Over the past week, executives with publicly traded senior living companies outlined their latest earnings reports. They all see a long runaway ahead for occupancy and NOI growth — the trick will be getting there.
A general theme has emerged in recent quarters: Executives see the senior living industry perched at a crossroads between today’s challenges and tomorrow’s opportunities, and believe that pivoting to growth will require truly new approaches to operations.
To that end, REITs are poised to take a more active role than ever before in driving ops.
For example, Welltower (NYSE: WELL) is spinning up a new operating platform and recently won flexibility from the IRS to self-manage about 45,000 independent living units in its senior housing portfolio.
Ventas, meanwhile, is touting its “Operational Insights” (OI) platform. Through OI, Ventas aims to put more actionable data at operators’ fingertips, to drive performance and margin.
Not every REIT is jumping wholeheartedly onto the bandwagon of self-management, but even organizations that have strategically avoided RIDEA in the past — namely, National Health Investors (NYSE: NHI) — now see this as a major growth area.
In this week’s members-only SHN+ exclusive, I analyze these and other themes, including:
- Welltower’s focus on reducing “mystery” to drive margin
- Ventas’ efforts to “engage and influence” via its OI platform
- NHI’s embrace of RIDEA — and Sabra’s caution on self-management
Mystery, margin and Welltower 3.0
Early in the pandemic, many senior living leaders were optimistic that the solution to margin compression was occupancy recovery.
Fast-forward to 2023, and margins still have not risen to pre-pandemic levels for many companies even as census has risen. That has prompted debate regarding whether the industry should rethink expected margins in light of higher wages for workers and a return to higher interest rates, among other pressures.
But Welltower CEO Shankh Mitra firmly believes that pre-pandemic margins are not only attainable but can be exceeded through more sophisticated management of communities.
By self-managing certain communities while harnessing its new operating platform to assist partners across its portfolio, Mitra said he believes the company can meet and exceed pre-pandemic margins of 30.8%. In fact, Mitra said he would be “disappointed” if the company only returned to pre-pandemic margins, echoing comments he made on a previous call.
Instead of working closely with operators to bring down labor costs as REITs such as Welltower often do, Mitra believes that the company can self-manage certain low-acuity units to have greater control over their performance in the long-term. Better labor management is one area targeted for improvement.
“Agency labor is a function of, frankly, weak management,” Mitra said. “We need to really get full-time employees in the communities. This is not just a question of cost, but … it’s also a question of culture and the customer experience.”
On the whole, Welltower management sees the industry in a period similar to what the multifamily real estate sector saw in the mid-90s, when it shifted from fee managers to owner-operators.
That gave owner-operators the ability to “move much faster — and it changed how we looked at the world,” Welltower COO and multifamily veteran John Burkart said.
The company has been putting the pieces into place to execute on the plan, including through appointing Jerry Davis, a longtime multifamily real estate executive, as a strategic advisor.
“We continue to see a tremendous opportunity to professionalize and modernize the operating side of the senior living business. Following our instinct, where there is mystery there is margin,” Mitra said. “Our PLR gives us significant ammunition to accelerate the pace for what Welltower 3.0 might look like.”
He added: “I would not be surprised if we start to self-manage some IL assets in the calendar year of 2023.”
It remains to be seen how the process plays out.
“WELL is investing meaningful capital in its platform/people, ahead of taking on greater operating control, which is a long-term positive,” a Feb. 15 investor note from Stifel reads. “But [that is] expected to come with some bumps as the business matures.”
Other routes to engage and influence
Mitra is not the only REIT executive with self-management on his mind. Analysts noted late last year that Ventas was seeking similar flexibility to self-manage IL units. But whether or not that comes to pass, Ventas already is making strides to “engage operators and influence performance” via its OI platform, per a company presentation.
Ventas has conducted more than 70 OI sessions with operators and launched a dashboard that “visualizes over 200k new daily operating and sales data points,” the REIT shared.
Like Mitra, Ventas CEO Debra Cafaro is looking to harness these capabilities to achieve ambitious metrics, including getting the company’s SHOP segment to its Great Recession-era average of 92% occupancy.
“We believe we have a good multi-year window here where we know the demand profile and can capture that,” she said last week. “At the same time, deliveries should remain very muted … again, much like we did after the financial crisis, where deliveries were low.”
NHI provides one more example of a REIT taking a greater role in operations — in this case, through the company’s foray into RIDEA, after being cautious about this strategy for years.
Like Mitra and Cafaro, NHI CEO Eric Mendelsohn noted that he sees “a path toward significant margin improvement” and flagged the operating portfolio as the “largest internal growth opportunity.” The SHOP communities in question formerly were operated by Holiday and now are with Discovery Senior Living and Merrill Gardens.
Clearly, operators working with the REITs are entering a period where expectations are high.
And while the REITs are enthusiastic about what they can bring to the table in terms of data and insights, operators will have to navigate new relationship dynamics with their REIT counterparts and do a sometimes tricky dance in translating numbers on a dashboard into performance on the ground.
And there is at least one REIT leader who remains resistant, at least currently, about moving toward self-management of IL units. Sabra in 2020 received an IRS go-ahead on self-managing certain independent living units after converting its then-21-community Holiday Retirement portfolio from a triple-net master lease to a management agreement structure in the prior year.
“We had some internal discussions about whether we would do anything else relative to management … but after Atria wound up taking over the portfolio, we decided that we would just keep that as optionality for us going forward,” Matros said Wednesday during the company’s earnings call.
I think Sabra’s exploration and ultimate rejection of self-management gives a window into how execs are thinking about the future, and the different tools they see at their disposal. And the faith that Matros expressed in Atria highlights the potentially fraught road ahead for owner/operator relations.
As some REITs move toward self-management of IL units and harness their platforms to influence operations, typical owner-operator dynamics will have to adapt. Success will depend in no small part on how well both parties can adapt yet stay aligned.
