When I learned that Atria Senior Living is acquiring Holiday Retirement, I thought back to April 2019.
That month, I was at the event announcing the results of the NIC middle-market study. Much of the discussion focused on how new operating and financial models are needed to create middle-market senior housing at scale.
I wondered if that was true, considering that the second-largest U.S. senior living company at that time — Holiday — offered a middle-market price point. I spoke with another attendee who was thinking along those lines.
“Where’s the next Holiday?” said Ryan Frederick, founder of development and consulting firm SmartLiving 360.
This week, we got one answer. Atria, Welltower and Holiday itself want to create the “next” Holiday — “Holiday 3.0” — through their partnership.
A few other companies in the industry stand to benefit if this trio is successful, and their efforts should spur innovation by making other providers and investors pursue the middle market with even greater urgency.
B-52s of senior living
Based on past experiences in taking over Holiday buildings, Atria CEO John Moore believes that these properties — though not the newest in their markets — remain the standard for affordable independent living. Rental rates average $2,775, according to a note on the deals from Stifel.
“I call the Holiday buildings the B-52s of senior housing, because no one’s figured out how to do anything better,” Moore said in an interview with SHN this week, referring to the Air Force plane that has been in service since 1955.
He credits Holiday Founder Bill Colson with being a “real estate genius” who built in the path of development and created “timeless designs.” Two-thirds of Holiday buildings are one- and two-bedrooms, with a smart use of common space, Moore said.
Constructing similar buildings in Holiday’s markets would cost a pretty penny today. Welltower calculates that in paying $1.58 billion, the REIT is acquiring the 86 self-managed Holiday communities at about a 30% discount to replacement cost. That’s a discount of about $225,000 a unit, BMO Capital Markets analysts calculated.
Because these buildings have such “impressive bones,” Welltower does not have to deploy “defensive CapEx,” CEO Shankh Mitra told SHN. Instead, the REIT plans to invest $1.5 million to $2 million per community to position them for the consumer of tomorrow, through projects such as the addition of standalone cottage homes.
“That’s what can make these B-52s last another 20 years as the best communities in not just the customers’ but also the operator’s perspective,” Mitra said.
The high cost of development insulates the Holiday portfolio from competition through new construction — but the preferred approach to serving the middle-market is through converting older buildings, according to the 2021 Outlook survey from SHN and Lument.
The Holiday portfolio has an advantage here, as well, because most of the buildings are largely identical, driving efficiencies across the platform. Given that consolidation has come slowly to senior living, investors and operators that want to convert older buildings to a middle-market product at scale will almost surely be cobbling together portfolios of eclectic assets that will require a lot of individual time, attention and money.
In other words, whoever owns and operates Holiday buildings has a major leg up on serving the growing demographic of middle-income older adults, by possessing the only large, efficient, ready-made portfolio of its kind.
Based on occupancy numbers, Holiday’s performance during Covid-19 was about in line with industry norms. Holiday’s occupancy stood at 76.3% as of June 20; by comparison, majority independent living communities averaged 82% occupancy in May 2021, according to NIC MAP Vision data.
Stifel analysts estimate that operating margins will start in the mid-30s for the 86 properties Welltower is acquiring. That is a typical margin for majority-IL communities, although maintaining margins at this level during Covid-19 is a solid accomplishment.
These numbers, though they are respectable while still offering post-pandemic upside, don’t tell the whole story, and Moore and Mitra effusively praised Donohue’s leadership of Holiday since joining as CEO in 2016. Among the highlights of her tenure:
— Holiday transitioned away from its long-time practice of having live-in managers
— The company switched from leases to management agreements with REIT partners New Senior (NYSE: SNR), Ventas (NYSE: VTR) and Sabra (Nasdaq: SBRA), and amended leases with NHI (NYSE: NHI)
— Donohue focused on workforce initiatives, cutting community-level turnover by more than 20%
— Holiday undertook a successful grassroots effort to obtain Covid-19 vaccines for its residents and associates
— Recent efforts have focused on upgrading the resident experience, including through the Holiday365 initiative
“What Lilly has done with, frankly speaking, not a lot of resources is beyond impressive,” Mitra said.
Moore put it this way: Donohue has led the creation of Holiday 2.0, and the new partnership will create Holiday 3.0.
