and financials and be able to adjust the staffing and expenses immediately, if needed. The investor/operator should also be willing to continually invest in the community, as flooring and furniture wear-and-tear is high, and new wandering management and cognitive improvement technology is always being created and introduced to maintain a competitive advantage in the market.  

Okay, so I presented many risks, as well as some mitigating factors, but is stand-alone memory care a good investment? Personally, I would be very cautious on investing in any new stand-alone memory care development, or stand-alone memory care with a short operating history. I would also spend a lot of time understanding and underwriting the operator’s experience, senior and local management team, risk management procedures, focused marketing strategies, regional impact, and long-term vision. Of course, market, location, design, competition and reputation are always huge factors to consider before any senior living investment decision. I would also underwrite a very conservative stabilized occupancy, lower market rates (for likely concessions), and large annual capital expenditures. I wouldn’t base my pricing on a year one NOI to market cap rate methodology, but would factor in a variable discounted cash flow analysis (considering operating swings and annual capital expenditures) along with a pricing comparison to replacement cost (for new competition). Overall, stand-alone memory care product is here to stay, but utilizing conservative underwriting and pricing models will help make sure your senior living investment is a success.

By Scott McCorvie | CEO of Enhance Senior Living

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

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

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