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Last week, Welltower (NYSE: WELL) announced it was moving to dissolve its joint-venture partnership with Revera and sell its ownership stake in Sunrise Senior Living in favor of launching a new management platform with Cogir in Canada.
Welltower is rolling out the operating platform in parts of Canada with plans to acquire Revera’s interest in dozens of communities, among other transactions.
Known internally at Welltower under the moniker “Project Transformer,” the move is the culmination of a seven-year process to bring Welltowers’ contracts into the future — or, as CEO Shankh Mitra put it, to bring all its senior housing operator relationships into “bottom-line focused contracts where we sink and swim together.”
Welltower’s latest move with Cogir takes the contract transformation to the next phase, thanks to the private letter ruling (PLR) from late 2021 that enabled Welltower to directly operate independent living assets. The joint operating platform fundamentally changes the “owner/operator” dynamic to one of joint managers.
Mitra called the move one that will “truly transform our company in the next chapter of this evolution.” I agree with him that this is a transformative move for Welltower, especially given its relative position in the industry. But more than that, I think it could represent among the most significant developments in owner-operator contracts since the popularization of the RIDEA contract structure over the last 15 years.
In this week’s exclusive, members-only SHN+ Update, I analyze the latest moves at Welltower, and share some key comments and takeaways, including:
- Why the stage is set for even more alignment between owners and operators
- How Welltower’s road ahead may be a blueprint for other REITs looking to grow an in-house management platform
- Where I think management contracts could go next
Stage is set for closely aligned contracts
In 2010, Welltower — then known as Health Care REIT — formed an $817 million partnership with operator Merrill Gardens in what became an early substantial RIDEA contract for the REIT. In the 13 years that followed, RIDEA contracts continued to proliferate, and Welltower has continued to refine them — in a particularly focused way since 2016.
Today “RIDEA 3.0” and “RIDEA 4.0” contracts represent “virtually all” of Welltower’s agreements with operating partners, Mitra said in the company’s most recent earnings call.
Welltower’s effort aimed to address“misaligned incentives due to revenue-based management contracts” and “limited flexibility and optionality given highly restrictive termination rights,” according to its most recent business update. By gradually moving to a new contract structure, the company’s management said it was able to win “greater long-term alignment of incentives through NOI-based management fees and enhanced promote structures,” “optimized asset and portfolio management flexibility” and “simplification of legacy joint-venture partnerships [providing] increased operational and capital flexibility.”
For operators, RIDEA can be a bucking bronco. Although linking up with a REIT through RIDEA can create a fast-track for growth and operational sophistication, operators could suddenly find themselves with far fewer communities to manage if they are unable to perform to a REIT’s liking.
But a mix of ongoing trends seem to make RIDEAs more attractive for both parties, and that could spell more of these contracts in the future. Senior living operators are under myriad pressures that make it harder than any time in recent history to stand on their own two feet: Expenses are still high, margins are still depressed, occupancy is still in many cases not back to pre-pandemic averages. At the same time, financing is tougher to get than in the past.
Already, there are companies that previously ruled out RIDEA that have since embraced it, including National Health Investors (NYSE: NHI), which launched a new senior housing operating portfolio (SHOP) with Merrill Gardens and Discovery Senior Living in 2022.
For operators, a RIDEA contract also usually comes with access to the larger company’s pocketbook and expertise — not just CapEx and market studies, but financing and operational data platforms.
For REITs, a RIDEA contract is effectively an investment in the future. If owners and operators can work together to increase a community’s value, there is potentially lots of upside to be had — especially if a community was first acquired at a low cost basis.
For example, Welltower has previously outlined how one former Holiday community in Hawaii could add a net value of as much as $158.7 million. All told, the company has identified $415 million of “embedded NOI growth” for its senior housing operating (SHO) portfolio simply by returning to pre-Covid occupancy of 88% and margins of 31.1%.
At the same time, it’s no surprise that a senior living operator would see having a well-capitalized, large partner like Welltower as a competitive advantage, especially if it unlocks new growth and operational strategies.
Operators that have more or less linked their future to Welltower’s — Oakmont Senior Living, for example — have grown quickly during the pandemic years. Welltower and Oakmont’s relationship began in 2015 with the acquisition of two properties, and since then has expanded to 64 communities mostly in California.
