• Unit occupancy rate. Compare occupied residences against available ones at the end of the month, or count number of resident days for the month. It is easier to use actual numbers rather than per- centages. This number is also critical to financials when offering a shared or companion rate
for individuals. The
care-staffing schedule and per-resident, per-day cost will need to be adjusted as occupancy of actual resident fluctuates.
• Food costs. This can be counted as be- ginning inventory plus purchases minus ending inventory; the idea is to reflect actual food consumed during the month.
• Net operating income (NOI). Revenue from the property minus operating ex- penses. This is also known as EBITDA (earnings before interest, taxes, depreci- ation and amortizations).
• Days cash-on-hand. Your cash cushion. Divide the month-end cash balance by daily operating expenses for the month.
• Operating expense ratio. The percent- age of revenue used to pay all operating expenses. This number can reveal over- all efficiency of a community.
• Payroll expense ratio. The percentage of revenue used to pay all payroll expenses. Knowing this indicates how well staffing costs are being managed. There could also be other costs that are associated with staffing, such as training (often re- quired by state agencies), staff turnover (cost of hiring a new employee), and special benefits that could be offered by the company overseeing the community.
Liabilities What you owe: Loans, interest, credit, wages to be paid. If you’ve been paid for a service you haven’t provided yet, it’s both an asset and a liability.
Mezzanine financing Just like that odd level between the lobby and the apartments that you have to cross in some buildings, mezzanine financing bridg- es a gap. It’s a hybrid of debt and equity funding, with the lender having an option to turn it all into equity if there’s a default. A senior living provider that wants to grow or build new communities may turn to this; it
often involves existing relationships. It offers high returns but carries high risk as well.
Net If revenues exceed expenses, that’s a net income, or profit, for that period of time. If expenses exceed revenues, that’s a net loss. Net is also referred to as the bottom line.
Not-for-profit A not-for-profit organization may make money, but what it makes is plowed back into the organization, so it can do an even better job at improving literacy or ensuring clean water. Any income isn’t supposed to go to members, directors, or officers, as it might in a for-profit company. Not-for-profit organiza- tions are usually tax-exempt, but they must prove some basics, such as their benefit to the community, to get and keep that status.
Private equity (real estate) This type of investment pulls together money to buy, finance, and own properties. The idea is to find a property that needs an injection of money and business savvy, help it out, and sell it for more than you bought it for—something like flipping houses on a much grander scale. Like flipping, it can net some pretty large returns—and involves some risk. So-called “vulture capital” pri- vate equity firms go after seriously distressed properties and strip the bones. But the most popular form is the leveraged buyout, in which the new owners want to get the busi- ness or property healthy and performing to its best. With increasing private equity interest in senior living comes concern that investors will expect booming returns, fast, and not understand the care-based nature of the industry. But with a leader experi- enced in senior living guiding private equity moves, investors can be educated toward realistic expectations and appreciation of the business value of senior living.
Profit and loss (P&L) statement, also known as income statement This shows profitability during a set period of time (e.g., monthly), capturing revenues and expenses incurred during that period, not necessarily the cash coming in and going out.
Real Estate Investment Trust A REIT (pronounced REET) is a company that owns and usually operates real estate that produces income. Senior living is a spe- cial area of concentration for some REITs. A REIT works somewhat like the mutual fund in your 401k: It’s a way many working people can make diversified investments in big things, those things being commercial, income-producing property in this case. Be- cause the REIT is invested in a community, it’s to its own and its investors advantage to help ensure that community is high-quality and operated with best practices.
Return on Investment (ROI) This term is now used casually to indicate any kind of benefit that comes from putting in some kind of effort. But technically, it’s a way to determine if an investment is effi- cient—if you get more bang for your buck. The proper formula to calculate ROI goes like this: ROI equals the current value of the investment minus the cost of the invest- ment, divided by the cost of the investment. For instance, if I bought a book at a yard sale for $10, then sold it online for $12, the ROI would be 20 percent: $12 minus $10 is $2, and $2 divided by $10 is 0.20. But ROI works just as well as a concept and for considering intangibles: If I thought the book was terrible, my ROI would be greater than 20 percent, because I could figure in the joy of getting rid of it. Or if I loved the book and then gave it to a friend, the ROI would be greater as well, because talking about books with friends is worth far more than $10.
Stabilized occupancy A senior living community is said to be “sta- bilized,” according to NIC, if it is at least two years old, or, if less than two years old, has had occupancy of at least 95 percent since its opening.
Triple net lease The tenant covers property taxes (1), building insurance (2), and maintenance and repairs (3)—that’s where the triple comes from. In- vestors have typically seen these as offering steady income with fewer worries.
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