Assisted Living - Pros and Cons

My firm is considering its first ground-up senior housing/assisted living development on a site in a dense area but with lower walkability and rents.

It seems like a very profitable industry, but the operators are usually separate from ownership, which can create issues and misaligned incentives.

For those in the industry, any advice? Advantages/disadvantages of the business?

Comments (38)

Apr 22, 2020 - 4:03am

it's not going away and I suspect this pandemic will have somewhat of a short term effect. While Senior Living has quite the stigma, it's a necessary evil as Americans culturally do not take care of their elderly.

On a macro level, there's been quite a few PE players getting into the senior living game. We all know how those folks roll so only a matter of time before some scandal hits the news about a cost cutting endeavor killing Gramps.The media will assuredly go out of its way to kick the PE guys in the nuts every opportunity they get so it's simply a matter of when. Then the politicreatures will come out of the woodwork to pass more laws and I think that will be the big unknown.

I've had too much to drink so I'm going to bed but that's my worthless 2cents

Apr 23, 2020 - 3:24pm

Dr. Rahma Dikhinmahas:

Curious about this, what are their alternatives realistically

In-home health care or 55+ "Villages" with various levels of service based on need.

Commercial Real Estate Developer

Apr 22, 2020 - 9:54am

Though it may be over-supplied today in some markets, Senior Housing (IL/AL/MC) is definitely not going away. Projected growth of the seniors population in the next couple of decades is huge.

COVID impact on new admissions is/will take place because of the stigma. It's difficult or impossible to take new residents now because there is not adequate information and testing to insure that they are not taking in infected residents. So far, the largest amount of deaths have been in Skilled Nursing facilities. Once we get through the next 12-18 months people will need to weigh home care vs Senior Housing. Cons of home healthcare include high staff turnover and risk of cross contamination as providers are visiting multiple homes in most cases.

In developing, the operators are a big risk. Those outfits that develop and operate are at a big advantage. A mediocre operator can kill performance. Lease-up takes much longer than multifamily and can be crushed by poor marketing and bad reviews from skimping on service in the early lease-up stage.

Do your homework, and then do some more.

Apr 22, 2020 - 9:55am

It is a risky asset class but the rewards can also be high. As an LP we like the space but finding a good deal is harder than your typical apartment project. Covid 19 is not having a huge impact on our portfolio except that visitors aren't allowed in the facility. We've been very lucky to have zero deaths across 5 properties. Our deals in lease-up are still signing leases through virtual tours which really surprised us. Adult kids have realized during the quarantine that they can't take care of their parents anymore.
Having the right developer/operator partnership is one of the most important aspects of a deal for us. As a new developer to the space you'll want the best operating to partner you can find. Make sure they have a track record of leasing up new facilities. They can also help with design aspects you might not think of as a first time developer, like making sure the memory care wing has a circular corridor because the tenants like walking and get really frustrated when they hit a dead end. They can refer you to a good architect who knows the local code for senior living. And I can't stress this enough, make sure everything is ADA compliant, there are lawyers out there who pretend to tour properties looking for noncompliance and will sue you for it.
Our operators have invested in the GP on every deal we've been apart of. It's just something most LPs like to see but doesn't happen on every deal.
Our favorite deals have IL, AL and MC units which allows for "Aging in place". The IL and AL units will lease up first followed by MC units as AL tenants start going down that slippery slope of dementia. Lease up will be slow, 5-10 units a month. We underwrite 5 year holds and beef up the interest reserve/op deficit budget to account for this.
Your rent comps are super important. Know every competitor in a 10 mile radius, and try to get absorption info on new deals. At the end of the day you're selling to the adult children so you need to have every amenity your comps have, even though most amenities don't get used. It's crazy but we've found that a big selling point is having a full sized fridge in the AL units even though most tenants don't even use them. Walk-ability is not important to the tenants but it might be to their children. At they end of the day the kids just want peace-of-mind that their parents have the best quality of life possible.
Right now my shop is holding off on new deals but we're not out of the space completely, just hitting pause while the dust settles. Some markets are highly overbuilt right now but we still think that the aging population will create enough demand in certain locations.

Apr 23, 2020 - 12:37am

Thanks for the input. As designed the project only has 80% AL/ 20% MC units, no IL, due to the poor walkability of the surrounding area. Is this a mistake or would this just produce a higher EBITDA with lower margins - maybe around 40%? We think there is enough demand for those two product types.

Also, we are hesitant to allow the Op to invest. What safeguards are there in case they can't perform? Would we have to buy their share back if we wanted to change operators?

