Sunrise Senior Living is once again building new properties from the ground up. After a period of inactivity, the company announced the opening of a community in the Bay Area last week, with others set to open in Ohio and Southern California in the coming months.
The new developments are part of a “measured, rifle-shot” approach that Sunrise now is taking, Green Street analyst Kevin Tyler tells SHN.
Specifically, this will entail opening between two and five properties annually, according to Stifel analyst Daniel Bernstein. While the pipeline may be modest, the fact that Sunrise is back in action can be seen as a sign of health for the company and the sector, Bernstein tells SHN.
Sunrise and some of its primary partners, such as Health Care REIT (NYSE: HCN) and Revera Inc., are among the biggest players in senior housing. With total resident capacity exceeding 25,000, Sunrise is the fifth largest senior living provider in the United States, while HCN is the largest non-provider owner of senior living communities, according to the Assisted Living Federation of America.
Revera is the largest Canadian operator, with 90 senior housing properties and 76 nursing care properties, according to CBRE, BofA Merrill Lynch Global Research. HCN and Revera jointly own the Sunrise management company.
The size of these companies, as well as comments recently made by their leaders, raise the question: What is the big-picture growth strategy and just how much development might Sunrise undertake?
Sunrise—based in McLean, Va.—attained its super-size status in part through a robust period of development that took place roughly between 2003 and 2007, during which time it built residences bearing the distinctive high-end amenities and other characteristics of the Sunrise brand. The company operated 303 communities in the United States, Canada and the United Kingdom as of May 1, 2015.
“Unlike many other senior housing operators their size, it was not a cobbled up roll-up of assets,” Bernstein says. “They designed and built a very homogenous portfolio in urban, high barrier-to-entry locations. In our view, they may still be the only true, homogenous brand in the industry on a national basis.”
However, the financial crisis put the brakes on, as the company sold off land and development projects, and basically shut its pipeline down. The provider’s real estate subsequently was acquired by Health Care REIT in a landmark deal in 2012 that ultimately was valued at about $4.3 billion. HCN then staked claim to a 24% share of the Sunrise management company, with the rest of the ownership going to Revera in a 2014 deal.
Sunrise has continued to operate independently under its established brand throughout these changes.
HCN is not the landowner of these newest properties, a Sunrise spokeswoman confirmed to SHN. However, the relationship of HCN, Revera and Sunrise makes it obvious that the companies are all involved in the decision to develop, Bernstein says.
Indeed, Revera’s growth strategy in the United States is focused on Sunrise, Revera President and CEO Thomas G. Wellner recently told SHN. It’s part of a larger strategy to concentrate on private-pay senior housing and scale back in other areas; Revera recently sold its U.S. contract rehabilitation business and two dozen skilled nursing facilities to Genesis HealthCare (NYSE: GEN).
And Sunrise’s own CEO, Chris Winkle, also has hinted at development plans and expressed a willingness to get back into property ownership.
“I don’t rule out having real estate ownership, but the key for us right now is real estate development and we have multiple partners for that,” Winkle told SHN shortly after entering the CEO role last year. “Developing Sunrise, selling and managing is the primary strategy. We’re not opposed to ownership, but it won’t be a conscious strategy.”
Still, the newly developed real estate could end up in HCN’s portfolio, Green Street’s Tyler suggests.
“Sunrise is a preferred partner for HCN with approximately 15% of the REIT’s NOI coming from properties Sunrise operates,” Tyler tells SHN. “The strength of the relationships between the two firms would suggest additional partnerships are likely in the future. In the UK, HCN and Sunrise have a 12-community development deal in place with Gracewell’s founding partners. Under this agreement, HCN will purchase newly developed properties and Sunrise will operate the communities.”
The new Sunrise community set to open in Burlingame, Calif., will have a 97-resident capacity with about 80 units including assisted living and memory care.
The next community opening is scheduled for August, in Dublin, Ohio—a Columbus suburb that is home to numerous corporate headquarters, including Wendy’s, Stanley Steemer and Cardinal Health. This will be followed by Sunrise at Palos Verdes in the Los Angeles area next year.
Sunrise and HCN declined to provide further details to SHN on the current pipeline, but it appears to be a continuation—albeit on a smaller scale—of the type of luxury development in high barrier-to-entry markets Sunrise was doing before the economy tanked.
As such, it suggests that it might now be more economical to build than buy in the locales Sunrise is targeting and for the type of product that Sunrise is creating, Bernstein and Tyler say.
Keeping new construction at modest levels makes sense, as it would allow Sunrise to focus on the uniform development and product branding it is known for, Bernstein says.
“It’s a pace that doesn’t overburden the existing infrastructure,” he says. “You don’t have too many assets to fill up at the same time.”
As for whether Sunrise might ramp up construction in the future, Bernstein says a lot depends on financing.
“If you’re underwriting it well and they’re filling up the properties, I think it’s fine,” he says. “There’s not zero risk to that. But as long as you’re not doing 10 a year, I think it’s OK.”
Written by Tim Mullaney
*Editor’s Note: The original version of this story stated that the HCN acquisition of Sunrise totaled $1.9 billion. This was the initial purchase price; the article has been updated to reflect the aggregate value when the real estate deal closed.
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