Another such operator is Cogir, which similarly started a relationship with the REIT in 2015 after an acquisition. Today, that relationship has grown to 95 communities through development, acquisitions and operator transitions, not to mention a burgeoning operating platform.
These operators appear to be fully on board with Welltower’s data-driven approach to operations, but I’m aware that not every operator in the sector embraces the REIT’s philosophy. Indeed, Welltower can be a polarizing topic of conversation at industry conferences these days. There may be a shakeout coming as some operating partners part ways with the REIT, amicably or not, as Welltower continues to build out its operating platform.
Mitra himself has spoken about growing with certain “premium” operators that are on board with the direction Welltower is headed, while transitioning away from other operators. Painful as these separations might be, they could be a step toward achieving the broader goal that many industry leaders say is critical: achieving broader owner-operator alignment across senior living.
Welltower operating platform a blueprint
As Welltower blazes a new trail in joint-venture operating platforms, I don’t see any other companies in senior housing following suit. Leaders with Sabra have no plans to pursue self-management of independent living, although the REIT also has received a green light in the form of a PLR. And Chicago-based Ventas (NYSE: VTR), Welltower’s closest REIT peer, ruled out taking a similar strategy earlier this year after “thoroughly vetting” it.
“If you’re going to take the risk of erecting a national operating platform, you better believe it’s going to drive NOI better than your current approach,” said Ventas CFO Bob Probst at the time.
In Welltower’s case, the initial operating platform does have room to substantially grow NOI. The communities with Cogir currently carry an occupancy rate of 74%, which is far below the senior living operator’s typical occupancy averages and margins north of 40%.
The operating platform with Cogir is also part of a larger 110-community portfolio, formerly with Revera, that has “a potential NOI upside in excess of $120 million upon stabilization,” according to management.
Although Welltower will be the first REIT to attempt a management platform of the scale and size with Cogir, it surely will not be the last if the prize is worth it in the end. Although the companies’ way forward in that regard is still not entirely clear, Welltower management noted in the REIT’s most recent earnings call that Cogir could only be the leading tip of a wider strategy.
According to Mitra, the new platform helps form the company’s vision of a new “post-PLR world,” following the favorable ruling issued by the IRS in November 2022, and he predicted “rapid growth” for it in the “very near future.”
The move with Cogir does at least answer the question about what Welltower’s first big move would be, leveraging the PLR. And it’s interesting that the early strategy is is centered around Canada, where the REIT has most of its independent living properties. That’s because the Canadian model of independent living, as characterized by big brands such as Cogir and its competitor Le Groupe Maurice, is distinct in several ways from the typical U.S. model. Some hallmarks of the Canadian model include large properties — Cogir’s “sweet spot” is between 200 to 300 units — that are sharply focused on lifestyle and hospitality. Cogir also develops multifamily properties like the mixed-use “Humaniti” development in Montreal, which includes a Marriott hotel in addition to condos, office and commercial space.
The Canadian IL model in fact might represent an interesting blend between active adult and more traditional U.S. independent living. At a time when there is some hand-wringing about rising acuity redefining IL in the United States, and a white-hot active adult rental market, the time could be ripe for the introduction of a Canadian-style offering here. And should Welltower want to create such an offering, the pieces may be well-positioned. For instance, the REIT already has a strong relationship with Cogir’s U.S. operating arm, led by industry veteran Dave Eskenazy.
And should Ventas want to pursue a strategy along these lines, it’s worth noting that the company also has a strong Canadian partner in Le Groupe Maurice — which at least prior to the pandemic was exploring the possibility of expanding into U.S. markets.
The introduction of a new IL model in the States, should it prove successful, could in fact drive great interest in and adoption of REIT self-management of independent living in the years ahead, despite the tepid interest expressed by companies other than Welltower today.
This is all very speculative, of course, but the push to increase penetration rates by creating more innovative models, the major opportunity represented by the leading edge of the boomer demographic, and the ability of REITs to self-manage IL all could combine in the years ahead — and certainly, Welltower is positioning its efforts with Cogir as a major moment of transformation. If Welltower’s “Project Transformer” ends up being appropriately named, I think the company’s efforts could reshape the industry in the same way as the REIT’s pursuit of RIDEA contracts from the model’s earliest days to its expansion and refinement in recent years.