Aligning Senior Living Owners and Operators

Vetting 3rd party operators.

Maximizing Net Operating Income (NOI) in the senior living industry starts with the vetting process of third-party operators. The evaluation criteria are the same for both a prospective operator or an incumbent. Can the operator(s) in question consistently hit budgeted NOI goals?

Start your analysis by reviewing a trailing twelve-month (T-12) income statement. The T-12 income statement should include detailed budget versus actual line items for the same period. For this analysis, you can eliminate property taxes, insurance and utilities. The remaining line items with minor exception are directly controllable by an operator. Your operator must be able to illustrate their ability to control the controllable expenses at a high level.

You should never accept a -4% variance or greater NOI performance in a twelve (12) month period. This is specifically important for the identified controllable expenses. Every 1% of NOI performance has exponential consequences on cashflow and terminal values. Why be concerned over 1%?

If you accept a 1% budgeted NOI shortfall over a five (5) year period, this “NOI leakage” may reduce total projected profits. The profit reduction could be $765,000+/- during that timeframe. This estimation is for a sixty (60) unit $18.6M (30% equity) investment. Additionally, if you accept a 9.5% NOI shortfall over a ten (10) year period for the same investment you risk losing 100% or your equity partners entire initial investment.

The proposed NOI expectations above are very realistic for class A and B assets in primary and or secondary markets. It also assumes that the facilities have been properly maintained. Both common areas and rooms are in a condition commensurate with average market rates.

If your operator meets or exceeds the above NOI criteria you are ready for the next step and the subject of our next blog. Implementing an equitable management agreement. If you choose to retain or are contractually obligated to an under performing operator you might consider advisory services from SeniorLivingAlignment.com to protect every 1% of your NOI. Click the ‘Learn More’ button on our home page to inquire about our free no obligation consultation.