But Holiday 3.0 will take shape gradually, over a planned three-phase process.
The first phase is getting this transaction across the finish line, Donohue told SHN. The second phase will involve Holiday and Atria paying “really close attention to how we both do things,” in order to determine what approaches make the most sense for the future of the company.
“Sometimes, it might be doing something that Holiday does well, others might be what Atria does well, others might be we want to go find and create something totally new and different,” she said.
While phase two is still in the future, Donohue and Moore flagged the potential to leverage Atria’s homegrown technology platform and in-house marketing muscle to drive efficiencies and reduce reliance on third-party referral platforms. I think Welltower has the potential to bring more health care options into these buildings through its partnerships with health systems.
In the third phase, the organizations “get to really dream” about the future, and consider branding decisions. All the while, Welltower’s CapEx program will be elevating the physical plants of its 86 properties.
The decision to keep Holiday’s management team and brand in place in the near-term drew praise from analysts, as a way to minimize disruption. However, the strategy obviously hinges on the ability of Donohue and Moore to work together well.
The last time two top-10 operators combined, the integration was troubled, to say the least. So, I think it’s a good sign that Atria, Holiday and Welltower are taking a different approach. And leaders with all three companies emphasized that their businesses are culturally compatible.
A shared commitment to tech-forward, data-driven operations; Atria’s ingrained culture of being a “fiduciary”; and the “nuanced” RIDEA 3.0 management agreement are all contributing to that alignment, Mitra said.
“I wanted to make sure this is a cultural fit … there’s the right operational and managerial and philosophical alignment,” he said.
Given the scale of the companies involved, the transactions will have reverberations throughout the senior living industry.
Analysts praised the investment as a shrewd move for Welltower, increasing the REIT’s presence in lower-acuity and middle-market senior living at an attractive price. But other REITs could also gain from the deal.
Notably, Chicago-based Ventas (NYSE: VTR) is a 34% owner of Atria, and so would see upside from the acquisition if Holiday’s profitability improves. So too would the other REITs that count Holiday as an operating partner, analysts with BMO Capital Markets pointed out.
The rivalry between REITs — Welltower and Ventas in particular — at times has been bitter, but on Welltower’s Q4 2020 earnings call, Mitra said he is “confident we are embarking on a new era of collaboration amongst the public companies in our space.”
I was skeptical of that statement, chalking it up to the fact that the whole industry was pulling together during the pandemic. But it’s true that the REITs have a mutual interest in driving the success of operators they have in common.
Still, the competition for accretive acquisitions is always tough, and all the senior housing REITs surely are aware that Welltower has in recent months completed $2.2 billion in investments, not counting this latest deal.
In fact, Mitra and his team seem be running on overdrive; the transaction with Holiday and Atria stemmed from a phone call he placed to John Moore only about two months ago. No doubt, the other REITs in the space do not want to see Welltower lapping the field on getting deals done — and with $10 billion in capital to deploy, Mitra seems intent on continuing the external growth story.
My mind turns to the fact that Sabra wants out of its Enlivant JV. Earlier this year, BMO analysts proposed Welltower as a possible buyer, and I think that’s an even more interesting proposition now that the company has such a large Holiday portfolio.
In fact, in a previous SHN+ Update, I described how Enlivant’s middle-market AL communities might complement Holiday’s middle-market IL communities. Now, Welltower could have an inside perspective on how to sync up the two operators, because former Holiday and Enlivant CEO Jack Callison is leading Sunrise Senior Living, which is partially owned by Welltower.
On the operator side, Atria becomes the second-largest U.S. senior living provider, with nearly 450 communities. Furthermore, Atria now has a strong presence in the middle market while also growing its luxury properties through its $3 billion development JV with Related Companies.
All of this is to say that other investors and operators in the sector could be feeling pressure to keep pace with Atria and Welltower. But don’t expect other companies to execute a similar large deal to create a rival entity to Atria/Holiday, because there aren’t other portfolios like Holiday out there.
So, providers and investors will have to find other ways to compete with Atria and Welltower. This will be tough but could be good for the industry, speeding up the pace of innovation — because Welltower, Atria and Holiday do not intend to waste time.
“Lilly and I intend to deliver results for Shankh and his shareholders immediately and often,” Moore said.