Moneyball Approach to Trading Senior Living Operators Starts to Take Hold

For more than three decades, Watermark Retirement had never been replaced by a different management company. But times have changed.

“We were replaced by Welltower on a few of our communities; but on the other hand, we’re being the replacer, going into some communities,” Watermark Chairman David Freshwater told me recently.

Swapping management companies is not a new phenomenon in the senior living industry, but we are in a particularly active period, especially for the industry REITs. Many Enlivant communities — in the Fannie Mae and wholly-owned Sabra portfolios — are transitioning; LTC is considering new management for some Brookdale communities with expiring leases; and reports suggest Ventas is weighing new management for communities in the Santerre portfolio.

Changing operators is always risky, insofar as the process involves some level of upheaval at the affected communities. But there are signs that owners are getting better at pairing the right operators with the right buildings.

The two largest owners in the space — Welltower and Ventas — say that their data analytics are driving these decisions. Both REITs beat analyst estimates for Q1 2023 earnings and touted the success of recent operator changes.

Freshwater drew an analogy to Major League Baseball, with managers getting let go by one team and picked up by another. I think it’s an apt comparison, particularly considering how data analytics drives so many decisions in the MLB, following the advent of the “Moneyball” approach.

The Moneyball story also shows that data-driven gameplay, while leading to on-the-field success for franchises, negatively affected some core aspects of the game, including the value prop of being entertaining for spectators — hence the rule changes implemented this season. In senior housing, I believe that we’ll likewise see a learning curve, as companies determine both the power and the limits of data-driven approaches, including in making operator changes.

Indeed, Freshwater thinks that current, confounding market conditions already are showing the limits of data in showing operators which “levers to pull.” Complicating things further, the industry must confront the fact that aging legacy assets require considerable capital investment in physical plant improvements, building systems and technologies. Choosing to make these necessary investments has been particularly challenging for REITs and other senior living owners in this environment of rising costs of capital and shrinking margins. It simply doesn’t pencil. This highlights that replacing an operator is not necessarily a panacea; the industry is facing other serious systemic challenges.

Operator shifts paying off

On their most recent earnings calls, execs with Welltower and Ventas touted successful results stemming from some operator shifts that have taken place in recent years.

Welltower flagged Oakmont in particular, focusing on six assets that transitioned from a different management company in August 2021. Since that time, spot occupancy increased more than 1,200 basis points (reaching 86.2% as of March 2023). And earnings per unit are up by a projected 20% for the portfolio as a whole.

These properties are located in California’s Bay Area and the Los Angeles metro, which are areas well-known to Oakmont. Welltower also highlighted the mid-2022 transition of The Kensington, in the San Francisco suburb of Walnut Creek, to Kisco Senior Living’s management. Concurrently with that shift, Welltower acquired Kisco’s nearby Byron Park community.

The Oakmont and Kisco examples showcase Welltower’s strategy of creating “regional density” with preferred operating partners. This is not a new strategy in senior living, of course, but the REIT believes that it can execute more effectively on this approach than has historically been possible, with data informing the decisions about which operator is best suited for particular properties.

“We continue to believe that there’s an opportunity to recognize meaningful cash flow from our own portfolio as we optimize location, product, price point, and operators using our data analytics platform, Alpha,” Welltower CEO Shankh Mitra said on the Q1 earnings call.

Ventas leaders also have highlighted their increasing use of data — via the REIT’s Operational Insights platform — to match the right operator with the right asset. On their most recent earnings call and in an accompanying presentation, they said this “meticulous” approach has resulted in “outsized” growth in the transition portfolio of 200 properties, which posted 30% year-over-year NOI expansion in Q1 2023.

Discovery Senior Living, Sodalis and Priority Life Care were among the operators that Ventas Chief Investment Officer and EVP of Senior Housing Justin Hutchens called out by name, for their success with transitioned communities. Discovery, for instance, in Q4 2021 took on 16 assisted living communities located in a “tight geographic area” and existing Discovery markets; the portfolio has achieved 770 bps of occupancy growth and has grown NOI by “many multiples,” Hutchens said.

