What is the RIDEA structure?

By Scott McCorvie | CEO of Vita Senior Living | Founder of Generational Movement

vitaseniorliving.com | generationalmovement.com | seniorlivinginvestments.com

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.

Scott McCorvie leverages 20 years of senior living investment and operational experience to improve a rapidly growing and changing market. To learn more about optimal investment and operational strategies in the current senior living environment, visit Vita Senior Living at vitaseniorliving.com. For additional educational and improvement content dedicated to increase the performance of our senior living industry, visit Generational Movement at generationalmovement.com

Vita Senior Living | News Release

Vita Senior Living brings new life, growth, and transformation to an industry still recovering from massive change and disruption.

(Orlando, Fla.) February 8, 2022 – Senior living veteran Scott McCorvie has devoted his 18-year career to helping improve the senior living industry, and with his new venture, Vita Senior Living, he is placing the focus squarely on improving residents’ lives.

“Vita is Latin for Life, and that’s exactly what our mission and purpose is each day – to improve lives, plain and simple,” said Scott McCorvie, CEO of Vita Senior Living. “We have ambitious goals, but our team has been hard at work, and we’re so excited to finally implement our plan, realize our vision, and improve as many lives as possible.”   

To make the vision a reality, Vita Senior Living is acquiring select communities in Florida that can be enhanced through strategic improvements to the real estate and operations. “Although the real estate is just a mechanism to deliver our care, we are senior living real estate experts, and each investment includes a specific plan to update the design and aesthetic appeal,” McCorvie said. “Even relatively minor changes to the FF&E, unit mix, lighting, technology and community amenities can make a huge impact to the resident’s life and overall wellness going forward.”

This is especially true in the current landscape where new technologies are providing residents the ability to age at home longer. “One of my biggest frustrations is touring a gorgeous new senior living community and then seeing zero community engagement or resident life,” McCorvie said. “If senior living is going to be a better alternative than home healthcare or other care options, we must provide services and experiences that residents can’t find at home. That’s why Vita Senior Living is focused on improving lives – all the intangible benefits that can only be received in our community setting and not within a home.”  

Along with upgrades to the real estate, Vita Senior Living is heavily focused on improving the operations. Each acquisition includes a carefully orchestrated operator transition period to ensure a smooth hand-off at closing. “From the very start, we knew our operational model would not only be focused on improving the resident’s life, but also on identifying and removing operational inefficiencies,” McCorvie stated. “It can be a daunting task to uncover operational issues within hundreds of documents, but that’s what drives our passion, and separates our process from other platforms.”

Vita Senior Living developed a unique process that leverages team experience in senior living appraisal, investment, and operations to uncover inefficiencies compared to market performance. During the underwriting process, the company employs proprietary industry benchmarking analysis tools, and other industry resources to uncover any performance irregularities. Vita then carefully reviews each department to identify areas of inefficiency and formulates the best course of action to correct issues at closing. The company’s improvement plans typically include revisions to hiring policies, recruitment, training, scheduling, record retention, expense management, agency contracts, vendor management, group purchasing, advertising, technology platforms, and other key areas of operations.

Vita Senior Living is currently seeking acquisition opportunities in Florida, along with new investors or other capital partnerships. Additional information can be found on the website vitaseniorliving.com or by contacting with us at connect@vitaseniorliving.com.  

For additional content on successful strategies and best practices on investing and operating senior living communities, visit the Generational Movement at generationalmovement.com

Lifestyle Living: The hottest new segment in senior living

By Scott McCorvie, CEO, Vita Senior Living | Founder, Generational Movement

www.vitaseniorliving.com | connect@vitaseniorliving.com

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.

Scott McCorvie, CEO, Vita Senior Living | Founder, Generational Movement

Scott leverages 20 years of senior living real estate investment, development, and operations experience to increase performance and maximize value and investor returns. Learn more about Vita Senior Living and their investment strategy at www.vitaseniorliving.com or by emailing connect@vitaseniorliving.com.

