Welltower announced the acquisition of Holiday Retirement’s owned portfolio of 86 independent living communities for $1.58 billion, or just about $152,000 per unit. Simultaneously, Atria Senior Living said that it was acquiring Holiday’s operating business for an undisclosed price. Either of these announcements would normally be major news, but they also come on the heels of Harrison Street’s $1.2 billion purchase of 24 properties operated by Oakmont Senior Living and a very busy June (so far) with more than 30 individual transactions already made public. Perhaps the tide has turned for investment activity in seniors housing and care. 

The Welltower deal also represents yet another portfolio acquired “below replacement cost.” Earlier this month, the REIT purchased 22 properties operated by Pathway to Living and previously owned by a debt fund for $97 million, or under $90,000 per unit. Welltower plans to spend between $15,000 and $20,000 per unit to upgrade each property, which is a little higher than the roughly $12,400 per unit to $16,500 per unit estimate for the Holiday portfolio, which translates to between $1.5 million and $2 million per property. 

The Holiday owned portfolio consists of 86 properties, 80 of which are nearly identical independent living communities and six have a mix of IL and assisted living units. There are around 10,400 units across the portfolio, and occupancy averaged 76%, not far off of the pandemic low. The initial cash cap rate was reported at 6.2%, putting cash flow at around $98 million for the 86 properties. 

The deal represents the end of nearly 15 years of Fortress Investment Group owning Holiday Retirement, which it acquired in December 2006 for $6.6 billion, or around $190,000 per unit. This is not the same Holiday portfolio that was acquired then, since Holiday had around 300 properties under its belt at the time as opposed to close to 240 now. But valued at $152,000 per unit, this Welltower acquisition is certainly below Fortress’ initial price per unit from 2006.  

At the time, the price was considered to be very high and the cap rate, between 5.5% and 5.75%, very low. But at the time, the seniors housing acquisition market had never been so strong with so much depth, capital, product and willingness to deal. Holiday’s average occupancy rate at communities open for at least 18 months was also about 92%, and nearly 50 of the communities were at 100% occupancy—tops for the industry. We also can’t underestimate the tight ship Bill Colson ran at the time. 

But we still thought Fortress overpaid at the time for a “Chevy” product in secondary markets, and then the Great Recession happened. With close to 75% of Holiday’s customers selling their houses before moving into communities, the company was in for a difficult few years. Indeed, occupancy plunged to 75% in early 2010, which was much worse than anything the rest of the industry had suffered. It since rebounded, but fell back to those levels as a result of the pandemic. 

The properties were believed to have sold at a discount to estimated replacement cost in excess of 30%, which would put that “replacement cost” over $215,100 per unit. Interestingly, when you use a 6.2% cap rate on New Senior Investment Group’s Holiday portfolio’s (102 properties and 11,975 units) first quarter NOI of $27.97 million annualized, you get a value of about $150,000 per unit. Occupancy across those properties in Q1 was 79.4%, and they operated at a 36.1% margin. We’re not sure of the margin of Holiday’s 86 owned properties (but it must be in the mid-30 range), but its occupancy was not far off. 

But does “replacement cost” matter much? There are clear advantages to replacing the communities. Namely, you get a brand-new community that can better compete with the other new IL competition or brand-new active adult communities popping up seemingly everywhere. And you can charge higher rents. 

The advantage for Welltower is that they will have much lower capital costs across the communities, which frees up cash flow to invest in capex. Even with capex, the all-in basis of $165,000 to $170,000 leaves some room for error, or for growth, however you look at it. Plus, the average Holiday resident age is 81 years old with an average length of stay of approximately 32 months. That seems pretty attractive and furthers WELL’s strategy to move down the acuity spectrum. 

With Atria acquiring Holiday’s operating business, Welltower also entered into a RIDEA agreement with Atria. The contract aligns incentives for both companies, with top- and bottom-line financial metrics. There are also substantial promote opportunities to Atria upon achievement of certain long-term financial metrics. If achieved, that would improve a nominal yield in excess of 9% to Welltower and a net economic yield over 8% after capex and payment of the promote. 

Meanwhile, Atria grows substantially in size, from just over 200 properties to 447 communities in 45 states and seven Canadian provinces, making it the second-largest operator in North America. The portfolio could really be separated into two groups: Atria’s legacy properties of higher-price communities in coastal markets and its collection of more middle market communities, which the Holiday portfolio fits into nicely. Holiday’s management team, including CEO Lilly Donohue, will remain in place. 

With that scale, Atria stands a decent chance of successfully delivering on a high-quality, middle market product that could serve as a model for other investors and developers in the years ahead. However, more problems always arise the larger you are. It helps that the two companies will stay somewhat separate in terms of management and culture. But that is likely just in the near-term. When problems arise in the early-2020s (rising labor costs, new regulations, stagnant census recovery, to name a few), scale will be important, but being nimble will be useful too.