Educational resources to enhance our senior living industry

Enhance Senior Living is a national senior living broker firm specializing in nationwide senior living i nvestment brokerage solutions including active adult brokerage, independent living brokerage, assisted living brokerage, memory care brokerage, and skilled nursing brokerage. Learn more about our senior living broker and operational improvement solutions and contact us today to learn how we can help you enhance senior living today.

November 28, 2018

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

November 28, 2018/ Scott McCorvie

By Scott McCorvie | CEO of Enhance Senior Living

Enhance Senior Living is a national senior living broker firm specializing in nationwide senior living i nvestment brokerage solutions including active adult brokerage, independent living brokerage, assisted living brokerage, memory care brokerage, and skilled nursing brokerage. Learn more about our senior living broker and operational improvement solutions and contact us today to learn how we can help you enhance senior living today.

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 Enhance Senior Living Podcast.

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

November 08, 2018

Senior Living Portfolio Premium

November 08, 2018/ Scott McCorvie

By Scott McCorvie | CEO, Enhance 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 Enhance Senior Living Podcast.

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

August 08, 2018

Is Senior Living Even Real Estate?

August 08, 2018/ Scott McCorvie

By Scott McCorvie | CEO, Enhance 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 Enhance Senior Living Podcas.

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

November 21, 2017

Chatting with the Masters - Michael Baldwin, Oracle Healthcare Advisors

November 21, 2017/ Scott McCorvie

In the next installment of Chatting with the Masters, I chat with senior living valuation and market analysis expert Michael Baldwin. I have known Michael for more than a decade, and have watched his dedication to the industry (and especially market analysis) through the years. With my mission to drive smart, thoughtful growth within senior living, I wanted to reach out to Michael to talk about market analysis for new senior living development.

Question: Why are there so many different metrics and methodologies out there that people use to analyze if there’s enough demand to develop a new seniors housing community? Sometimes in the same market one person will say to build but another will say not to, so how does anyone know who is right or wrong?

Answer: That’s an important question because it gets to the mental framework of what market analysis is. The goal of a market study is to be as accurate as possible about the market’s health. Demand estimation models are just tools to do that. They’re like funnels, with the funnel’s mouth being the starting point where a total population count goes in, and its stem is the end result of the model, narrowly defining how much net demand exists in an area. With that framework in mind, clearly some models are better than others because they more accurately quantify net demand. The worst methodologies are those where the ultimate level of accuracy is still very wide, like simply testing the subject market’s penetration rate or capture rate against some benchmark range and concluding that the subject’s market is good or bad based on whether the rate is above, below, or within that broad range.

Question: If you don’t use penetration rates, what market metrics do you analyze?

Answer: We definitely use some of the same broad metrics that everyone else is using, such as acuity rates, income levels, and certainly the starting population data with most people using Claritas or ESRI. But the key difference is what we do with those metrics and how specifically we use them. We developed the quantitative piece of our model through many years of reading the latest industry research and building the results of those studies into our models, as well as through our experience doing hundreds of market studies nationwide every year. We also have really geeky conversations with the best in-house analysts at some of the industry’s most successfully growing operators—the ones who we see nailing their market selection almost every time they build a new project. Then after each major improvement in our modeling, we back-test our model’s results to make sure it works. At this point our “funnel” is quite narrow because each metric we use is very specific itself and then is very specifically applied to the subject’s market.

Question: What income and age qualifications do you typically utilize?

Answer: That was something memorable about developing our models because at first it was challenging and then it became funny as we dug into it, that there was such a simple fact about age versus income and acuity that seemingly no one was accounting for previously, and most still aren’t. Age, acuity, and income aren’t three separate variables where any possible combination is equally likely. There are way more old seniors with medium acuity needs and low incomes than say young seniors with high acuity and high income. People know this intuitively, but as we asked around, we found that when it comes to estimating demand people are just applying those qualifiers in a linear way, one on top of the other, without thinking through how much double and triple-counting it creates. We quantify how those multiple levers shake out in a given market, so up to a certain point in our model we’re actually running separate tracks to estimate demand from each age cohort before combining them.

Question: Do you utilize other non-senior metrics when analyzing the seniors housing market strength (i.e., adult children population, housing market, labor market, etc.)?

Answer: A few other qualifiers we look at are how adult children impact demand as well as supply side variables like how many seniors are receiving care from home care aides or adult daycares. We go through several layers of analysis beyond what most market study firms do. That lets us identify those markets where demand is great and getting better faster than others realize, as well as advise our clients where not to build, where at first it may look like there is demand but the affordability isn’t there for the price points they need to get.

Question: With all the reports of oversaturation, how do you analyze new supply coming into a market?

Answer: We have access to subscription-based data services that give us leads on who is building where, but on that point we find that there’s no substitute for old-fashioned legwork. We call all of the appropriate planning and zoning departments to see what other developers have in the works, and we also search local news, but oftentimes the best information comes from driving the market and speaking with the people who live there and work in the industry. Once we feel like we’ve found everything possible, we dig into the projects one by one to assess how likely it is that they end up getting built. The toughest situations are when we find a great market for our client but there’s one other project someone is trying to do, and there’s only room in the market for one—them or our client. In those situations we have to just give our client all of the information and analysis possible and let them make their decision to try to beat them to the punch or look elsewhere.

Question: How do you conclude on the appropriate primary market area and secondary market area for a new seniors housing development?

Answer: We just ask Google, Siri Alexa, and Cortana and see if any two of them agree, and if not, we guess and shake The Magic Eight Ball. Just kidding, of course, but we can dream. After mapping all existing and proposed projects and speaking with existing competition about how far away they draw from ,we're able to hone in on the PMA. We don't put weight on what's going on in the secondary market unless it has a cluster of competition that's pulling from within our defined PMA or if there are proposed projects that will do so in the future.

Michael Baldwin, President, Oracle Healthcare Advisors

Michael Baldwin has specialized in the valuation and market analysis of seniors housing and healthcare properties since 2005. Mr. Baldwin stays directly in touch with the senior housing and nursing care market by visiting hundreds of properties each year to interview on-site management and has personally toured over 2,000 senior housing and long-term care properties across almost every state in the U.S. He has led the development of over 1,500 appraisals and market studies nationwide for lenders, developers, investors, and operators. Prior to forming Oracle Healthcare Advisors he held leadership roles in several national healthcare real estate valuation firms.

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

Senior Living News

Educational resources to enhance our senior living industry