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Deals & Dealmakers

Why capital will always chase life cycle properties

By Michael Edery, principal, Paradigm Commercial Real Estate, LLC

At first blush, it would appear that the real estate industry has only three sectors to it; retail, office, and multi-family.

Photo by Ulrich Joho/ Flickr
Photo by Ulrich Joho/ Flickr

Every now and again, we read about the industrial sector, and in the current climate, about hotels, because it’s hot.

When did we ever hear about the skilled nursing sector (SNF)? Or how about the assisted living sector (ALF)? What about the Independent living (IL) sector? Ok, that was a rhetorical question, but the real answer is, very rarely.

Interestingly, however, life cycle properties, as we are wont to call them, are a huge part of our economy, and a thriving industry in and of itself.

As a modest example, there are close to 40 SNF in New York’s Nassau County alone, some with many hundreds of beds.

Nationally, there are 15,401 SNFs, according to the Kaiser Family Foundation, with California clocking in at 1,178 homes on the high side, and Alaska closing in at 18 on the low side. In total, there are, give or take, 1.4 million residents in nursing homes, and about 720,000 in residential care communities.

According to a 2013 CDC report there are 22,000 ALFs nationwide.

Interestingly, cap rates for SNF purchases are at 13 percent, historical norms for the SNF space.

When properly leveraged, that ROI increases exponentially.

So why has this sector been somewhat neglected by your average real estate operator?

The answer is quite simple. Given the fact that SNFs are a non-urgent care provider of health care, the operations thereof have many moving parts, and thus are a business of their own.

There are licensure issues, staffing of all kinds of natures; OT, PT, RD’s, etc, all of which are required whether your home has 50 beds, or 500 beds.

So as such, because of the economies of scale, unless the homes are pretty much adjacent to each other, it would not behoove one to buy a facility with less than 100-120 beds.

Another intimidating factor which lies here is that, in light of the fact that SNFs are so operating-cost heavy, it typically translates into an expense-to-income ratio of about .85:1, whereas your typical multifamily building will operate at an expense-to-income ratio of .45:1, give or take.

To this end, if one’s occupancy rate, or censuses, as it’s called in the SNF world, aren’t in the high 90’s, it can be a tough sell.

Now, one would think that people are competing to get in, just like they are in NYC rental apartments. Not true.

SNF’s, just like hotels, clothing retailers, and mortgage brokers, actually compete for business, by soliciting acute care facilities, doctors and other sources of long term care patients, by hosting lavish introductory parties, and grand openings.

The logic is simple. Even though no one wants to spend any time in a nursing home, no matter how nice it is, it is nonetheless a necessary evil, which won’t go away.

Therefore, all of the homes will compete for the same resident-base all looking for a home.

However, not unlike a luxury condo building, which will have a slightly less limited buyer base, but not limitless, and therefore will be amenitized to the hilt, a nursing home, too, is given hotel-like finishes and amenities which are geared towards the aging population that benefits from it.

Typically, there are three payor sources for skilled nursing care. Medicare, 2) Medicaid, 3) private pay.

Medicare and Medicaid payments vary from State to State, and often times within counties WITHIN a State, just like private pay and insurance payors will vary from State to State.

As an example, NYS reimbursement rates for Nassau and Suffolk Counties are $407 per day, while in the Central Region of NYS (Jefferson, Cayuga, Onondaga, etc) rate will be $288 per day, or about 30% less.

Another factor to consider is that Medicare reimbursement rates, which are typically almost twice that of Medicaid reimbursements, are limited to 100 days a year per patient, which essentially means that if one were to pray that he would be blessed with only Care patients, he can expect to have turnover every 100 days.

That is why one will find, that when looking at a census report, one will see Caid at about 80 percent of the occupancy, and Care at about 20 percent of the occupancy. Overall occupancy rates, depending on the region, are typically in the high 80 percent to the Low 90s.

That said, if one maintains solid occupancy at the metrics mentioned above, he will have a profitable operation that can be leveraged properly.

One would be surprised to know how much capital is chasing health care and even more surprised to know that this sector isn’t always flavor of the month by investors.

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