The effects of the Covid-19 pandemic are reshaping the senior living marketplace, with the rise of mid-size operating companies an accelerating trend.
In just the last few weeks, we’ve reported on numerous transactions showcasing how senior living providers of roughly 10 to 30 communities are gaining scale, including:
- Juniper Communities has added 8 communities and entered the state of Texas
- Oaks, Phoenix, Charter and Cedarhurst are assuming management of Diversified Healthcare Trust communities
- Anthology Senior Living forged a 3-property development JV with Harrison Street
- Oakmont Senior Living plans to double the size of its portfolio with Welltower
- Innovation Senior Living acquired one community and plans to add a dozen or more
Looking back further, the list goes on, and includes companies such as Pathway to Living, Oxford Senior Living, Matthews Senior Living and Randall Residence.
Examining these transactions, I have a few takeaways for what this trend means for the industry:
- The pandemic did not alter REITs’ growing preference for regional operators
- Mid-size operators taking on a lot of properties will be tested
- Some startup providers are now coming of age
REITs hold firm as mid-size operators step up
As soon as the severity of the pandemic became apparent last spring, I heard sharp concerns from industry leaders about how mom-and-pop operators would fare.
Without the access to capital, technology infrastructure, and group purchasing power of larger companies, small senior living providers were in a precarious position. There was a widespread expectation that mid-size providers would find opportunities to grow by acquiring these smaller, struggling operations.
These types of deals are occurring, but the recent growth of mid-size operators largely stems from portfolio restructuring efforts at real estate investment trusts (REITs), as they shift properties away from the largest national providers.
For instance, LTC Properties (NYSE: LTC) shifted Senior Lifestyle buildings to Juniper and Oxford, while Welltower transitioned Senior Lifestyle buildings to Pathway to Living. And Diversified is finishing an effort to transition 108 communities from Five Star Senior Living (Nasdaq: FVE) to smaller operators — including Phoenix, Oaks, Cedarhurst and others.
Some of these transitions were in the works before Covid-19, as Senior Lifestyle’s leaders recently pointed out to me.
Before the pandemic, several REIT leaders were open about their preference for mid-size, regional operators, saying these companies enjoyed some efficiencies of scale while maintaining hands-on management of communities. It’s worth noting that the pandemic did not change this REIT perspective on mid-size operators.
During Covid-19, the largest national operators possessed some serious advantages, and some of these providers have demonstrated the advantages of scale during the pandemic. I think of how Atria leveraged its scale to partner with best-in-class health systems, gain access to testing and vaccines, and acquire or manufacture needed equipment and supplies. Or the fact that Brookdale Senior Living (NYSE: BKD) was able to shore up liquidity by selling 80% of its home health business to the nation’s largest hospital system.
These were not moves that were available to many operators of more modest scale, and I could imagine a scenario in which REITs would back away from their plans to shift properties to regional providers as a result of the pandemic.
However, many smaller providers banded together to secure equipment, relied on relationships with trusted capital partners to weather financial challenges, proved resourceful in partnering with health care systems and clinical experts, and maintained strong occupancy and margins relative to the industry.
I think it’s no surprise that many of the mid-size providers that are now expanding are those that were taking just those steps described above. For example, Oakmont pivoted from a hospitality to a care focus; Juniper was an industry leader on testing and vaccines; and Phoenix partnered with Atlanta health systems.
So, the pandemic proved that the advantages of mid-sized operators were durable even in a crisis of unprecedented proportions, and the expansion of the strong performers should benefit the industry in the longer term. For example, Juniper is now bringing its Connect4Life model into a new state, with plans to eventually introduce Perennial Consortium Medicare Advantage plans as well.
Operators will be tested
While I believe that the growth of mid-size providers will help spread innovation, these operators will also be tested as they add scale, particularly if they are taking on a lot of properties at once.
Chicago-based Pathway to Living, for instance, is adding 22 communities in a joint venture with Welltower, nearly doubling the number of properties in its portfolio.
Integrating these communities will be a test for Pathway, but the good news is that the company was already strengthening its growth capabilities before the pandemic. In 2019, commercial real estate investor and operator Waterton took a controlling stake in Pathway.
With a roughly $5 billion portfolio of multifamily and hotel assets across the country, Waterton brings extensive resources and expertise to Pathway, including a staff training platform that was a draw for the senior living operator.
Pathway’s leadership is confident not only about integrating these 22 communities but pursuing further growth, and Waterton just hired a new SVP of investments for the senior living platform. In CEO Jerry Finis and COO Maria Oliva, Pathway to Living has seasoned leaders, but they will have to strike a delicate balance in order to aggressively grow while maintaining the innovative approach to operations that the company is known for. It should help that the newly acquired portfolio largely operates on Medicaid waiver business, and Pathway already has expertise in this program.
Oaks Senior Living is another mid-size provider gaining a lot of scale at once, taking on 26 Diversified-owned communities in Georgia and South Carolina. Most leadership roles at Oaks are still held by its family owners, including CEO Alex Salabarria, his brother Nelson Salabarria, and his brother-in-law Douglas Shook.
However, Oaks added Bear Mahon as COO in November 2020. Mahon should provide valuable expertise as the company expands, having spent over a decade in leadership roles with Emeritus and Brookdale.
Oaks also has partnerships with other large-scale health care organizations that should translate to strong full-continuum services even as the company gains a larger footprint. Its partners include home health giant Amedisys (Nasdaq: AMED) and therapy provider EmpowerMe Wellness. Oaks also has a joint venture with home care company CaraVita — an organization that Mahon previously led as president and COO.
Startups come of age
Several of the mid-size providers that are in expansion mode are operators founded within the last 10 years. These include:
- Phoenix Senior Living, founded 2014
- Charter Senior Living, founded 2016
- Vitality Living, founded 2016
These companies already were firmly established before the pandemic, with some signature deals and growing market clout. Still, I see this as a coming-of-age moment for these organizations.
That’s because the entrepreneurial energy that they brought to the sector has made these companies attractive partners to REITs and other investors, which are turning to these providers now, both to weather current challenges and grow in a post-pandemic environment.
I hope that as these companies expand, they will not lose their startup mentality, which has resulted in innovative approaches and interesting projects, such as Charter’s role in the Wellpoint mixed-use development, Vitality’s active adult plays, and Phoenix’s healthcare partnership program with Atlanta health systems.
Longer-term, I hope and suspect that some mid-sized providers will find a way to expand nationally while maintaining the culture and operating practices that worked well for them at the local or regional level.
I think of Southwest Airlines — the very name of the company highlights its roots as a regional enterprise. But, the airline found a way to adapt its model to become one of the largest U.S. carriers while still offering low-price fares and a distinctive culture that resonates with consumers and its workforce.
As Southwest started serving new markets, the impact was so strong that the U.S. Department of Transportation coined the term “The Southwest Effect.” While the effect was disruptive for legacy carriers, they adapted in ways that frequently increased sales for all airlines in a given market.
As smaller senior living operators expand in the wake of Covid-19, I hope that some mimic Southwest’s success, showing new ways of providing senior living while boosting business even for their competitors.
