A care home has three break-even occupancies, more than twenty-five points apart, and the one in the sale memorandum is the one that ignores the rent.
Divide the fixed costs plus the rent times the required cover by the contribution each occupied bed makes, then by the number of beds: occupancy = (fixed costs + rent × cover) ÷ (contribution per bed × beds). On an illustrative 80-bed home trading at 90 per cent, EBITDARM breaks even at 60.0 per cent, the rent is just paid at 78.4 per cent, and a 1.40x cover covenant bites at 85.8 per cent: 4.2 points below where the home trades.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A care home has three occupancy thresholds, not one, and the one most often quoted is the least useful. "Break-even occupancy" usually means the level at which the operating business stops making money before rent. The landlord and the lender care about two higher levels: where the rent stops being paid in full from trading, and where the cover covenant fails. The gap between the three is the fixed cost base, and it is large because most of a care home's cost is staff who have to be on the rota whether the beds are full or not.
| Input | Value |
|---|---|
| Registered beds | 80 |
| Current occupancy | 90% |
| Average weekly fee per occupied bed, blended | 1,050 |
| Revenue per occupied bed a year | 54,600 |
| Variable cost per occupied bed a year | 9,800 |
| Contribution per occupied bed a year | 44,800 |
| Fixed costs: staffing floor, premises, utilities, insurance | 2,150,000 |
| Rent | 660,000 |
| Rent cover covenant, on EBITDARM (illustrative) | 1.40x |
At 90 per cent the home has 72 occupied beds, revenue of 3,931,200, EBITDARM of 1,075,600, a 27.4 per cent margin, and rent cover of 1.63x. Variable cost here is food, consumables and the care hours that genuinely flex with residents; the rest of the rota is in fixed costs because it cannot be cut bed by bed.
EBITDARM = occupied beds × contribution per bed − fixed costs
Occupied beds needed for a cover c = (fixed costs + rent × c) ÷ contribution per bed
Occupancy threshold = beds needed ÷ registered beds
In Excel: =(Fixed+Rent*Cover)/(Fee*52-VarCost)/Beds. Set Cover to 0, 1 and the covenant level in three cells and the three thresholds sit side by side.
| Threshold | Occupied beds | Occupancy | Headroom from 90%, points |
|---|---|---|---|
| EBITDARM break-even | 48.0 | 60.0% | 30.0 |
| Rent cover 1.0x | 62.7 | 78.4% | 11.6 |
| Cover covenant 1.40x | 68.6 | 85.8% | 4.2 |
Thirty points of headroom on the first line and four on the last. A sale memorandum that reports a 60.0 per cent break-even is reporting a true number that answers no question an investor in the lease is asking.
Each point of occupancy is 0.8 of a bed and worth 35,840 of EBITDARM, which is 0.054x of cover. Losing five points, a normal swing after a poor inspection or a manager leaving, removes 179,200, or 16.7 per cent of EBITDARM. That operating gearing is why a few points of occupancy separate a comfortable cover from a breach.
The covenant here is tested on EBITDARM, before the operator's central management charge. If the lease tests it on EBITDAR, after a 5 per cent management charge the operator cannot actually avoid paying, the picture changes. The charge is 196,560 a year, contribution per bed falls to 42,070, and cover at 90 per cent falls from 1.63x to 1.33x.
| Threshold, tested on EBITDAR | Occupied beds | Occupancy | Headroom, points |
|---|---|---|---|
| Rent cover 1.0x | 66.8 | 83.5% | 6.5 |
| Cover covenant 1.40x | 73.1 | 91.3% | −1.3 |
On the same home, on the same day, the covenant has 4.2 points of headroom on one definition and is already in breach by 1.3 points on the other. Read the definition in the lease before reading the ratio in the pack.
| Average weekly fee | Fixed costs 1,950,000 | 2,150,000 | 2,350,000 |
|---|---|---|---|
| 950 | 90.7% | 97.0% | 103.3% (unattainable) |
| 1,050 | 80.2% | 85.8% | 91.4% |
| 1,150 | 71.8% | 76.8% | 81.8% |
A hundred a week on the fee moves the threshold by 8.9 to 11.3 points; two hundred thousand of fixed cost moves it by 5.6. A home that loses part of its private-pay share, and with it a hundred a week of average fee, needs 11.3 more points of occupancy to stay compliant. Wage rises go straight into the fixed line, and a home that cannot pass them on to fees climbs this table one row at a time.
Compute three thresholds, not one: 60.0, 78.4 and 85.8 per cent here, against 90 per cent trading. The last is the one that matters to a landlord or a lender, and it sits closer to current trading than almost anyone expects. The free Care Home Model for this case carries a sheet of occupancy thresholds and the debt alongside the full resident engine. Where the average fee in the formula comes from is worked in how payor mix changes a care home's average fee, and what the rent supports as a price in what multiple cover and yield imply.
It depends on which break-even is meant. On an illustrative 80-bed home, EBITDARM breaks even at 60.0 per cent, the rent is just covered at 78.4 per cent, and a 1.40x cover covenant fails at 85.8 per cent. The gap is the fixed staff and premises cost, which does not fall as beds empty.
One point is a hundredth of the registered beds times the contribution per occupied bed. On an illustrative 80-bed home with 44,800 of contribution per bed a year, a point is worth 35,840 of EBITDARM, or 0.054x of rent cover on a 660,000 rent.
Either, depending on the lease, and the choice matters. After a 5 per cent central management charge, an illustrative home covering its rent 1.63x on EBITDARM covers it 1.33x on EBITDAR, and the occupancy at which a 1.40x covenant fails rises from 85.8 to 91.3 per cent.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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