Despite Fears of ‘Death Spiral’ for Small Buildings, Seasoned Operators See Promise in Enlivant Portfolio

Earlier this spring, I received a LinkedIn message related to the future of the TPG/Sabra Healthcare REIT (Nasdaq: SBRA) joint venture senior living portfolio, operated by Enlivant.

The message was from a relative of a resident, sharing a letter stating that a new operator would soon be taking over. I eventually learned the future operator in question would be Navion Senior Solutions. Then just this week I received another credible message noting that Discovery Senior Living via its Terrabella regional brand had taken on one of the transitioned communities.

The exchanges are just two small pieces in the much larger puzzle, regarding the future of Enlivant. And the ultimate fate of Enlivant will also say something about the future of the industry as a whole, given the provider’s large scale and the profile of communities in its portfolio.

In particular, I’m concerned about the potential for a large number of small senior living communities in secondary and tertiary markets to enter a “death spiral” that leads to many properties closing their doors or being repurposed for other uses.

In this week’s exclusive, members-only SHN+ Update, I consider the future of Enlivant and offer key takeaways, including:

• How Enlivant’s transitions might parallel Eclipse Senior Living’s in 2021
• How a myriad of pressures could send some communities into a “death spiral”
• Why there’s optimism for the future of Enlivant buildings

The past informs the present

As of its latest count, the Enlivant JV covered 154 communities, with 51% of the JV owned by TPG and 49% by Sabra. The JV represents the majority of Enlivant’s total portfolio, which numbered 215 communities per the 2022 Argentum data. For the full year of 2022, Enlivant reported a net loss of $64.3 million, while total revenue at the Enlivant JV grew 15% between 2021 and 2022.

Interest rates impacted the company’s debt service costs, going from a monthly interest expense of roughly $1.7 million in the fourth quarter of 2021 to nearly $3.6 million in the fourth quarter of 2022.

In March of this year, results from a financial audit noted there was “substantial doubt” about the ability of the JV to continue as a going concern amid generally high expenses and rising interest rates. It was revealed that Enlivant will need “additional liquidity to continue its operations over the next 12 months.”

Earlier this year, the JV was in the process of negotiating with lenders — including Fannie Mae, Freddie Mac and KeyBank — to restructure its financing following a notice of default. Then, in May, Sabra officially exited the JV. The move had “no impact on earnings or any other ramifications to the company,” according to CEO Rick Matros. He also confirmed that Fannie and Freddie have taken back the JV assets in their loan portfolios and are transitioning them to new operators.

At least one of the Sabra-transitioned properties out of the JV will be operated by Navion, although which companies will operate the others is yet unclear. Matros declined to comment further on the transitions, noting that Sabra was “not directly in the loop” regarding the JV. But the REIT also is transitioning the 11 wholly-owned Enlivant properties in its portfolio to new operators.

A spokesperson for TPG also declined to comment when reached by Senior Housing News.

Enlivant’s struggles and subsequent management transitions in 2023 also call to mind Eclipse Senior Living, which in 2021 permanently shut down operations due to impacts of the Covid-19 pandemic’s early stages. Ventas (NYSE: VTR), which then owned a 34% stake in Eclipse, transitioned operations of its 90 Eclipse-managed communities across 20 states to eight new operators.

Like Enlivant, Eclipse was formed to take on operations of older, struggling communities — in that case, the legacy Elmcroft portfolio. Eclipse suffered from particularly bad timing, as the company was newer and less stable than Enlivant when the pandemic hit. But Eclipse’s closure still cast a long shadow over the industry and called into question the future of certain kinds of communities in need of a turnaround. Even at the time, analysts observed that Eclipse’s fate did not bode well for the prospects of TPG finding a buyer for the Enlivant portfolio.

With the Eclipse parallel in mind, and so many Enlivant communities going to new operators, I reached out to Enlivant to ask whether the company will continue to exist once the transitions are complete. Enlivant provided the following statement:

“For more than a decade, Enlivant has delivered high-quality, compassionate care to residents across the country. We are committed to working with our lenders and owners to serve and protect the wellbeing of these individuals, their families, and our employees. In many of these cases, this involves transitioning management of communities to new operators. We truly appreciate the support of all our stakeholders as we go through this process.”

The language “many of these cases” implies that Enlivant will continue in some instances to operate senior living communities. But the company will be vastly diminished in scale from its position as the 12th-largest senior living provider in the country, per the 2022 Argentum rankings.

Enlivant’s management team, including CEO Dan Guill, is routinely praised within the industry, so it’s conceivable to me that REITs or other ownership groups could tap them to take on new portfolios, reviving Enlivant by giving the team a chance to apply their skills to communities with more market advantages and less financial drag than the legacy Assisted Living Concepts buildings they have been working with.

If this doesn’t happen, I suppose it’s possible that the company will continue to operate with a more modestly sized portfolio. But I don’t think it’s a promising sign that Sabra is transitioning its 11 wholly-owned properties, given that these communities are larger facilities in larger markets than the typical JV community, which on average had fewer than 50 units. If Enlivant is to continue as an operator, it seems to me that they will need to have as many of these larger communities under management as possible. That’s because the smaller buildings are especially hard to operate in current market conditions.

In fact, I wonder how successful even new operators will be with the JV properties, as I fear some of these assets are facing a “death spiral” of unsustainable financial and operational challenges.

Some communities could face ‘death spiral’

According to the latest occupancy report from NIC, the senior living industry has seen seven straight quarters of occupancy growth. And yet, certain senior living communities could be falling into a tailspin of diminishing returns even if they can build occupancy.

