Last week, Discovery Senior Living announced that Hilary Bullard — formerly VP of senior housing asset management with Healthpeak (NYSE: PEAK) — will lead the new Morada brand. Discovery is launching Morada with 16 communities recently acquired from Healthpeak.
The Bullard hire and Morada’s launch are among many news items that have been generated from Healthpeak’s exit from rental senior housing over the past few months.
Healthpeak still has about $1.5 billion worth of transactions to complete, and the Denver-based real estate investment trust (REIT) is “far down the path” on those deals, president and CIO Scott Brinker said on the company’s most recent earnings call.
But with about $2.5 billion worth of senior housing transactions announced over the last seven months, Healthpeak’s exit already is revealing some trends and driving certain changes in the industry, including these:
Valuations have held up
The Covid-19 pandemic has motivated some struggling senior living providers to sell, dragging down average acquisition prices 20% for independent living and 30% for assisted living on a year-over-year basis, according to recent data from Irving Levin.
But, Healthpeak’s transactions indicate buyers still value high-quality properties and see the pandemic very much as a temporary setback. Generally, Healthpeak’s SHOP assets were higher quality than its triple-net assets, according to execs with the REIT, and the SHOP communities sold at roughly a 3% cap rate on annualized Q4 2020 net operating income. That’s significantly lower than the average senior housing cap rate of 7.8% in 2020, as calculated by Irving Levin.
Healthpeak’s remaining transactions involve more triple-net assets, so we can expect to see higher cap rates on those deals. But, the REIT’s executives say that their initial expectations around pricing held up last year, as cash flow degradation was apparently offset by optimism around vaccine availability.
Of course, Healthpeak’s leaders will be glad to get strong prices on the SHOP sales and are already talking about deploying that capital to grow its MOB and life science portfolios; but, the strength in pricing also suggests the possibility that Healthpeak was rash in disposing of attractive senior living assets as boomer demand is set to increase. But the company’s leaders have said they expect ongoing volatility in the senior housing business, and they could be right about that.
I’m reminded of what Senior Living Communities (SLC) CEO Donald Thompson told me in 2019: Don’t underestimate the effect of the average move-in age increasing for senior living. That was before the pandemic further eroded confidence in communal senior housing.
Even if the Covid-19 recovery happens more quickly and smoothly than some predict, there are more home care options popping up all the time. The extent and timing of baby boomer demand for today’s senior living product is at the very least an open question.
CCRCs show strength
Healthpeak is not entirely folding its hand on senior living, as the company is maintaining its portfolio of 15 continuing care retirement communities (CCRCs). The REIT’s leadership team thinks the CCRCs are in strong markets and are insulated from new competition, considering the high cost and difficulties of obtaining land for campuses.
Their decision appears shrewd, as the CCRC/life plan community market has proven more resilient than other segments of senior housing:
— Average CCRC occupancy was 85.7% in Q4 2020, compared to 80.7% for senior housing overall (NIC/Ziegler analysis)
— Median independent living occupancy among Fitch-rated life plan communities remains above 90%
— A Mather life plan community under development was 70% presold as of Oct. 2020
— Kendal’s Enso Village CCRC under development was 70% reserved in 8.5 weeks (a record) and was 96% reserved by late Feb. 2020
— SLC, which operates about a dozen CCRCs, increased occupancy during the first two months of 2020, while many other providers were happy just to see census declines slow down
CCRCs have had some built-in advantages during the pandemic, such as a generally younger resident base in independent living, and therefore longer length of stay than other types of senior housing. Also, single-family home sales have boomed, enabling older adults to tap home equity for entrance fees.
But the positive indicators for CCRCs also are cause for optimism that senior housing demand remains strong — at least, for high-quality products that emphasize wellness and socialization, and offer a continuum of care. CCRCs that were struggling before the pandemic are in even more dire straits now, with some Chapter 11 filings in the last few months. Just this week, California-Nevada Methodist Homes filed for bankruptcy.
The new approach to scale
Two of Healthpeak’s transactions stand out to me as examples of how owners and operators are trying to achieve greater scale.
In one of those transactions, private equity firm Harrison Street picked up 12 communities formerly operated by Atria Senior Living, and these communities now are being operated by regional providers including REDICO, LCB Senior Living, Kisco Senior Living and Dial Senior Living.
In the other deal, Discovery and non-traded REIT White Oak acquired 16 communities formerly operated by Atria, Capital Senior Living (NYSE: BKD) and Life Care Services.
These deals replace large, national operators with regional providers (or, in the case of Discovery, the new Morada sub-brand, which is meant to operate like a regional provider).
Regional providers have been favored in recent years by REITs and private equity due to their hands-on management and knowledge of local markets. Meanwhile, Brookdale’s struggles following the Emeritus merger have showed the difficulties of establishing a single mega-brand.
As more properties hit the market in the wake of Covid-19, many in the industry expect regional providers to gain more scale, which we’re already seeing occur with these Healthpeak deals, as well as in transactions from other REITs such as NHI (NYSE: NHI).
It seems possible that we’ll see the emergence of more “super regionals.” This is a term that Locust Street Capital uses internally, to describe operators that are in the roughly 25- to 50-building range, in three or four contiguous states, managing director and founding member Dan Contardi told me.
Going forward, the question might be just how large regional providers can get. Discovery CEO Richard Hutchinson told me that he thinks 20 to 30 properties is the sweet spot for a regional, and that companies struggle to stay “intimate with their communities” and “nimble” when they exceed that threshold.
While the Healthpeak deals added new communities to regionals like Kisco and LCB, the transactions highlight the strategy for larger operators like Discovery and Atria to segment their portfolios into differentiated brands, whether that’s by region or by price point. Atria lost communities in the Healthpeak deals with Harrison Street and Discovery, but gained 21 buildings in a transaction with New Senior (NYSE: SNR). Atria will use these properties to introduce its middle-market Atria Retirement independent living brand in the United States.
These multi-brand plays and the operating models that underpin them are in their earliest stages, and working out the kinks could contribute to the volatility that Healthpeak expects in senior living.
I would not be surprised if the REIT stays on the sidelines as owners and providers build their new brands and evolve operating models to meet different price points and consumer preferences. When best practices are established and some winning companies emerge, perhaps Healthpeak will again start to make investments in this sector, taking advantage of its industry knowledge and relationships.