Hi all!
I was wondering if people could give like.. an intro to senior housing as it's one of the only products i have no experience in underwriting. For example, it'd be great if you can talk about the different types (assisted living vs. skilled nursing vs. etc...) and what they mean and which is preferred, how these deals are looked at from an underwriting perspective, and the risks associated with them.
Any help is appreciated, thanks!
I can help with this. Senior housing has the potential to be a big deal in the coming years since our population is aging (baby boomers) and people are living much longer. Facilities are usually broken up into different care levels. Some places have only one care level while others have a mix.
The 4 Main Care Levels:
Independent Living: You need little to no help doing day to day activities, so the move to the community is not completely out of necessity. What separates IL from active living (55+ apartment complexes) is that IL has a commercial kitchen where there's usually a variety of meal plan options. There can also be more planned activities and amenities like room service / laundry service at an independent living facility compared to active living.
Assisted Living: This is the biggest sub-group of senior housing units. These tenants could only need help for something small like putting their socks on in the morning, all the way up to can't bathe yourself, wipe your own ass etc. Tenants are charged a base rent plus a low to high care fee depending how much "Assistance" you need. Assisted living tenants usually die at the facility or they move to a different facility if they need a higher level of care that is not offered at their current facility.
Memory Care: Like AL, but these tenants have alzheimers and die quicker which means more turnover. Rent is higher than AL, and is usually set up as a flat fee rather than broken out into rent and care fees. Charges for when tenants shit the bed are separate.
Skilled Nursing: For people on their death bed or recovering from a surgery. Usually charged a daily rate like a hospital. Most expensive and most difficult to keep occupied of them all.
If I were an investor, I think an AL/MC facility (say 80-85% AL, 15-20% MC) is the most attractive set up (generally). Moving to assisted living is needs based. IE You're 45, and want to ensure your parents will be taken care of. Hiring a nurse or caretaker to help out around your parents house is not cost effective and it is difficult to match the 24 hour care an assisted living facility offers. You and your sibling can't help out much because you both have jobs, so moving your parents to one of these facilities is the best option. The previous example shows why the adult child (40-50 yr old) demographic can be just as important as the number of 65+ or 75+ people living in an area. Often times its the children's choice to move their parents to a "home".
Investors/Lenders are not super high on standalone memory care facilities right now. Developers saw the 10-12k rents they could charge memory care tenants and got overzealous aka built too much. On top of that, the higher turnover and higher number of employees required to operate the facilities make them less attractive. It's basically the same story for Skilled Nursing.
Senior living is operationally intensive similar to hospitality. Hiring and retaining good employees is a difficult part of being an operator. Because unemployment is low right now, this has been especially difficult for operators. In bad times, you can find an experienced employee and pay them minimum wage. In times like today, you might have to pay above minimum wage for someone who has no experience working in senior living. Compounding this issue is the amount of construction going on in the product type. A developer will construct a facility in the same market as older facilities, and steal nurses/caretakers from the older facilities by giving them a $1-2/hr pay raise.
I've only seen a handful of markets so far in my short career, but I know Dallas is one of the more overbuilt markets, while LA is very attractive if you have patient capital that can wait through the time consuming zoning process in California.
I'm just spitting out information as it comes to mind so sorry if this is jumbled. Feel free to ask any other questions if the above is too basic.
Edit: Wanted to clear up the independent living paragraph, as I thought I made it sound too much like a regular apartment complex. Independent living tenants will often have “home health” care providers check-in and help them out with the healthcare side of things (check blood pressure, medicine, bathing etc). However, the home health provider is a separate company from the IL facility that might lease a small amount of office space in the building. So you can still have 90 year olds with walkers at an IL facility - it’s just that the healthcare services are provided by a third party rather than the facility itself.
This is a very good explanation of the general industry. If there's anything that I can add, is that it's a generally low margin industry, though a lot of these facilities can trade at high cap rates (think 10-13%).
Another thing worth mentioning, especially when underwriting and looking at an existing portfolio of facilities, is the composition of the different payors that have patients in the facilities. These will be Medicare, Medicaid, VA, various commercial payors, as well as patients that pay out of pocket. Generally speaking, Medicare and Medicaid payors are seen as more reliable, particularly Medicare which generally bills at the highest rate compared to the other payors. In states where there are budget issues, like Illinois, Medicaid can be less reliable.
PM me if you have any questions.
I think you guys are sort of discussing two separate things here, pure seniors housing versus skilled nursing. In general, yes there's definitely a larger population of buyers that shy away from skilled nursing altogether because of it's reliance on public payor sources (Medicare and Medicaid) and thus stick to private-pay seniors housing (Independent or Assisted Living). However, once you're talking specifically about skilled nursing facilities, Medicare is often viewed by buyers as the most attractive revenue source largely due to the fact that it provides the highest reimbursement levels of all payor sources (private, Medicaid, commercial, you name it), but also because federally funded Medicare is viewed as more stable and easier to collect from than state-funded Medicaid, especially in states with budgetary problems like I think someone already mentioned.
There's definitely a larger buyer universe for private-pay seniors housing, but once you're talking about skilled nursing specifically buyers want Medicare residents because they're an enormous revenue driver. So in a way I think you're both right here, but talking about slightly different things.