I currently work as an acquisitions analyst for a value add MF shop. Recently I connected with a principal at a shop that exclusively acquires and develops senior housing communities with memory care units.
They are looking for an acquisitions associate and want me to come in and meet the team. He is aware I have zero experience dealing with senior housing but still wants to see if its a good fit.
In an effort to not look like I have no business even meeting the team I am doing some research. I would appreciate it if someone has a model they wouldn't mind sharing. Any advice on deal points specific to this property type would help as well. I can't imagine its that different from MF on the underwriting side but I could be completely wrong.
Given that the principal exclusively focuses on memory care, I'm going to assume the company is a management company as well as a developer, but correct me if I'm wrong. Some operators only handle acquisitions / development (Formation Capital), and the day-to-day management of the property is left to a management company that receives a 5% fee (sunrise senior living, brookdale, five star senior living). The three management companies I listed own properties themselves, but will also contract their services out to other properties.
A senior housing model is going to look almost exactly like a multifamily model but with additional line items like Care Income/Expenses, Dining Income/Expenses, Laundry etc. On the excel/modeling front you'll be fine.
Senior housing isn't much more complicated than multifamily, but there's some nuances. There's a hospitality component (more relevant in independent living) and a healthcare component (more relevant in skilled nursing and memory care). Because of that, the operator of the property can be even more important than the location. Right now operators are having a hard time keeping their properties staffed with nurses and aides. There's lots of development going on, so new properties are hiring away employees from competitors by giving them a small raise.
In addition, the development is making it hard for older assets to maintain their occupancy. A 1996 facility just can't keep up with a 2016 facility unless it has undergone some extensive renovation during its lifetime. Usually young adults are putting their parents in one of these homes, so they're not going to send them to a run-down place if the rent is only $800 cheaper (all-in rent can range from $2k - $8k and beyond for AL/MC properties)
Memory care is one of the harder types of senior housing to manage, because tons of residents can die in a very short time span, typically during the winter time. This means having a good marketing program, and getting referrals from assisted / independent living properties is really important. I'd figure out if the company does standalone memory care, or they invest in properties with a continuum of care (IL/AL/MC or AL/MC).
Feel free to ask more targeted questions, as I'm pretty bad at putting together a well-rounded post without some additional direction. Also PM with the name of the company if you're comfortable sharing. If it's relatively large, I might have some experience with them and can share my thoughts.
@JSmithRE2010" great explanation and interesting points about senior housing. Thanks for sharing insight into the field that gets less attention on this site.
@JSmithRE2010" Thanks for the insight! Could you go into more detail on the revenue side? What is the typical % of revenue breakdown between private pay, medicaid, medicare, and insurance (Am I missing any categories?)? Does this vary across IL, AL, SN, MC? How do rates/rents vary? Which sources of revenue are more profitable?
There's no typical breakdown between private pay / medicare /medicaid. Some properties will have a very high percentage of medicare, but this is seen as a negative from the viewpoint of most investors, because we don't know how laws surrounding these types payments will change. If the company you're talking to does a lot of medicare / medicaid work, I don't know much about it, other than that we try to avoid financing properties with a high % of medicare tenants. I believe the higher up the care spectrum you get, the more medicare you will see because there are more care charges associated with those properties.
I don't believe owners look at the different services they provide and try to maximize the most profitable ones. That's what a hospital does (jk but not really). The goal is to provide quality service and keep your occupancy up, keep tenants happy, and build a brand as a reputable care provider. Lots of referrals come from word of mouth or online resident placement services, so reputation is important. Typically when a tenant is placed at a building through A place for Mom or other online referral source, you have to give up a whole months rent or even more to the referral source. Some operators will choose not to use those sites because of the high fees, but the best operator we work with gets a ton of referrals from there so interpret that however you like.
Rents and Rate vary wildly. I worked on a deal where the most expensive suite in an IL only facility was over $12k a month and the cheapest studio was $2000. Most recent memory care deal I worked on had average all-in charges of $5500 for a semi-private unit, which means there are two memory care tenants in the same unit. So that's $11,000 of income each month in a 400 sqft unit. This is in a town of 80,000 people around three hours from a major metro area. IL is the cheapest because there is no care provided. AL usually has a base rent (typically higher than an IL base rent) plus a care charge that depends on the level of assistance you need. There can be Levels 1 through 5. Level 1 means you need minimal assistance in your daily life and level 5 means you need help doing most things. Usually a committee at the property will review each of the tenants needs every quarter and assess if the tenant needs a bump in care level. Same process for memory care.
If you're wondering about profit margins, the expense ratio (operating expenses / EGI) increases as you move up the care spectrum. So an AL/MC facility will have more income due to the care charges, but there are also lots of expenses that come with it.
What would you say the margins are for IL/AL/MC? Do total returns typically exceed those of multifamily? Would you say that HUD 232 financing is a better option for the developer?
My firm is about to start due diligence on a ground up AL/MC project in CA. Would love to pick your brain about financing and the business in general.
A big problem with the AL/MC properties like previously noted is the high rent. You generally have families trying to grapple Medicaid spend down issues and, in the process, causing bad debt to balloon and working to get payment plans in place. Factor in periods when several residents may pass, the financial performance of these types of assets can be highly volatile and they never truly stabilize. As a result, these assets can often trade at cap rates that are 200bps higher than similar vintage traditional MF in their market.
Thanks for the help guys. Meeting went great. Will probably accept the job if an offer is extended.
Definitely follow up if you get the offer. Also, figured I'd add that underwriting seniors housing can differ from traditional multifamily in a few other ways:
Community Fees - Depending on the market, many communities charge one time community fees (~1-2 months rent, non refundable) to new residents. This can end up representing a substantial portion of underwritten revenue because of the high turnover at these properties so get it right.
Rent Growth - from what I've seen, most communities in most markets (that aren't overdeveloped) increase rents by 3% every calendar year, rather than whenever leases turn over.
Unit Count vs Bed Count - sometimes communities will have a few units with two beds (most likely MC) in one unit. The residents will just be charged for the bed, so the underwriting needs to capture 2x revenue per bed for those few units.
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