Of course, transitioned communities should be driving outsized growth, given that an operator shift usually is meant to improve underperforming assets. And operating fundamentals seem to be improving across the board — Welltower and Ventas also noted the strong Q1 performance of legacy communities managed by long-time operators such as Sunrise and Atria. Furthermore, Brookdale Senior Living’s Q1 earnings beat analyst estimates, as did the results of LTC Properties and National Health Investors, showing a generally rising tide.

Still, I think it’s encouraging that the largest REITs are in a position to boast about the performance of transitioned communities, and highlight their performance as part of a larger, positive story. Over the last three years, the REITs made some big moves to swap operators — sometimes in deals involving 20 or more buildings — and I feared (and expected) that we would start hearing about trouble in some of these portfolios right around now, as the new operators struggled to handle such rapid growth.

This surely is playing out in some instances, even if the REITs aren’t broadcasting these issues on their calls.

As Freshwater told me, taking on 20-plus buildings all at once virtually guarantees some “stumbles,” given the scope of the undertaking. He echoed what I’ve heard from countless other operator execs when he said: “You just brought on a whole lot of people that have to buy into your culture, understand your systems, do marketing and sales the way you want it to be done — it’s not easy.”

Even the most sophisticated data analytics won’t change the pain that comes with an operator switch; still, the recent earnings provide some indication that the Moneyball approach to operator shuffles might be taking some guesswork out of the process and improving the odds of success.

Limits of data

I’m optimistic about the potential for systems like Welltower’s Alpha and Ventas’ OI to modernize the industry by not only aligning operators with the right assets, but by generating insights that will help them improve their management once they’re in place.

However, we’re still in the early innings for these platforms, and there are sure to be examples of failed transitions, and lessons learned about the best ways to apply data and the limits of its power to predict and drive success.

In fact, current market conditions could present particularly tough tests for the data-driven approach, as Freshwater describes “fascinating” but confounding variations in performance within discrete market areas.

“We may have, for example, six communities in a concentrated area within a state, where four of them are doing great and two of them are struggling, and then you ask, why are the two struggling?” he said. “Then you look to analytics — for example, lead conversion, search engine optimization, all that stuff, and we’re pulling the exact same levers at all six communities; we’re doing everything identically and two are underperforming, maybe two are overperforming and two are doing just fine.”

This is leading to a situation in which Watermark is having to adjust its approach nearly on a community-by-community basis.

“We have 70 communities, it’s like there are 68 permutations,” he said.

Such variation is hard to explain, but Freshwater attributes the disparities in part to the differences in Covid responses and protocols even at the county level, and the lingering effects that this is having on marketing and sales, the performance of on-site restaurants and other revenue-generating elements of a community, consumer perceptions of senior living, and other factors.

The upshot is that Watermark has totally pivoted in its approach to management.

“We at one time were trying to streamline our business, at least on a marketing/sales side, so that we repeated the things that worked and avoided the things that didn’t work — we were moving away from customization of everything we did, because we wanted to be more efficient, move quickly,” he said. “We’ve gone full circle, we’re back to 100% customization of every single thing we do, because we just are not finding any two things work the same way.”

All this said, Freshwater and Watermark CEO David Barnes are firm believers in the power of technology to drive senior living forward. Barnes has a degree in Management Information Systems and a minor in math, and Watermark early on hired three programmers to build its technology platforms in-house. And data is helpful even now, revealing some trends that allow Watermark to “follow the bouncing ball,” Freshwater said.

But he also said that the current climate — the most unique time he’s experienced in the industry — is highlighting once again that senior living is a “people business,” with all the unpredictability that entails. And to meet the moment, he is looking up from the data and finding it especially helpful to connect with colleagues across the industry, brainstorming and exchanging ideas. Based in part on these connections, he sees some “really cool things going on” and is more optimistic than pessimistic about the future.

“I don’t think we have much to hide in this industry, we’re all feeling the same thing,” he said.