Why Welltower’s $1B Affinity Deal is Another Milestone for the Active Adult Market

This article is available as part of your SHN+ membership

Earlier this week, Welltower (NYSE: WELL) made headlines by acquiring a 25-property portfolio operated by Affinity Living Communities for nearly $1 billion.

The portfolio consists of 3,900 units primarily concentrated in the Pacific Northwest and carries an average age of less than eight years. With its latest transaction, the Toledo, Ohio-based REIT said it has expanded its “wellness housing portfolio.” And it plans to further grow in what CEO Shankh Mitra called the “mid-market segment” of active adult and wellness housing.

With its latest move, Welltower now works with what Mitra called the four “major” players in the space: Clover, Calamar, Sparrow and Affinity.

Mitra said that this kind of senior housing will become a much more significant part of the company’s overall strategy. And he has “never felt better” about the company’s immediate growth prospects.

I can see why Welltower is scaling up in this end of the market. The REIT said the Affinity portfolio in particular carries margins of close to 60%, with opportunities to expand by as many as three or four projects per year.

In this members-only SHN+ Update, I analyze the REIT’s recent moves in the active adult space and offer some key takeaways, including:

• How Welltower has become dominant in this part of the market
• Welltower’s plans to scale up in the space
• How Welltower’s other partners in the sector offer a glimpse into the company’s overall strategy going forward

Growth opportunities and higher margins

Four years ago, just before the Covid-19 pandemic reared its ugly head, Welltower teased a new senior housing endeavor geared toward wellness and an attainable price point for older adults. I wondered what the REIT – which was, at the time, known more for making big plays in higher-acuity senior housing properties under then-CEO Tom DeRosa – saw in the segment.

“What I’m trying to do … is mimic what goes on in a $10,000-a-month senior living community for $1,000 a month,” DeRosa said during an investor forum in 2020.

Four years later, with Mitra now at the helm, Welltower has continued that charge by amassing a portfolio of more than 25,000 wellness- and mid-market focused senior housing units open or under development. 

The REIT’s strategy is relatively straightforward. In its bid to grow that end of its business, it is seeking to “address significant and growing unmet demand for wellness and social-focused rental housing primarily in non-coastal U.S. markets,” the company noted in a business update.

The company is growing holdings specifically with an eye for communities with a “moderate price point for age-targeted residents, including empty nesters and active adults.”

It’s not hard to see why Welltower is betting more of its chips on the segment. For one, the active adult space came through the Covid-19 admirably, demonstrating the resiliency of communal living and sustainability of demand for these types of properties, despite the initial fears that the pandemic stoked.

Welltower said the operating partners in the portfolio “maintained high levels of occupancy throughout Covid, with favorable annual renewal rate increases demonstrating unmet demand for moderately priced senior apartments.”

Such communities also can carry margins closer to multifamily apartments than their senior living counterparts, with a 2022 NIC analysis noting they can be as high as 55% to 60%, given the lower overhead of operating such communities. By comparison, for-profit and non-profit independent living communities had a median operating margin of 37.1%, according to the 2023 State of Seniors Housing report.

As I have noted in previous SHN+ Updates, the senior living industry has much more opportunity to scale up in the space. For one, there are millions of older adults who will want and need senior living services but lack a way to pay for them in the next decade.

There is also the fact that Welltower believes it can crack the code for achieving financial structures amenable to middle-market rates and margins.

Welltower and Mitra believe they can acquire such communities on an attractive basis and then help grow the platforms to serve a wider market. The company acquired the Affinity portfolio for about $233,000 per unit after adjustments for cost savings through its method of financing. Mitra noted during the company’s 4Q call Wednesday that the communities operated by Affinity have “almost no services from an acuity standpoint,” and therefore can maintain higher margins.

And he does not think that is an “aberration” as he surveys the market.

“I think about this business from mostly a mid-50s to mid-60s percentage margin business,” Mitra said Wednesday during the earnings call.

Furthermore, Welltower can directly manage active adult communities, leveraging the technology-driven operating platform that the company is building. I’m sure this gives them further confidence about being able to build margin where there is the opportunity for more efficient operations, and sustain margin on an ongoing basis.

Examining the ‘major’ players in mid-market active adult

As Mitra noted, Welltower now works with what he considers to be the four major players in mid-market active adult senior housing. I believe this makes the Affinity deal another milestone in the maturation of the active adult segment, which has been red-hot for several years.

When rental active adult first emerged as a fast-growing real estate segment, one recurring question was whether the model fits more naturally into the multifamily or senior housing category. Big players right out of the gate included multifamily giant Greystar, which on the strength of its active adult portfolio has risen all the way to No. 9 on the 2023 ASHA ranking of the largest senior housing owners in the United States.

But with Welltower’s portfolio now including Affinity, Clover, Calamar and Sparrow, the largest senior housing owner has staked a claim to also being the dominant force in the active adult market specifically. Obviously, active adult communities share characteristics of multifamily and senior living, but a few years ago, it was conceivable that the market would not coalesce to this extent in the portfolio of a well-established senior housing owner.

A closer look at Welltower’s deals in the space showcases the extent of influence that the REIT will wield in shaping active adult going forward, as these companies continue to gain scale.

According to Welltower, the Affinity portfolio it acquired comprises about 3,900 units in the Pacific Northwest. The REIT noted that the operator’s markets have “a projected 5-year 55+ population growth more than two and a half times the U.S. average.” The communities are purpose-built with an average age of eight years, and carry resident rates of $2,100. They are equipped with 30,000 square feet of amenity space, which is “significantly more than the industry average,” according to Welltower.

Welltower has made similar portfolio plays in the past.

In 2019, the REIT brought Clover Management into the fold with a deal to acquire 32 communities for $343 million. A typical Clover community is about 120 units, carries no care services and charges residents monthly rates well within the definition of middle-market senior living.

When I most recently spoke with Clover CEO Michael Joseph, he said he thought the sector would explode with interest in the coming years, given its high margins and lower resident rates.

“I think active adult will end up being a major part of the senior continuum,” Joseph told me . “We’re just at the beginning now.”

Welltower forged its partnership with Sparrow in 2021. The company’s communities typically carry rates between approximately $1,400 to $2,500 per month, with amenities geared toward meeting local market demand.

One year later, Welltower purchased a 25-property senior apartment portfolio from real estate firm Calamar for $502 million. The portfolio, located on the East Coast and in the Midwest, carried average monthly rents of $1,300 per unit at the time of the acquisition.

I expect Welltower to continue scaling up in this fashion, including with its existing partners in the sector. And it’s certainly worth noting that Welltower has other active adult partners as well, including Treplus Communities.

“I believe in going deep, not going broad,” Mitra said during the company’s earnings call this week.

There is still a lot of territory left to grab in the active adult market, especially in its middle-income sector. But other investors will no doubt have to contend with the programmatic approach to the market that a REIT of Welltower’s scale and resources can bring to bear.