As demonstrated in some of the latest senior living acquisitions and announced development deals, there are a lot of new entrants into the industry. I’m sure these groups are well versed in underwriting commercial real estate, but how much do they understand about the specialized senior living niche? In this article, I’ll dive into the top underwriting strategies to consider before committing any capital to a senior living real estate investment.
The first, and most important segment to underwrite, is the operator, or management company. I want to understand the manager’s senior living history, past experience, senior and local leadership teams, staffing strategy, geographic concentration, acuity mix, marketing systems, litigation history, current and future capital partnerships, community ownership, and future growth plans. I want to know how many similar buildings they own and/or operate, and their performances. If it’s a new development, or turnaround community, I want to make sure the management is part of the overall plan, and compensated for the value creation (not a straight management fee). Last, I want to really dive into the culture of the management, and see if this culture transfers to the residents and staff. Every time I underwrite an operator, I’m looking for a long-term partner, and not just a one-time deal.
If the management checks all the boxes, I’ll dive into the financials. I want to look at least three years of operating history, the past few monthly rent rolls, as well as the past several months of payroll statements (position, FTEs, and wages). I want to understand the revenues and expenses on a per-resident-day basis, and look for opportunities of growth or conservation. I’ll then compare the revenues and expenses per department on a per unit and per resident basis to other communities with similar size, acuity, and geography. I place little to no weight on a sellers or broker’s proforma, but I spend a good amount of time working with the new manager on their year one proforma/budget (including any marketing and staffing changes). I want to make sure everyone is on the same page of future performance, before the capital is deployed. Last, I want to get a solid understanding on any development/redevelopment costs, timelines, and financial impacts.
The next segment I’ll spend ample time on is underwriting and understanding the local market. I’ll look at the calculated supply/demand, penetration rates, and unmet beds from any recently completed appraisals or market studies. I’ll call the local planning board to discuss any applications for new senior living development. I’ll look at household incomes and house values in the immediate area, as well as survey the adult children demographics in the overall market. I’ll utilize NIC MAP (if market is covered) as well as other senior living reporting agencies to analyze occupancies, absorption, rates, and rate growth on a macro and micro level. Last, I’ll spend most time understanding each competitive community in the market. I want to know how my community ranks to each competitive community in terms of price, service, quality, amenities, location, and reputation.
If all the previous three segments check out, I’ll finally spend some time on the actual real estate. I’ll want to know the year it was built, renovated / converted, and spend time understanding the unit count, unit square footages, amenities, dining room size(s), offered amenity rooms, hallway sizes, acuity room locations, courtyards, parking, traffic flow, nurse call system, FF&E / flooring replacement history, A/C systems, etc. I’ll want to meet with the Executive Director to discuss desired unit types, amenity room utilization, and any ‘wish list’ items. I’ll also want to dig into the past several years of capital expenditures, along with the current cap ex budget, to get a realistic plan for the future. Last, I’ll spend time understanding the current and future technology implementation at the community.
Overall, there are many things to consider and underwrite before making any senior living investment decision. However, applying some of these senior living strategies can help ensure your senior living investment is a success. If you have any questions, or need help with a senior living investment, feel free to contact me.
Scott McCorvie leverages 20 years of senior living real estate investment, development, and operations experience to improve a rapidly growing and changing market.