Hi Y'all,
I'm trying to get my head round the above - how do these senior housing / living players look at deals? Is it the underlying business (# beds/care services etc.) or just a fixed lease / rent - I've only ever looked at this from the former, in fact I've not looked at anything thats just focussed on the freehold income.
is it the same with say retail, where its not about the retail business but their ability to pay / service the rent? Why would you still need to model out the senior living income/ expenses?
Thanks Folks
The value of the real estate is tied directly to the operations so it’s important to have a handle on the ops and make sure they are solid. Typically it’s valued on a per bed/unit or cap rate, depends on market and other factors. For valuation purposes, you focus on the EBITDAR (earning before interest tax depreciation amortization and rent) and is synonymous with NOI. Depending on product type and market cap rates range from 6-10%.
but if you are on say a triple-net basis or just owning the real estate, you would not necesasrily model the operators performance right as you would in that scenario just be a standard rent collector
Would you not model out per bed etc. if you also hard a part to play in driving the business?
I guess I am confused as to when an investor would need to model out the operations vs just value the ability to pay the lease
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I would say that you should always model and understand the operators performance and budget to make sure they can actually cover rent and have a believable budget and not just pie in the sky numbers. That being said, Senior housing is unique in which the operations drives the value of the RE but if it’s a NNN structure the lender will likely test the rent payments and make sure those can cover DSCR 1.25x+ i think.
If like one commenter posted above, that these deals trade at 6-10 cap rates, there’s truly way more room for value add here than in multifamily. A lot of players in the multifamily value add space tout their ability to drive rents better than other multifamily operators. Although maybe some of them are right, there is way more “operations” that takes place managing a 300 unit senior living complex than a 300 unit multifamily complex.
There is significantly more risk involved in senior housing than multifamily and that's why the cap rates are higher. That being said if you have a great operator you can drive real value from day one with proper expense management, staffing scheduling, vendor contracts etc. there's usually more fat to trim here.
I guess i'm just trying to figure out how to value these sites - guess it depends if the asset is either Owned alongside an Operator OR Leased through something like a Triple Net.
Is it a) Operational Business so work all the way down to EBITDA * Multiple or NOI / Cap Rate
or b) Leased: Look at EBITDARM / Rent to gauge Rent Cover. For valuation Ground Rent - Costs = NOI / Cap Rate
There's two different ways to look at it right, depending on whether the investor has a stake in the operational business or simply just freehold and leases the land.
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