Underwrote labor at 42 percent of revenue on a 52-unit AL recap. It ran 54 and the preferred stopped.
$150k LP check into a recapitalization of a 52-unit assisted living community in a secondary market. Sponsor had two others like it, real operating history, decent reporting. I asked what I thought were the right questions.
The pro forma: occupancy 78 to 92 over 24 months, rate growth 4 percent a year, labor at 42 percent of revenue holding flat, 6 percent preferred paid quarterly, refi in year three, five to seven year hold.
Demand was never the problem. Occupancy hit 89 by month 20 and touched 92 briefly. The tailwind everybody in this room talks about showed up exactly as advertised.
Labor did not hold at 42. It ran 54 within eighteen months. Two things drove it. Caregiver turnover was 22 percent a quarter at one point, and every gap got filled with contract staff billed at roughly 1.9 times the equivalent base wage plus travel. And the state adjusted minimum staffing expectations mid-hold, which changed the required hours per resident day. Staffing rules are set state by state and can move without much notice, so anybody underwriting this should ask what's pending in that specific state rather than assuming the schedule is fixed.
A twelve point swing on a revenue base around $9.8 million is roughly $1.2 million a year. That's the whole preferred and then some. Distributions ran five quarters and stopped for nine. Refi didn't clear coverage, sponsor called capital, I didn't fund, and my share got diluted under a mechanic I had read but had not modeled. Sale in year five returned $104k on the $150k.
What I'd do differently. Underwrite labor as dollars per resident day and stress it 20 percent, instead of carrying it as a percentage of revenue where rate growth hides the damage. Require agency hours and agency dollars as their own line in monthly reporting, separate from payroll, because blended payroll conceals the burn until it's a year old. And model the dilution math on a capital call I don't fund at the moment I'm signing, not the day the call arrives.
The demographics were right. I was wrong about the cost of the people delivering the care.