A Practitioner's Guide to Rent Cover, Payor Mix, EBITDARM and What an Operating Asset Is Actually Worth
Julian R. Sterling
Someone will tell you this home is worth £16.8 million and someone else will tell
you it is worth £14.2 million, and they are looking at the same roof. One is pricing a trade and
the other is pricing a lease, and the two only agree at one particular rent cover:
1.52x. The lease in front of you is written at 1.80x.
These are the workbooks the book was written from. Every figure the book prints is
reproduced by a live formula, and each workbook ends with a sheet that compares the two
line by line.
The files
The whole book
The Care Home Model
The resident engine every figure in the book is computed from. A care home has no leases, so occupancy cannot be read off a schedule — it is built from admissions decaying against a hazard of leaving, each cohort carrying its funding source until the resident's capital runs out. 70 beds, the fee card, care hours through to loaded staff cost, the full profit and loss, the rent a cover ratio produces and the value by two routes. On the home in the book, 55 per cent of admissions arrive self-funding and 36.4 per cent of the BEDS still are. Overwrite the inputs and every figure moves.
Care_Home_Model.xlsx · XLSX · 47 KB
Chapters 5 and 6
The Payor Mix Tracker
The arithmetic of the conversion, built to take your own capital distribution and your own length of stay. It returns the occupied-bed mix behind any admissions mix, the presentation premium — £38 a week here — and how much of a fee increase the mix gives straight back, which on this home is 8 per cent of it.
Payor_Mix_Tracker.xlsx · XLSX · 19 KB
Chapters 7 and 8
The Rota and Employer Cost Calculator
Care hours per resident per day to full-time equivalents to heads to a loaded cost, with employer national insurance computed per CONTRACT rather than per equivalent — because that is how it is charged. The roster comes out 15.5 per cent bigger than the rota, and the two threshold regimes sit side by side so you can price a change before it is announced.
Rota_And_Employer_Cost.xlsx · XLSX · 11 KB
Chapters 14, 19 and 22
The Bid Sheet
The bridge from asking price to bid, the five inversions — each of which closes the gap on its own — the ranked operating levers with a warning that they do not add, and the omissions table for the facing page, with a column saying where each unpriced item can actually be found.
A Practitioner's Guide to Rent Cover, Payor Mix, EBITDARM and What an Operating Asset Is Actually Worth — Julian R. Sterling. One home underwritten completely: the resident flow,
the payor conversion, the rota, the lease, the regulator and the bid. 1,287 controls run
over the model behind it.
Blue on pale blue is an input you may edit. A yellow fill is the carrying
assumption of the sheet — the one to argue about first. Black is a formula.
Nothing is locked, protected or watermarked. There are no macros and no external links.
Each workbook ends with a sheet called Checks: the figure as the book prints
it, the figure the workbook computes, the variance and a status. If a line ever reads
“to check”, the workbook and the book have drifted apart — and the
workbook is right.
Three numbers to compute on your own home
The true average length of stay. Twelve months of admissions,
twelve months of average occupied beds, divide. Here it is 22.5 months. It will not match the
figure the home quotes, because homes compute it over residents who have left —
which excludes the long-stay residents who are still there.
The private-pay share of occupied bed-weeks. Not of admissions. On
this home the two differ by 18.6 points: 55 per cent of admissions arrive self-funding and 36.4 per cent of
the beds still are, because capital runs out and the council takes over at £273 a week
less.
Care hours per resident per day, from the payroll. Not from the
rota, and not from a percentage. Then divide the hours by 1,694 hours rather than by a contracted
year, because leave and absence have to be covered by somebody who is also paid.
One warning, because it decides the answer
Three ratios get quoted about every care home transaction: the multiple of EBITDARM
the trade is worth, the yield the investor requires on the rent, and the rent cover the
lender insists on. They are not three judgements. Cover × yield ×
multiple = 1, exactly, so any two of them fix the third. At 11.00x and 6.0 per cent the
implied cover is 1.52x — not the 1.80x in the term sheet. An investor who insists on 1.80x
at that yield is not applying a prudential standard; he is naming a price, and the price
is 9.26x of EBITDARM. Multiply the three numbers in any memorandum you are handed. If the
product is not one, somebody is holding a difference they have not been told about.
And one risk with no analogue anywhere else in property
A regulatory rating drops and admissions stop. Nothing else changes — no fee
falls, no wage rises, no resident leaves who was not going to leave anyway. The home
empties at the rate people die, bottoms at 69.6 per cent occupancy in month 6, and takes 4.0 years to
recover. The cost is £1.4 million, which is 0.92x of a year's EBITDARM, and it outweighs every
operating lever in the book put together. It is the reason this asset class is priced on
an operator and not on a building.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
Significant Risk TransferThe bank's ceiling and the investor's floor derived independently, and the narrow band of prices at which both can say yes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.