Underwriting Senior Living Investments

By Scott McCorvie, CEO, Vita Senior Living | Founder, Generational Movement

vitaseniorliving.com | generationalmovement.com | connect@vitaseniorliving.com

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 have any questions, or need help with a senior living investment, feel free to contact me at scott@srgrowth.com

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Scott McCorvie, CEO, Vita Senior Living | Founder, Generational Movement

Scott leverages 20 years of senior living real estate investment, development, and operations experience to increase performance and maximize real estate value and investor returns. Learn more about Vita Senior Living and their investment strategy at www.vitaseniorliving.com or by emailing connect@vitaseniorliving.com.

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

By Scott McCorvie | CEO of Vita Senior Living | Founder of Generational Movement

vitaseniorliving.com | generationalmovement.com | seniorlivinginvestments.com

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.

To learn more about successful investment and operational strategies in senior living, visit Vita Senior Living at vitaseniorliving.com.

For additional content on ways to improve the performance of your senior living community, visit the Generational Movement at generationalmovement.com.

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Scott McCorvie | CEO of Vita Senior Living | Founder of Generational Movement

Scott McCorvie leverages 20 years of senior living real estate investment, development, and operations experience to increase performance and maximize value and investor returns. Learn more about Vita Senior Living and their senior living investment strategy at vitaseniorliving.com or by visiting Generational Movement at generationalmovement.com.

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

By Scott McCorvie | CEO of Vita Senior Living | Founder of Generational Movement

vitaseniorliving.com | generationalmovement.com | seniorlivinginvestments.com

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

If you have any questions on this article, or would like help navigating the senior living and memory care market, visit Vita Senior Living and Generational Movement for additional tips and strategies on best practices for investing and operating senior living communities.

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Scott McCorvie, CEO of Vita Senior Living, and Founder of Generational Movement leverages 20 years of senior living real estate investment, development, and operations experience to maximize performance and investor returns.

Senior Living Portfolio Premium

By Scott McCorvie, CEO, Vita Senior Living

www.vitaseniorliving.com | connect@vitaseniorliving.com

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.   

This is just small sampling of ways to create and maximize value in a senior living portfolio. If you have any questions, or need assistance, feel free to contact me at scott@srgrowth.com.

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Scott McCorvie, CEO of Vita Senior Living, leverages over 18 years of senior living real estate investment, development, and operations experience to maximize performance and investor returns. Learn more about Vita Senior Living and their investment strategy at www.vitaseniorliving.com or by emailing Scott directly at scott@vitaseniorliving.com.

Is Senior Living Even Real Estate?

By Scott McCorvie, CEO, Vita Senior Living

www.vitaseniorliving.com | connect@vitaseniorliving.com

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.

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Scott McCorvie, CEO of Vita Senior Living, leverages over 18 years of senior living real estate investment, development, and operations experience to maximize performance and investor returns. Learn more about Vita Senior Living and their investment strategy at www.vitaseniorliving.com or by emailing connect@vitaseniorliving.com.

Chatting with the Masters - Michael Baldwin, Oracle Healthcare Advisors

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. If you have any comments or questions, feel free to e-mail Scott McCorvie at scott@srgrowth.com.  

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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.

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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.

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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.

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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.

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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.

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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. 

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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.

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Scott McCorvie, President, Senior Living Growth Advisors

Scott McCorvie has over a decade of experience within the seniors housing industry, and has a strong passion to help cultivate smart, thoughtful growth. From 2004 to 2012, Scott worked for one of the largest dedicated seniors housing consulting and advisory firms, where he completed hundreds of seniors housing valuation, feasibility, regulatory, and market analysis assignments in markets across the United States. From 2012 to 2017, Scott worked for two public, non-traded healthcare real estate investment trusts, and was actively involved in the full spectrum of the investment and asset management process. In 2017, Scott launched Senior Living Growth Advisors to assist owners, operators, developers, and investors achieve their desired growth success. Scott has a strong passion for the industry, and strives to combine innovative investment strategy with strong knowledge of seniors housing market and operating fundamentals.

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What makes a GREAT senior living operator?

https://www.youtube.com/watch?v=HxYYtPitTrc