Is Stand-Alone Memory Care a Good Investment? Part 2

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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

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.

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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.