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.