Rise of Regionals: Mid-Sized Senior Living Providers Gain Scale Amid Pandemic

As Covid-related distress has hit senior living, particularly for mom-and-pop operators, some providers with regional portfolios are seizing the opportunity to expand in 2021 and beyond.

While regional operators weren’t seen as a big driver of consolidation in previous years, some brokers now expect them to be a driving force in acquisitions this year. In fact, 19% of respondents in Senior Housing News’ 2021 outlook survey said they expect regional operators to be the biggest buyers of communities in 2021. A year prior, no respondents had picked them to the biggest buyers.

Among regional operators themselves, there is a sense that the pandemic has opened doors to new acquisition opportunities that weren’t previously available, as smaller and single-site companies trim or sell their senior living portfolios as a result of the pandemic.

Regional operators may also help play a larger role in the industry’s recovery, especially as real estate investment trusts (REITs) turn to them for expertise managing portfolios in specific parts of the country. The reason why might lie in the relative success of these buildings during the pandemic, according to Jeremy Stroiman, CEO of Evans Senior Investments (ESI).

“We have been saying for years that the most successful buildings we see are operated by regional operators,” Stroiman told Senior Housing News. “The only buildings I have heard about that did not lose significant occupancy during Covid are groups that operate less than 20 buildings in a central geographic region.”

Regional growth

Although current conditions are accelerating the rise of regional providers, the industry was already heading in that direction.

For instance, data from the National Investment Center for Seniors Housing & Care (NIC) shows that the number of medium-sized operators with five to nine properties — which only represent a portion of regional operators in the U.S. — grew in the past decade.

There were 158 medium-sized operators managing 661 properties in the fourth quarter of 2011, but by 4Q20, that number had grown to 197 operators managing 842 properties, according to a recent NIC analysis of 99 markets included in its NIC MAP data service.

Some of that growth has to do with REITs and other large owners of senior living, whose leaders have expressed a preference for working with regional operators and have strategically grown portfolios with some of these partners.

Regionals have also grown as private owner-operators execute acquisitions paid for by in-house or private-equity capital, according to Laca Wong-Hammond, managing director of M&A at Lument, which was formed out of the combination senior housing financing firms Lancaster Pollard, Hunt Real Estate Capital and Red Capital Group.

“We’re seeing a lot of mom-and-pops … are not able to block and tackle the way someone with a lot more scale — 50 facilities — can,” Wong-Hammond told SHN. “So, we’re seeing a wave of consolidation, and I think we’ll see more and more of that.”

At the same time, money is again starting to flow back into the sector after providers’ capital streams had largely frozen solid in 2020. This, too, will help drive senior living consolidation in the coming years as capital sources look to strong owner-operators that have the wherewithal to scale.

Regional providers have in recent years been prolific buyers of senior housing assets despite competition from institutional groups, according to ESI’s Stroiman. But that competitive landscape may get easier for regional buyers as they turn their attention to secondary markets.

“Many institutional groups will not go to second- and third-tier markets, which is allowing the regional groups to purchase these assets,” Stroiman said. “Both REITs and regional groups will continue to purchase in 2021, but as we have always said, it doesn’t matter where the capital is coming from, you still need a great operator, and in our opinion, regional operators are the best in the country.”

Rise of the regionals

Among the reasons regional operators are preferred: They are small enough to maintain more hands-on management of communities than larger-scale providers, and they have an intimate knowledge of local markets, making them better at establishing referral streams and appealing to the local resident base. At the same time, they have more scale and therefore more operating efficiencies than mom-and-pops operating a single site or in just a single market.

The regional model holds such wide appeal that one of the largest U.S. senior living providers just launched a new strategy to create regional sub-brands. Bonita Springs, Florida-based Discovery Senior Living kicked off this approach by forming Morada Senior Living, which will operate a regional portfolio in Texas and neighboring states.

“My belief is that regional operators are very intimate with their communities,” Hutchinson told SHN. “As companies scale beyond 20 or 30 communities, they start struggling staying intimate with their communities and understanding the details of the market and staying nimble — that makes regional operators very, very good.”

While Discovery is a national provider trying to gain the benefits of regionally-focused operations with its multi-brand strategy, more traditionally organized regionals are also expanding. A few examples include Cedarhurst Senior Living and its parent organization, St. Louis-based developer, builder, owner, acquirer and management firm The Dover Companies; Chicago-based Encore Management and Development and its brands Encore Senior Living and Matthews Senior Living; and Randall Residence.

Cedarhurst Senior Living is currently on the hunt for acquisition and development targets to grow its 50-community portfolio in the Midwest. The company’s footprint currently extends to nine states, with the largest concentration of its communities in Illinois and Missouri.

While the operator’s core growth strategy is through development, Dover also has a private-equity fund it uses to deploy capital for acquisitions. The two strategies align with one another as the company grows regionally. That is evident in Kentucky, where Cedarhurst acquired one community about a year and a half ago and has two more slated to open soon, according to Steve Wertman, who serves as CFO of Cedarhurst and The Dover Companies.

“We acquired in Kentucky intentionally when an opportunity came up because we understood that we were heading to that market,” Wertman told SHN. “If we had never designed to develop in Kentucky, this is an acquisition we would have passed on, and that’s really how we look at our growth strategy from a geography standpoint.”

Cedarhurst pins its strategy to specific regions for two main reasons.

The first is that having a large concentration of communities in a specific region helps the provider gain expertise regarding local markets, which aids Cedarhurst when marketing its communities to prospective residents, working with regulators and hiring employees. The other is that keeping a tighter geographic footprint aids the company’s culture and leadership by keeping people in closer proximity.

“It’s a challenge to spread culture as you grow in its own right,” Wertman said. “But to try to do that in every direction all at the same time, we think that’s probably a task that is too insurmountable for what we’re trying to achieve.”

Encore is another regional provider, with five communities in Minnesota and 34 in Wisconsin. The company plans to grow its footprint in the Midwest in the coming years, with a focus on Minnesota, Illinois and potentially Iowa, according to Encore CEO Tom Ostrom.

“Our typical regional operations person only has about 400 units, maybe 500 units, that they manage. And to do that you need to be pretty tightly focused geographically,” Ostrom told SHN. “It’s much more effective in my mind to be able to get in a car and go there than it is to have to get on a plane and spend a day to go to one building.”

Encore is also growing with the help and backing of REIT partners that include Chicago-based Ventas (NYSE: VTR) and Murfreesboro, Tennessee-based National Healthcare Investors (NYSE: NHI). The company also in February took on five former Senior Lifestyle properties for a new REIT partner, Westlake Village, California-based LTC Properties (NYSE: LTC).

“Where we have an advantage is that we can know our markets a little better, and also, we can make decisions very, very quickly,” Ostrom told SHN.

Encore isn’t the only regional senior living operator growing with the help of LTC. Randall Residence, a senior living provider headquartered in Lawton, Michigan, manages eight communities for the REIT. Overall, the company has 19 communities and another under construction, with the portfolio spread across Michigan, Ohio and Illinois.

The senior living business is relationship-based, and regional providers are better-positioned to forge close bonds, according to Randall Residence CEO Chris Randall. Randall has set a goal for the provider to have 25 communities by the year 2025.

“There’s a great space for a strong regional player in that 20 to 60 [communities] range. To get bigger than that, I think it’s a whole different dynamic and a different philosophy that takes over,” Randall told SHN. “We’re enjoying the stage we’re at and will continue to grow, but intend to stay true to that regional focus.”