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Even in markets that have reached temporary saturation for assisted living, many of
the national operators have maintained 88% occupancy rates or better. There is
considerable evidence that the more sophisticated companies with newer properties
are taking market share from the smaller, older properties. There is a strong
argument that adding independent living properties to a multi-family portfolio will
decrease risk for a given level of return or increases return for a given level of risk,
since these assets are not highly correlated.
4. Industry Cost Structure Creates Excess Returns for Additions and Expansions
The industry's high fixed-cost structure, which can create problems where there is a
large drop in occupancy, also provides significant, value-added opportunities. Small
additions to a property can create significant increases to net operating income and
produce leveraged internal rates of return well over 30% with little additional risk to
the property. For example, an existing 100-unit independent living property that
adds a 30-unit assisted living wing has very little fixed or variable operating
expense other than incremental nurse's aide wages, utilities and food. Due to the
extremely high revenue per unit (unlike apartments), there is a significant increase
to net operating income.
In this specific example, NOI can increase by $500,000 per year on an additional
equity investment of $2,500,000 above the equity investment in the property,
producing a doubling in the value of the additional equity investment at an 11%
capitalization rate.
5. The Current Market is Inefficient which Provides Opportunities To Make AboveMarket Returns Through Sophisticated Research
Unlike the other property types which have several national information reporting
and data tracking services at both the national and local market levels, senior
housing has been slow to develop these efforts.