One determining factor is where a community is located. Communities in secondary and tertiary markets face a greater uphill climb toward pre-pandemic recovery due to mitigating factors like a shallower labor pool than in larger markets, and less ability to drive rate than communities located in more affluent areas.

Community size is another factor. The country’s largest financial institutions are wary of properties under 100 units, with some exceptions for particular operators or specific communities. The issue is that smaller communities often can’t absorb the cost increases associated with leaning on agency staffing to fill gaps like a larger community could.

“The smaller problems can create a large ripple effect against NOI,” VIUM Capital Managing Director Grant Blosser told me.

Walker & Dunlop Senior Vice President Mark Myers knows all too well the impact rising interest rates and inflation can have on a smaller-unit count community. He owns a small, 16-unit AL and 49-unit skilled nursing home in southern Minnesota that ultimately closed due to the exact market pressures I’ve been describing, with Myers now in the process of transitioning the property.

The property had multiple factors stacked against it, the biggest of which being it was in a rural market and to attract staff, the community had to increase wages between 30% and 50%, while food costs shot up 35%.

“You have to hire people at a much higher cost, and everything else you’re doing costs more money and you can’t spread it over enough units, it’s really difficult to survive,” Myers said.

That leads to a self-sustaining cycle of pain where an operator can’t cover the costs after building back census on discounted rates all while paying staff competitive wages. Even with 40% margins — a rare but still attainable sight in today’s senior living environment — troubled operators must refinance debt — already trickier thanks to recent financial market turmoil — and then make debt service payments that might be harder to meet than before they ran into operational troubles.

An industry source with knowledge of the Enlivant situation told SHN there was very little appetite by the industry’s institutional investor base for small assets, only hammering home the trouble facing tertiary markets. The source told us that structural changes in labor and expenses made it difficult to turn a profit on such isolated communities, with the source adding that capitalization rates were likely in the 8% to 9% range, if anyone chooses to bite on an Enlivant property.

The industry’s bifurcated recovery has never been more clear as labor concerns weigh heavy in rural markets as labor softens for larger, primary markets.

At the same time, communities in secondary market and tertiary market properties may not be able to be as aggressive on raising rates, leaving operators handcuffed from managing costs while margins are squeezed and labor is tight — a phenomenon Myers and others who have spoken with SHN term as a “death spiral” as occupancy declines, rates are reduced and costs outweigh revenue.

Operators also are witnessing the “death spiral” phenomenon. The situation is all too real, Watermark Retirement Chairman David Freshwater recently told my colleague Tim Mullaney, and is one reason why Watermark is pursuing a strategy focused on the high end of the market, where the provider is still able to command “pretty decent margins” at 70% to 75% occupancy.

Sodalis Senior Living focuses on a more affordable price point of around $5,000 a month for assisted living, but President Traci Taylor-Roberts also is wary of communities that are too small. Sodalis sold its 16- to 32-bed memory care communities, and said that similarly sized properties simply “have a very difficult time making money” in the current climate.

“I think that’s why you see so many for sale, is because they just can’t bear all the inflation; they just don’t have the kind of margins to be able to absorb it,” she told Mullaney.

While many of these small communities are for sale, actually getting deals done could prove problematic, as buyers flush with capital will smell blood in the water and bid low to get a steep discount.

Even as the Federal Reserve announced plans to skip June’s interest rate increase, there’s no substantial relief in sight for senior living operators facing slim margins within smaller markets, even as demand for senior living grows. I believe this shows that the recovery and optimism shared by many in the industry is tilted towards operators who are in larger markets with dry powder ready to deploy capital where demand remains strong.

While Enlivant’s future is hazy, one thing is clear: senior living operators, especially smaller ones, would be well to study the aftermath and plan accordingly.

Reasons for optimism

Still, there are reasons to believe that Enlivant can succeed in operating certain communities going forward, and that new operators can be successful after taking over some former Enlivant buildings.

Sabra’s Rick Matros, for one, believes that the Enlivant buildings are still viable assets, per an email he sent SHN:

“The issue isn’t with the facilities or the markets they are in. It’s a combination of the impact of Covid on the business followed by the downturn of the debt markets. That downturn knocked out most of the buyer universe as we’ve seen throughout that space.”

Furthermore, operators with experience and credibility see potential in some of the assets. And it seems that in particular, they believe more regionally-focused operators might be effective in running the communities.

Discovery is one of the largest U.S. providers, but is organized around largely autonomous regional sub-brands such as Terrabella. And Navion’s strategy, per a 2022 interview with SHN, is to take on communities that are no more than a 5-hour drive away from the company’s existing markets. Representatives for Discovery were unable to comment, citing a non-disclosure agreement.

Blosser said the Raleigh, North Carolina-based Navion is likely “small enough that they can be a little more nimble” than larger operators, a possible sign that lenders could be fitting the transitioned properties with operators able to work more efficiently in smaller markets.

If we’re looking to Eclipse as a somewhat comparable situation, some of the new operators are driving good outcomes at those properties. Sodalis, for one, has been able to achieve occupancy growth and financial upside across more than a dozen former Eclipse buildings.

I’m not arguing that all small-scale senior living buildings are doomed. Several small-home operators that are intentionally going small to reduce overhead costs and satisfy a different niche within the industry. That’s evidenced by small-home neighborhood demand seen by Rose Villa, within the rapid growth of Majestic Residences’ small-home franchise model and BrightStar Care launching its new Care Homes small-home model.

For the time being, operators will need to dip their fingers into the chalk bag, secure their handholds and hang tight before considering climbing to new heights. I’m choosing to hope for the best outcomes, not only for the sake of the industry, but for the residents this industry serves.