Most Helpful
Apr 22, 2020 - 2:13pm

Pretty much agree with HotelCRE and SB's comments above. Returns are generally higher than multifamily but obviously it comes with a higher degree of risk due to the operationally intensive nature of the asset class. Industry is getting beaten up a little bit right now due to COVID but that will pass, I agree with SB that this may actually spur some folks on the fence about moving themselves (or their parents) into making the leap. National media loves to vilify the industry as it's an easy target, particularly skilled nursing because it has public funding, but I think the industry has actually done a fairly good job navigating the crisis, especially considering that senior living providers have gotten completely de-prioritized in terms of funding.

Operators are key here, bad ones can kill projects. Proven track record in general should be a given, but ideally they'll have a track record in the region/market of your project. These things operate in a very local manner so the operator having solid experience in the region/market is a huge plus. Usually best to have a project with varying acuity levels (IL/AL, AL/MC, IL/AL/MC), but critical to ensure that the design properly separates the different resident populations. To use a simple example, IL residents, who are usually still pretty active, generally wouldn't want to share a dining room, courtyard, etc. with higher-acuity folks such as the MC residents. So while those projects are definitely preferred, have to thoughtfully design a building in a way that will appeal to all your different resident types. Getting operators in early on in the design process can be immensely helpful.

In terms of structure with operators I've seen it done a variety of ways. Operators investing in the GP obviously keeps incentives aligned, but you can also use things like (i) incentivized management fee structures where they get a kicker on any NOI above a certain hurdle (on top of their base management fee) and (ii) exit fees where they get a payout if project reaches return thresholds. Keeping the operator out of the GP can keep the structure cleaner from a developer's perspective, but if you do that and use something like an incentivized management fee to try and keep everyone aligned, then you'll have to be able to sniff out if an operator is sandbagging on budget which can be tough if you're new to the space.

In terms of market research SB hit the nail on the head, we diligence the shit out of our rental comps. An unfortunate part of the seniors space is the relative lack of transparency compared to something like multifamily, can't just find everyone's rates on the internet. Generally will require secret-shopping, both by phone and by touring the community, to get pricing for your full comp set. Important to research not only base rents, but also how they charge for care fees (some go higher base rents with inclusive care, some lower base rents with add-on care, etc.). We spend the bulk of our time researching comps on the occupancy and revenue side and then we'll let our operator really dig into the wages (by far the largest expense for senior living) and other expenses, with some appropriate back and forth with us until we're at an NOI number we all think is fair. Don't get too greedy on lease-up, should be 18-30 months depending on the size and community type.

Zooming out, advantages are that when you know what you're doing and can identify the right operating partners, returns can be exceptional. Data from NCREIF over the past few years has shown returns for senior housing have been superior to almost all other property types, I think seniors and industrial have bounced back and forth between 1 and 2. While not recession-proof, the industry does tend to be recession-resistant due to it being more need-based than demand-based as you move up the acuity spectrum. Right now is a little different since it's the pandemic itself that's beating up the industry, but when you look at great financial crisis senior housing did very well relative to what happened to other real estate classes. I also just think it's a really interesting space due to the operational component of it.

I've hinted at disadvantages, primarily that a deal can go belly-up quick with the wrong operator. More capital has been flowing into the space the past few years, but still a more limited pool of investors (both debt and equity) when compared to more traditional real estate classes so those terms can be less favorable. Over-development has been an issue in some markets in recent years, but the combination of COVID slowing construction along with the overwhelming demographics should make this less of a concern moving forward. Labor market can be a blood bath (maybe less so with COVID) as generally providers will have to go a few bucks higher than the surrounding competition such as retail or restaurants to keep good talent, not many people would rather do things like clean up shit than work at a dept. store.

Overall I'm bullish on the sector going forward. Main advice would be know your market and REALLY know your operator.

  • 6
Apr 23, 2020 - 12:44am

Thanks for the input. As designed the project only has 80% AL/ 20% MC units, no IL, due to the poor walkability of the surrounding area. Is this a mistake or would this just produce a higher EBITDA with lower margins - maybe around 40%? We think there is enough demand for those two product types.

Also, we are hesitant to allow the Op to invest. What safeguards are there in case they can't perform? Would we have to buy their share back if we wanted to change operators?

Apr 23, 2020 - 12:15pm

Definitely not a mistake - AL/MC projects with no IL are very common, the 80%/20% split between AL and MC is right around the sweet spot too. And correct, you'll likely have a higher EBITDA on a per unit basis than if you had IL but the % margin will be lower. 40% is a reasonable stabilized margin assuming it's a solid market.

This is the tricky part of allowing the operator to invest in the GP - the docs need to reflect that as developer you full retain decision-making control (or at least I assume that's what you want) and you'd have to legislate some terms of non-performance that would allow you to boot them, such as a number of consecutive periods where they miss budget. If you did kick them out I assume there would be some buyout calculation, not that familiar with this though. As I mentioned above there are other ways to align incentives with an operator without allowing them to invest in the GP, but will note this has the potential to limit your pool of operators as some groups will want that GP stake and subsequent upside.

