Senior Housing Question

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!

Comments (33)

Jan 14, 2018

Check out CBRE's public report on the Senior Housing Market. A new product type is being offered and is extremely popular in large markets with 55+ active living assets which have less risk than your conventional senior oriented property that provides meals/service/healthcare/etc.

Best Response
Jan 15, 2018

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.

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Feb 12, 2018


Is there something similar to a STR Host report (or PKF) that breaks down averages for operating expenses line items that can be used in Senior Housing underwriting?

Being located in Nashville, with so much healthcare surrounding me, I feel like I should do more to understand this market. Thanks

Feb 12, 2018

would also be interested in a OM detailing all the financials.

Feb 12, 2018

Senior housing is heavily lacking in the data department compared to other property types, so there's nothing like a STR Host report that I know of. 15 years ago there was hardly any data on senior housing markets, so it wasn't a very institutional industry compared to office/retail. But that's been improving recently

Buyers/lenders are much more concerned with who operates the property than they are how a property's nursing salary expense deviates from the average in that market. And again I don't think that data point is available anyway. They will definitely compare overall expense ratios / margins though

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Oct 19, 2019

For rental can use NIC. The coverage is limited to only primary markets...but it's helpful.

Nov 25, 2018

How do you properly comp out the expenses?

I was looking at a deal that had historical expenses with one operator, and now they have a new operator and their expenses are totally different. It seems like everyone categorizes things into different sections. Same with the appraisal.

For example: the previous operator had all of their salaries and wages for all departments (admin, food and bev, housekeeping, etc) in their "payroll" line item, but a new operator has salaries and wages for food & bev within the food & bev category.

How do you best try to compare these without going through paralysis by analysis?

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Nov 25, 2018

You should have a template that you put all borrowers / target into. Sometimes there's nothing you can do if, for example, the operator doesn't break out food and bev salaries and physical food costs. But if they only have one single line item for ALL salaries then they probably have a more detailed financial statement somewhere. Or maybe they're very inexperienced.

I never ran into a property that didn't break out salaries after we asked for more detailed statements, but we mostly dealt with institutional borrowers

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Dec 5, 2018

All healthcare facilities are required to submit annual Medicare Cost Reports when they have medicare patients given that medicare generally tends to reimburse on a cost + %. This information is available publicly from CMS' website so you should easily be able to pull comp facilities and get their entire annual financials and operating stats.

Also on a valuation term, I would like at a $/bed for the facility in much the same way you value hotel assets. Lastly, if the facility is structured as a lease, be sure to compare ebitdar/lease (lease coverage ratio) to get a sense of what's a fair lease rate for facilities as opposed to one that is owned/managed by a 3rd party operating company.

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Nov 29, 2018

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.

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Dec 4, 2018

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.

As someone working in IS specifically for senior housing I can definitely say that that's not true. Buyers shy away from facilities with Medicare and Medicaid payors because the methods of reimbursement are oftentimes difficult to understand, navigate, and subject to whatever fluctuations in laws that the geniuses in Washington or the state capitol decide to change. Especially in today's environment with a GOP admin that wants to cut healthcare costs whenever possible, buyers and operators want seniors who have sold their previous homes and are paying for the rent from those proceeds. They're also preferred because if they suddenly stop paying rent the operator/owner can pursue the tenant through the court system, which is significantly less complicated and less costly than trying to figure out how to get a reimbursement through the bureaucratic clusterf*ck of the Medicare/Medicaid system.

Dec 4, 2018

I should also add that senior housing properties are not low margin at all. Most properties I model have NOI margins that are easily in the mid 20s-mid 40s range (for CORE, Class A properties). If it's a smaller facility in a submarket or rural area (or they're located in Dallas cause that market's screwed) then they might be seeing single-digit margins.

Feb 12, 2018

PM me.

Feb 12, 2018

make sure that you have a keg delivery service. College seniors love beer

Feb 12, 2018

I work in that space. PM me if you want to talk.

Nov 30, 2018


Dec 5, 2018

I've been reading how a big issue in this industry is the fact better healthcare and more active boomers have resulted in more boomers living out later years in their home as opposed to assisted-living facilities. Can anyone speak to this trend? Obviously long-term the demand is there but I found this trend interesting given anecdotal trends I see in my friends grandparents (extremely active + healthy) and society overall moving in a direction that promotes more active lifestyles.

Dec 5, 2018

Can attest this. Not sure how it transfers across the broader market, or more isolated markets, but it's definitely a point of topic in our circle.

Summarized convo from different operators/sales and marketing staff: "We've been trying to get seniors to move in earlier than they think they need to [because of @Pocket_Rockets very anecdote] but we're seeing push back. Seniors are living at home longer with family and friends, and then it's too late to move in to our independent living community and they skip right to a facility with higher level of care (AL/MC)."

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Dec 6, 2018

you are absolutely right
The trend now favoring Independent Living/Seniors Apartments for new builds to capture younger and healthier residents. Quebec (Canada) tends to be a step ahead given the higher capture rate in that province, you can look at what Reseau Selection is doing to give you an idea of where the sector is going in North America. They are building a CAD$1 bln intergenerational mixed-used neighborhood and just completed a 30-storey luxury seniors apartments building for example. The line between seniors housing owner and multifamily developer is fading imo, you will see a lot of JV partnerships between the two going forward.

Jan 10, 2019

How does underwriting private pay work differently than medicare/medicaid?

Oct 18, 2019

Can anyone shed light on the different type of senior living models and their pros and cons? I have heard before that there are some communities where a resident "buys-in", effectively purchasing the property, and then pays a monthly fee similar to an HOA fee each month. On the other hand, I've heard that there's a rental model where basically a resident would pay a monthly "rent" on top of other base fees the community charges to live there. Is there a gravitation towards one model over In the industry? Would be interested in hearing from those that work on this product type to share what their experiences have been.

Oct 19, 2019

Been a while for me, but I believe the favorite model is a monthly rent + care charge depending on the level of care needed. For memory care, it's usually just one number that fluctuates on the amount of care needed.

I believe firms are moving away from the condo structure where the tenant "buys in" to the property and the deposit is either partially refundable or non refundable etc.

Oct 19, 2019

For rental can use NIC. The coverage is limited to only primary markets...but it's helpful.

Oct 19, 2019

I'll add some thoughts...

The 55+ active adult product is something that's somewhat new in the space. Greystar's Overture product is an example. The developments will range between 140-180 units. Although it's a different product from assisted living...the average age of the residents is similar...between 70-75 years old.

The best type of product is a mix of assisted living...memory care...and independent living. These developments will average anywhere between 120-220 units. The operating costs are substantial and differ by state. Each state has different requirements for level of staffing and the training level of staff.

Speaking of states...some states require certificates of need (CON) before you can develop a new senior housing asset. I won't go into too much detail about the CON process...but that generally puts several states off limits for new product.

Your operating costs will be between 41-46%. You can get exit rate comps from RealPage. The cap rates for senior are much higher than that for core MF assets. So you must keep that in mind. However...a good deal will be a cash flow juggernaut.

Personally...I would stay away from skilled nursing. Too much regulation is involved.

In terms of underwriting...most developers will use a third party market research firm. You use forward looking demographic data from Neilson to determine your capture rate and to determine what percentage of residents over the age of 75 can qualify financially in the local market area.

If you want to know whether the mix of assisted living...memory care...and independent living is a good investment...consider this: Goldman provides both equity and the debt on these types of deals. That is...they supply almost the entire capital stack for each individual deal.

Just some other underwriting need to make sure to include FF&E costs along with 100% of the utility costs.

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Oct 20, 2019