The SeniorCare Investor: Assisted Living and Independent Market

From the December 2009 Issue of the SeniorCare Investor:

There have not been many sales of strictly independent living communities this year, and although the volume of transactions in this sector is always relatively low, this has been a particularly slow year.  One large transaction, however, did close recently.  This 197-unit community is located in Scottsdale, Arizona and was constructed in 2007.  After a great start, with occupancy reaching 70% in seven months (20 move-ins per month), the owners had a difficult time moving beyond that level as the economy began to deteriorate.  In fact, the census was still near 70% at the time of sale.

 At the current occupancy level, revenues and EBITDA are approximately $4.2 million and $1.2 million, respectively.  With an all-cash purchase price of $24.0 million, that comes to $121,800 per unit and a 5% cap rate on in-place cash flow.  That, we suspect, is not quite what the buyer, Carlsbad, California-based West Living, has in mind for their return on investment.  This community has four distinct wings, and while we don’t know whether one of the wings is mostly empty, that often happens with new developments.  The average in-house rate for independent living is about $2,750 per month (before any discounts) compared with a street rate of $3,000 per month.  That obviously indicates a certain degree of market softness.  It would make financial and market sense to utilize one of the wings for the more need-driven assisted living, and that would change nearly 50 units to the higher level of care. 

 Since some of the units are quite large—one-bedrooms go up to 840 square feet and two-bedrooms are up to 1,296 square feet—there is also the possibility of some of the units being used with double occupancy.  If you assume that assisted living rates start at a 30% premium to the current average rate received, when stabilized the additional revenues would be up to $1.9 million with at least half that going to the bottom line.  On top of that, as levels of care increased, additional revenues and cash flow would follow.  Admittedly, we do not know the demand for assisted living services in the Scottsdale market, but the rate we used is probably on the low side and may be a way to drive demand, at least initially.  Leisure Care has been the manager and will presumably stay on into 2010, but we hear that newly-formed West Living may want to start its own management company.  Lisa Widmier of VantagePointe Capital Management & Advisory acted as the financial advisor to both the buyer and seller in the transaction.


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