Projecting rent cover on a care home lease year by year: why operating leverage makes EBITDARM lag the rent, and which input moves the answer most.
Project each line separately: fees, staff costs and other costs at their own growth rates, the rent at its index, then divide. Because staff costs in a care home are larger than EBITDARM itself, a small gap between wage and fee growth leaves EBITDARM growing far more slowly than an indexed rent. On an illustrative 70-bed home let at 1.80x, with fees up 3.5 per cent, wages up 4.5 per cent and rent up 3.0 per cent a year, cover falls to 1.51x in year 10 and below a 1.40x covenant in year 14.
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 lease is usually written for 25 years or more with the rent reviewed annually against an inflation index, often with a collar and a cap. The rent is set at the start by dividing EBITDARM by a cover ratio. What happens after that depends on whether the operator's profit keeps pace with the rent, and in a business where the main cost is wages and the main revenue is fees set by local authorities and private payers, it often does not. A landlord pricing the lease and a lender sizing debt against it both need the path, not the opening figure.
An illustrative 70-bed home, first year of the lease. Growth rates are illustrative, not forecasts.
| Line | Year 0 | Growth a year |
|---|---|---|
| Fee revenue | 4,000,000 | 3.5% |
| Staff costs | 2,300,000 | 4.5% |
| Other operating costs | 700,000 | 3.0% |
| EBITDARM (25.0% margin) | 1,000,000 | |
| Rent at 1.80x cover | 555,556 | Index 3.0%, collar 1% to 4% |
EBITDARMt = 4,000,000 × 1.035t − 2,300,000 × 1.045t − 700,000 × 1.03t
Rentt = Rentt−1 × (1 + MIN(MAX(index, 1%), 4%))
Covert = EBITDARMt / Rentt
Excel, year t in column: =Rev0*(1+gF)^t-Staff0*(1+gS)^t-Oth0*(1+gO)^t, then =Prev*(1+MIN(MAX(Idx,Floor),Cap))
The first year shows the mechanism. Fees add 140,000, staff costs 103,500 and other costs 21,000, so EBITDARM rises by 15,500, 1.55 per cent, against a 3.0 per cent rise in rent. The gap of 1.45 points is the operating leverage: staff costs are 2.3 times EBITDARM, so every point by which wage growth exceeds fee growth costs EBITDARM 2.3 points of growth.
| Year | EBITDARM | Rent | Cover |
|---|---|---|---|
| 0 | 1,000,000 | 555,556 | 1.80x |
| 2 | 1,030,612 | 589,389 | 1.75x |
| 4 | 1,059,443 | 625,283 | 1.69x |
| 6 | 1,085,986 | 663,362 | 1.64x |
| 8 | 1,109,666 | 703,761 | 1.58x |
| 10 | 1,129,824 | 746,620 | 1.51x |
Over ten years the rent rises 34.4 per cent and EBITDARM 13.0 per cent, a compound 1.23 per cent a year. Cover loses 0.29 of a turn, about 0.03 a year, and keeps falling: it passes below 1.40x in year 14.
Wage growth, by a distance. Holding fees at 3.5 per cent and the rent index at 3.0:
| Staff cost growth | EBITDARM year 10 | Cover year 10 | Below 1.40x |
|---|---|---|---|
| 3.5% | 1,457,276 | 1.95x | not within 30 years |
| 4.0% | 1,297,092 | 1.74x | not within 30 years |
| 4.5% | 1,129,824 | 1.51x | year 14 |
| 5.0% | 955,196 | 1.28x | year 8 |
Each half-point of wage growth costs about 0.23 of a turn of cover by year 10. A national minimum wage that rises faster than fees for several years running is therefore the central risk to a care home lease, and the one-off cost of a single increase is worked in how much a minimum wage rise costs a care home.
The rent mechanism matters less, but not nothing. A fixed 2.5 per cent uplift leaves cover at 1.59x in year 10 rather than 1.51x. The cap earns its keep in an inflation spike: with the index at 7 and then 6 per cent before settling at 3, the 4 per cent cap holds year 10 cover at 1.48x; uncapped it would be 1.42x.
Cover in any year is proportional to cover at the start, because the opening rent scales the whole rent line. On these inputs a lease that has to still show 1.80x in year 10 must start at 2.14x, a rent of 467,053 rather than 555,556. A lease that only has to stay above 1.40x through year 10 can start at 1.67x.
Growing EBITDARM at the fee rate. A model that inflates revenue and EBITDARM together at 3.5 per cent shows cover rising slowly against a 3.0 per cent rent, and the lease looks safer every year. The costs have to be grown line by line, with staff at wage growth, for the cover path to mean anything. The opening cover also has a price consequence: at a given yield, a higher cover means a lower rent and a lower lease value, the arithmetic in the multiple that cover and yield imply.
The book underwrites one home completely, trade and lease, and the free workbook for this case runs its lease over twenty-five years. On the book's own assumptions that lease moves from 1.80x to 1.96x: the direction depends on the gap between fee and wage growth, which is why it should be an input you can see.
Because staff costs are larger than EBITDARM itself. In the illustrative home they are 2.3 times EBITDARM, so a fee rise of 3.5 per cent against wage growth of 4.5 per cent leaves EBITDARM growing 1.55 per cent in the first year and 1.23 per cent a year over ten, well below a 3.0 per cent rent uplift.
Only if it is lower. At a fixed 2.5 per cent the illustrative lease is at 1.59x in year 10 against 1.51x on a 3.0 per cent index. A cap matters in an inflation spike: with the index at 7 and 6 per cent in the first two years, a 4 per cent cap leaves cover at 1.48x in year 10 against 1.42x uncapped.
On these inputs, 2.14x. Cover in year 10 is proportional to cover at the start, and the illustrative lease loses about 16 per cent of it over ten years, falling from 1.80x to 1.51x. A lease that must still show 1.80x in year 10 therefore has to start near 2.14x, a rent of 467,053 rather than 555,556.
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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