Ventas Puts Its Money Where Its Mouth Is With $2.3 Billion New Senior Deal

By moving to acquire New Senior (NYSE: SNR) in a $2.3 billion transaction, leaders with Ventas (NYSE: VTR) made good on recently stated intentions.

“We believe in the recovery story and are prepared to put our money where our mouth is,” Ventas CEO Debra Cafaro said at the Nareit conference on June 9.

The New Senior transaction is significant for Chicago-based Ventas and for the industry, as it relates to the blockbuster news last week of Atria Senior Living’s acquisition of Holiday Retirement’s management business, and the $1.6 billion acquisition of 86 Holiday buildings by Welltower (NYSE: WELL).

The New Senior portfolio includes 65 Holiday properties and 21 former Holiday properties that transitioned to Atria earlier this year, and Ventas appears to be a logical home for this portfolio.

Bigger-picture, these major deals:

• Signal that the largest owners of senior housing bet that the industry has hit bottom
• Shine a light on the promise of lower-acuity, middle-market products
• Renew questions in my mind about the future of independent living

Breaking down the deal

Ventas has been in pursuit of Holiday Retirement properties for years; in 2013, rumors swirled that Ventas wanted to acquire the entire Holiday portfolio. That year, Ventas bought 26 Holiday properties for $790 million. The rest of Holiday’s U.S. portfolio got divvied up among other players, including Newcastle, which eventually spun out New Senior.

But Ventas’ acquisition of New Senior and its Holiday properties appears to make even more sense now than in the past. That’s in large part because Ventas has a 34% stake in Atria, the new owner of Holiday’s operating business.

The New Senior acquisition is also a diversification play for Ventas, which gains increased exposure to communities at a mid-market price point, on the cusp of a huge wave of demand from this demographic group.

Also, Ventas is acquiring the portfolio in the wake of Covid-19, and leaders with the REIT — and analysts covering the company — believe that they got a fair price on a portfolio with significant potential upside as the pandemic recovery takes hold.

That longer-term upside has to be accounted for in considering the dynamics of the all-stock deal, which does increase Ventas’ leverage. The REIT is taking on about $1.5 billion of existing debt, and the current deal structure would result in leverage going up about 0.3%, Baird Analyst Amanda Sweitzer calculated.

And at roughly $187,000 per unit, the deal is pricier than Welltower’s 86-property Holiday acquisition, which rang in at about $167,000 per unit. That price differential could be due to the public nature of Ventas’ bid, BMO Capital Markets analysts surmised.

However, Welltower plans to invest $1.5 million to $2 million in CapEx per building, while Ventas is planning a more typical CapEx run-rate for the properties, which received about $1,700 per unit from New Senior in 2019. Ventas does see “tremendous opportunity” to refresh and redevelop certain communities to drive occupancy and rate, although these plans are still in the works, someone with knowledge of the deal told me.

In addition to any CapEx improvements, Ventas is betting that Atria — working with Holiday’s management team — can drive further upside through technology and other operational enhancements. Ventas leaders expect that the portfolio can achieve occupancy higher than 90% and meet or exceed per-pandemic margins of about 40%.

The cap rate on anticipated 2022 NOI is about 6%, and Ventas management expects an 8% yield in the intermediate term, Sweitzer noted.

“We believe the portfolio could generate additional upside over time through Atria’s platform/technology as well as expected targeted CapEx investments, which are expected to generate double-digit unlevered yields,” she wrote.

Green Street’s Hartwich calculated the nominal cap rate at about 6.5% on pre-Covid NOI and described the acquisition as a “fair deal” that is a good fit for Ventas.

“Overall, Ventas is a logical home for the New Senior portfolio from a strategic perspective,” he wrote.

The future of independent living

The deal also increases Ventas’ exposure to independent living, which will go from 48% to 58% of SHOP. Independent living occupancy held steadier than assisted living or memory care occupancy during Covid-19, although it dropped to 81.8% nationally as of Q1 2021.

Furthermore, Welltower CEO Shankh Mitra and Ventas’ Cafaro both recently commented on the surprisingly robust return of IL demand. The REIT executives appear to be optimistic about IL in general, and they are definitely bullish on the prospects for Holiday’s purpose-built IL communities.

They very well might be able to capture upside in Holiday as occupancy rebounds from the pandemic. But, I think that the independent living product in general faces an uncertain future.

Over time, the average age and acuity of independent living residents has gone up, and in the last several years, active adult rental communities have been on the rise. Active adult communities might be re-creating what was once independent living, NIC Chief Economist Beth Mace said Tuesday during Senior Housing News’ Active Adult Virtual Summit.

And although IL occupancy held steadier during Covid-19 than assisted living or memory care, active adult performed even better. Likely because prospective residents faced fewer visitation restrictions, active adult communities averaged about four move-ins per month in 2020 compared to two per month for independent living, according to data from Sherpa. Trends from 2021 show active adult still outpacing IL for move-ins.

With more advanced technology, on-demand services, and innovations in health care payment models, I believe there is the potential for active adult residents to age in place for a sustained period of time. That could be problematic for active adult communities that want to maintain a lower average age — but it also could be problematic for traditional IL, which starts to look like an unnecessary stop on the continuum between active adult and higher levels of care.

My hope is that Welltower, Ventas and Atria will not only refresh the Holiday portfolio and drive operational efficiencies, but will introduce innovations to revitalize the independent living value proposition.

Welltower has made inroads into the active adult or “independent living light” space, with organizations such as Clover, Priya Living, Treplus Communities, Sparrow Partners, and the welltowerLIVING brand. This might enable Welltower to gain greater insights into the differences between active adult and independent living consumers, and how best to serve and attract each group. And I wonder about the potential to bring practices like Clover’s health system partnerships into independent living.

Ventas is gaining some new operator relationships through the New Senior deal, including with Hawthorn Senior Living. Hawthorn is a middle-market independent living developer and operator that was acquired by Columbia Pacific Advisors in a reported $2 billion transaction in 2017. Hawthorn was previously co-owned by Bill and Bart Colson, sons of Holiday founder Bill Colson.

Hawthorn communities are the “next version of the Holiday prototype,” with some additional amenities and larger physical plants, managed by couples living on-site as Holiday buildings used to be, Columbia Pacific Managing Director Todd Seneker told me last year. As Columbia Pacific develops new Hawthorn communities, the firm is looking to further evolve the model to meet the next generation of consumers, and so Hawthorn could be an interesting source of new ideas or perhaps a growing relationship for Ventas.

It’s possible that Welltower and Ventas also could draw some inspiration from north of the border. Ventas has a major investment in Montreal-based Le Groupe Maurice (LGM), and Welltower is partnered with Montreal-based Cogir. Both companies have found success with large-format communities that are primarily low-acuity, apartment-style living, and they are eyeing or engaged in U.S. expansion.

While the physical plant of Holiday buildings is different than those of LGM or Cogir, a cross-pollination of ideas or talent from these operators could infuse some creativity as “Holiday 3.0” comes to fruition. As LGM Founder and President Luc Maurice said during the Senior Housing News virtual BUILD event last year:

“Whether you’re an older adult from Quebec, from the rest of Canada, or from the U.S., you want something that is a bit different than what exists right now.”