Several years ago, we had a rather heated discussion with Atria’s former CEO, John Moore, in the lobby of the hotel at the NIC fall conference. This was pre-COVID. It started with our comment that Atria was getting too big to be well managed, since no operator in long-term care had succeeded when they had over 500 communities, and maybe even 300. He took strong exception to that concept, insisting that if you were a good manager, like Atria, you could do well no matter the size. Let’s just say, we were right, he was wrong, and the rest is becoming history. While Atria became a very good operator, a little arrogance may have slipped in as to how good, especially during tough times.
We know that Ventas (NYSE: VTR) was not happy with Atria’s performance leading up to COVID, and certainly not during COVID. Now, Welltower (NYSE: WELL) has decided to transition management of 89 IL communities currently managed by Atria (and formerly managed by Holiday Retirement), to six existing operators based on geography and local strength. We have to say, this is a great move, as the new managers should be able to be better focused on operations and staffing, and maybe a different culture will help as well. In addition, Holiday always prided themselves on developing IL communities for the middle class, leaving out the bells and whistles and simply delivering a product with consistent services and food. Atria’s model, however, was always aimed at the upper end, and often the two do not mesh well, despite the effort.
Two portfolio transitions have already closed, and they include 14 communities in Texas and the southern U.S. going to Sagora Senior Living. At the time of transition, they had an average occupancy of just 73%, way below the national average for IL. The second portfolio that closed has 13 communities with an average occupancy rate of 74%, again very sub-par. These are located in Michigan, Indiana and Ohio and are now managed by StoryPoint Senior Living. With improved management and focus, census levels should increase, pushing margins up as well. This expands the relationship to 94 communities.
The two largest portfolios will be going to Cogir US and to Discovery Senior Living. Cogir will be taking over management of 20 communities in the Pacific Northwest and will expand the relationship to 45 communities. The average occupancy level is 77%. Discovery is taking over 23 communities located in California and Florida with average occupancy of 78%. While Discovery, with more than 200 communities, is approaching a size where diminishing returns often set in, we believe they have broken up the portfolios under management into smaller sizes and separate incentivized management teams. Think the Ensign (NASDAQ: ENSG) model, but in groups of properties.
Finally, Quality Senior Living (QSL) will be taking over management of 13 communities with 78% occupancy in the Southeast, and Arrow Senior Living will be managing six properties in a few Plains states with 84% occupancy. The pending transitions are all expected to be completed in the third quarter. This expands the QSL relationship to 25 communities. Welltower claims there is the potential upside of nearly $47 million in NOI upon achievement of pre-COVID occupancy and margin, and an additional $20 million beyond pre-COVID, across all six portfolios. That would be nice, if not overly optimistic on the margin side.
These 89 assets have a cost basis of $164,200 per unit at transition, and an expected $171,000 per unit after some post-transition renovations. And of course, all of this is below “replacement cost.” Welltower presented a case study of a former Holiday community that was transitioned to Oakmont Senior Living 18 months ago. Occupancy has gone from 76% to 82%, RevPOR from $5,400 to $6,236, NOI from $4.0 million to $7.2 million and NOI margin from 22% to 32%.
All very impressive, but it is Hawaii and not Indiana. It would be tough to come close to those results in the Holiday/Atria communities currently being transitioned. Regardless, the 89 communities should be performing better as the post-COVID environment gets better, but we do believe the new operators will be able to push the envelope. This will all be good for Welltower and the industry.
In other news, Welltower has increased its full-year 2024 earnings guidance, and has finally increased its dividend, the first increase since 2017. The increase, however, is a whopping 10%, much more than we had expected and been pushing for, but it shows how much the company has improved since March 2021. Oorah!