  • 2
Apr 22, 2020 - 9:12pm

Been following it a bit from a public investing perspective, and that has also led to some discussions with folks in the private market too.

The projected long term occupancies are looking pretty great, and the wealth level in that age bracket is high.

That said, there's been a ton of development the last ~5 years and it's only recently started to level off. Projections I've seen are 90% occupancy by 2025 with pretty modest starts. But I think there's a ton of regional variation so if you can pick those spots right then maybe it projects closer to mid 90's and you have a lot of room.

Still learning, will be curious to see what others add here.

Eligible population projecting to 60m people so covid deaths won't be directly impactful to capacity.

Apr 23, 2020 - 8:27pm

Most other comments cover it from the high-level overview side and quick P&Cs analysis. A few additional sources if you want to dive in deep below,

Rating agencies (M/S/F): Only two of the agencies really rate bonds - I forgot the two off the top of my head. Search any Senior/Assisted Living criteria and read thoroughly. PDF around to the team - very insightful. The fundamentals to the rating process will provide you with the most in depth understanding of the senior living industry as well as the key "what matters" metrics that develop a rating after the construction phase. Remember, rating agencies are rating based on an issuers ability to pay - important all around. the agencies also release annual industry insights/slide decks/trends sort of stuff, so some digging and key word searching will provide a ton of resources and broad data points for you to digest. It is a pain to search for, but doable. I remember one of the sites (Fitch, maybe). Switched from calling it "senior living" to something like "continuing care." Pain in the ass to track annual reports YoY when they randomly change the sector name.

You can also just search key words and the sites will auto populate issuers that are rated. Most of the reports tied to older projects will show you all sorts of great geographical data and trends that influence the outlook and assignment of rating. Search for issuers/comps in your target region.

Lastly, another angle to consider would be to pull a few OS' from EMMA. Can be tricky to find since a lot of them are "muni-HY" (unrated, smaller deal size, smaller firms leading the deals). A number of these things snag a muni designations due to ground leases originating from the county, public purpose etc. Just google any of the big industry names. They should have some muni related debt on EMMA or the rating agency sites. Can be a little annoying since they issue through conduits and developer type LLC names, but they are out there.

I was monitoring a handful of these things at the beginning of this and have not noticed a real impact quite yet. A handful of defaults recently. Similar to healthcare - Higher costs due to mitigation and spending pinching returns. Most are covered through the next few debt service payment cycles and those in construction are moving along since construction is "essential." Most defaults & disclosures I found were un-related or smelled of the sneaky developer getting out of a deal and blaming COVID or some sort of way to try not to pay rent. One positive was the deaths provide a room to lock in a higher rate tenant.

Apr 23, 2020 - 9:11pm

No worries on the cash - Shoot me a PM so I know how to get a hold of you in a few days. Might take a day or two to figure out a way to export these things without my seniors names plastered all over it.

Here is the most recent article released on my terminal. Just reloaded at the top of my news search when I keyed in senior living:

"The Henry Ford Village, a 1,038-bed
continuing care retirement community in Dearborn, Michigan, is
drawing on reserves to make its May 15 debt payment, citing
extraordinary expenses from the outbreak of the Covid-19
The non-profit, which has about $50 million in outstanding
debt, reported that 25 of its 900 residents had tested positive
for the virus through April 21 and 9 had died. Fifteen employees
have also tested positive.
The Covid-19 outbreak has hit the senior living sector hard
given the vulnerable, confined populations. Confirmed cases at
nursing homes has surpassed 3,500 according to, an
independent database. Containing the virus has led to increased
spending on staff, overtime and protective equipment. More than
$30 billion of municipal bonds have been issued for senior
living facilities, according to data compiled by Bloomberg.
Henry Ford Village will draw about $342,000 from its debt
service reserve to help make a $1.9 million payment due May 15,
according to bond trustee UMB Bank N.A. The borrower, which will
receive a loan through the federal Payroll Protection Program,
will have about $4.3 million left in its debt service reserve.
It's uncertain when Henry Ford Village will be able to deposit
money with the trustee to make future payments on the bonds, UMB
Eleven senior living projects have already disclosed
payment defaults in 2020, almost as many as occurred in all of
2019, according to Municipal Market Analytics."

Like I said, draw on reserves is expected with the high costs environment. Still have some cash to get them through a few payment cycles and can replenish reserves with whatever gov funding they get. Do some searching on Bloomberg News. Probably a bunch of market commentary at the moment.

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