This case tests profitability analysis and market entry strategy through a comparative regional analysis. The candidate must build a structured financial model comparing North vs. South operations while considering both short-term (90% occupancy) and long-term (80% occupancy) scenarios. Critical insight: despite lower per-unit revenue in absolute dollars, the North's higher rent and medical facility premium yield comparable profit margins to the South long-term, making expansion attractive despite higher costs and market uncertainty.
Our client owns and operates 25 retirement apartment complexes for the 55-75 year old demographic. The apartment complexes are in the Southeast and Southwest states of Florida, California, New Mexico and Arizona. The main goal for the client is to maximize profitability, so the client company’s CEO is considering expanding into Northern states. As a pilot, the client built an apartment complex in downtown Chicago two years ago. By and large, the client’s apartment complexes have similar designs and amenities. However, the new complex in Chicago has more amenities than the client’s properties in the South.
What are the main factors the CEO should consider for growth in the US?
Demand in the North: A survey of pre-retirees and retirees across a number of states, including New York, New Jersey, Massachusetts and Illinois, revealed an unmet demand in the North for retirement facilities. Retirees wanted options that would allow them to stay close to their families and friends.
Competition: In the South competition is fierce. In the North, competition is fragmented or nonexistent.
Revenues: • In the South, rent includes maintenance, amenities, and utilities. • In the North, rent further includes charges for access to a 24-hour on-site medical facility. • For the purposes of this analysis, buildings within a region can be considered identical.
Amenity Differences: The pilot building in the North offers 24-hour access to a medical facility in the complex.
Occupancy rates: Occupancy rates for new complexes typically start around 90%. Over time, they have tended to settle out around 80%. The pilot building in Chicago is still seeing a 90% occupancy rate.
Per Building, Per Month data: South: Units/Building 800, Rent revenue/Unit $500, Maintenance costs/Unit $125, Amenities $48,000, Utilities $38,000, SG&A $80,000, Medical Facility $0
North: Units/Building 400, Rent revenue/Unit $1000, Maintenance costs/Unit $200, Amenities $56,000, Utilities $45,000, SG&A $64,000, Medical Facility $55,000