The impending closure of Eclipse Senior Living and the transition of its 90 communities to eight other operators is the latest upheaval to the industry, after nearly 20 months of pandemic-related disruption.
Lake Oswego, Oregon-based Eclipse’s closure is obviously bad news, with 171 employees losing their jobs and shares of its real estate investment trust partner Ventas (NYSE: VTR) falling sharply.
My hope and belief is that Eclipse’s corporate workers will readily find other opportunities in senior living, given providers’ pressing need for talent. I also think the hit to Ventas will be short-lived, given that the transitions resolve uncertainty around the portfolio and new operators could realize upside.
In terms of larger implications and lessons, I’m drawing a few takeaways from the situation, including:
— Timing of the pandemic was particularly bad for Eclipse
— Creating an operator to tackle a turnaround is a tough play
— Covid is casting a long shadow, particularly over Class B and C properties
A matter of timing
When Eclipse was formed to take over Ventas’ Elmcroft Senior Living portfolio in late 2017, the play theoretically made sense.
The strategy seemed intended to replicate what Ventas and Atria Senior Living have successfully built: an operating platform with a seasoned executive team; an efficient and tech-forward operating platform to leverage efficiencies of scale; and, ultimately, a multi-brand portfolio to target different price points.
The transition of Elmcroft to Eclipse also shifted the communities from triple-net leases to Ventas’ senior housing operating portfolio (SHOP), and the REIT took a 34% stake in the operating company. So, interests seemed aligned, with Ventas and Eclipse striving to realize upside from the struggling portfolio.
But the effort proved challenging. Ventas reported that the Eclipse portfolio had been hit especially hard by “unprecedented” market dynamics in Q3 2019 — namely, sharp pricing pressures and persistent occupancy challenges that were most pronounced for assisted living in secondary and tertiary markets. Those market headwinds came amid the “noise” caused by Eclipse’s turnaround efforts, including the introduction of a dynamic pricing model.
That quarter, Ventas’ SHOP net operating income (NOI) dropped 5% year-over-year. Excluding the Eclipse portfolio, the SHOP NOI would have increased 100 basis points.
The Eclipse properties were still beleaguered as of late February 2020, at which point Ventas’ leaders said they intended to pursue a joint venture partner for the portfolio. But the Covid-19 pandemic was about to redefine what constitutes “unprecedented” market conditions.
Given where the Eclipse portfolio stood prior to the pandemic, I think it’s clear that Covid-related occupancy erosion, rising expenses and other challenges — including the current staffing crisis — proved too much to overcome. Obviously, a potential portfolio sale or JV transaction could not be consummated, precipitating the decision to shut down the operating company and transition the assets.
No doubt, Eclipse was not purely a victim of bad timing; management must have made missteps and miscalculations along the way. But any company, particularly a newly formed one, stumbles. RBC Capital Markets Analyst Michael Carroll is among those who believe that the ESL team deserves to be cut “some slack” given the pandemic.
“They had a portfolio that they were trying to turn around, they were trying to build a company, and then Covid happened, and obviously Covid just kind of threw a big wrench into what they were doing previously,” Carroll told me.
Building the plane in the air
I think it’s significant that, as Carroll noted, Eclipse was trying to turn around a portfolio and simultaneously build a company. While the ESL management team no doubt was unlucky with the pandemic timing, the situation reflects the high level of risk in creating a new operator to take on struggling communities.
Consider that Ventas could have transitioned the Elmcroft properties to regional operators back in 2017. Doing so might have driven more immediate results, given that Eclipse had to put its people and systems in place while also trying to shore up the properties.
“For the first few years, we were flying the plane while we were building the plane,” Eclipse CEO Kai Hsiao told me back in April 2021.
At that time, he said that the plane finally was built, with “all engines humming.” Unfortunately, it apparently took too long to get the company fully airborne.
Chicago-based Enlivant potentially is another example of just how long it takes to build an operating company and execute a turnaround.
Enlivant was formed back in 2014 to take on the deeply troubled Assisted Living Concepts portfolio. Like Eclipse, Enlivant operates largely in secondary and tertiary markets and has turned to dynamic pricing as a strategy.
Enlivant has achieved success in some areas; the company seems to have a strong culture and workforce, and former CEO Jack Callison has moved on to lead an even larger company, Sunrise Senior Living.
But, even before the pandemic, owners TPG and Sabra Health Care REIT (Nasdaq: SBRA) were in a holding pattern on a potential transaction — much like Ventas and Eclipse — as they waited to see if the Enlivant portfolio would strengthen. Presumably, when Sabra took its 49% stake in 2017, the REIT believed that the operator’s results over the next three years might improve more quickly and warrant Sabra taking out TPG’s interest, per an option.
Now, analysts with BMO Capital Markets think that the Eclipse closure could foreshadow trouble for TPG’s efforts to sell the Enlivant portfolio and pave the way for a Sabra exit.
“We see the lack of an ESL sale in what’s been a surprisingly liquid market (PEAK exited $4B of SH assets) as a potential negative read-through for TPG/SBRA’s targeted Enlivant sale,” the BMO team wrote. “Both portfolios are secondary market, assisted living focused with lower quality demographics.”
Senior living needs more entrepreneurial operators, but taking on a large portfolio with complex challenges is a huge lift for any management company, much less a startup. I think ownership groups and operators alike need to be realistic about these challenges and the timeframe needed to achieve objectives — and recognize that unexpected, major disruptions like a pandemic could be catastrophic in the midst of the process.
A bifurcated recovery
As the senior living industry continues to bounce back from the Covid-19 pandemic, the recovery appears to be playing out differently for Class A product versus Class B and C product. In just the last week, we reported on the unfortunate Eclipse news but also on positive trends among more upscale providers, with Koelsch Communities surpassing pre-pandemic occupancy levels, Commonwealth Senior Living adding about 4.5% of occupancy since March, and Benchmark achieving five straight months of occupancy growth.
And last week, NIC MAP Vision data revealed the first nationwide gain in occupancy since the pandemic began, with average occupancy hitting 80.1% in Q3 2021.
RBC’s Carroll believes that a bifurcated recovery is indeed taking place, with higher-end communities recovering more quickly, based on trends he has observed in REIT portfolios.
But, he is also upbeat about the potential for older, smaller and more middle-market communities to start regaining strength.
There is significant upside from where NOI sits today in the ESL portfolio, he noted, although he questions whether the run-rate will ultimately stabilize below 2017 levels, when Elmcroft transitioned out and Eclipse took over. Still, the post-pandemic environment could give the assets a much-needed and long-awaited boost, given reduced construction activity and stronger demographic tailwinds.
“They’re not the premier assets, but I think that there’s growth there,” he said.
It’s up to the new operators to achieve that growth; they should be aided by their knowledge of the local markets. And, they are aligned with Ventas through incentives tied to NOI, not just revenues, the BMO analysts noted.
Still, I expect some of these properties will ultimately be sold; the fact that two successive operators have struggled with the portfolio suggests to me that there are some obsolete buildings or other deep-rooted issues. And, Ventas did not rule out dispositions once the operator transitions have occurred. I also remain concerned that the ongoing shift toward local and regional management is going to over-tax some of the providers that are taking on multiple communities at once.
In any event, a bifurcated recovery indicates that Covid is casting a long shadow and headlines will remain mixed at least for the remainder of the year, with distressed providers and portfolios continuing to change hands or close even as overall industry metrics are on an upward trajectory. As Carroll put it:
“I think that there are companies struggling … I don’t think that the recovery in seniors housing is uniform.”