The recent acquisition of 16 communities from Healthpeak (NYSE: PEAK) was the largest transaction in company history for Discovery Senior Living and marks the start of a strategic shift for the provider, to a structure of regional brands.
The deal was publicly announced last week by Irvine, California-based Healthpeak, which is a real estate investment trust (REIT) that is in the process of selling its large portfolio of rental senior housing. Discovery acquired the 16-property portfolio in a joint venture with White Oak Healthcare REIT, for $230 million.
White Oak’s senior housing portfolio now numbers 65 properties, Managing Director Jeff Erhardt told Senior Housing News. Meanwhile, the addition of these communities brings Discovery Senior Living’s portfolio to 69 communities, representing more than 11,000 units. That places Discovery among the 10 largest U.S. senior living providers, according to 2020 data from industry association Argentum.
With Discovery having achieved this scale, the development of a multi-brand structure is meant to balance the advantages of regionally-focused providers with the efficiencies and resources of a national enterprise, CEO Richard Hutchinson told SHN.
“A long time ago, we said we didn’t want to replicate mistakes that other companies have made as they grew,” he said.
Behind the transaction
Shortly after the Covid-19 pandemic began to sweep across the United States last spring, Healthpeak made the strategic decision to dispose of its rental senior housing assets. The REIT approached Discovery to gauge the company’s interest in communities being marketed, Hutchinson said.
Meanwhile, White Oak also was looking at the assets for sale, and the REIT was interested in some of the same properties that were on Discovery’s radar.
There were some “twists and turns,” Erhardt said, but ultimately Discovery and White Oak decided to acquire the 16 properties in a joint venture, in part because the leadership teams at the two companies were already long-standing partners with about 15 years of shared history.
The portfolio consists mostly of independent living and assisted living units, with a small amount of skilled nursing, Erhardt said. The communities previously were operated by Dallas-based Capital Senior Living (NYSE: CSU); Des Moines, Iowa-based Life Care Services; and Louisville, Kentucky-based Atria Senior Living.
Coming in at about $125,000 per unit, the transaction offers a good basis for long-term value creation, Erhardt said.
Discovery and White Oak are “aggressively pursuing” renovation projects to position the portfolio — particularly the former Capital buildings — for success as the industry begins to recover from the Covid-19 pandemic, Hutchinson noted.
Discovery’s multi-brand strategy
Of the 16 newly acquired buildings, one is located in North Carolina, one is in New Mexico and 14 are in Texas. The concentration in the Southwest was appealing to Discovery, as a means to creating its first region-specific division, which will be called Morada Senior Living.
“My belief is that regional operators are very intimate with their communities,” Hutchinson told SHN. “As companies scale beyond 20 or 30 communities, they start struggling staying intimate with their communities and understanding the details of the market and staying nimble — that makes regional operators very, very good.”
Morada will be based in Dallas and will be geographically concentrated in the region, with communities in Texas, Oklahoma and New Mexico. The typical profile of a Morada community is 100 units or fewer, focused on assisted living and memory care, located in a secondary market, commonly operating on a universal worker labor model and with a lot of referral-based sales.
The Morada division will be run by a president who reports to Hutchinson. A president has been selected and is a “seasoned leader” in senior housing, and Discovery will soon announce the appointment, according to Hutchsinon.
The division will function in some ways as an autonomous regional provider, with its own management team and human resources and other business functions; but, the parent company will act as a support center, providing access to resources that regional operators typically do not have, such as an in-house marketing agency, a development group, a legal team, and a licensed home health provider.
Going forward, Discovery intends to create similar regionally-based divisions in other parts of the country, and work is already underway.
“We do have a couple brands that are expected to go into a full divisional construct over the next 12 months,” Hutchinson said.
Discovery will also continue to operate national brands. A community is a good candidate for a national brand if it is a higher-end product with a larger scale in a primary market.
Among Discovery’s national brands are:
— The Discovery Village brand of rental continuum communities
— The Discovery Commons brand of assisted living and memory care buildings that are typically larger than 100 units
— The Discovery Place brand, under which Discovery is creating a new product of senior apartments with services
— Discovery Select brands, which are higher-end communities in primary markets that operate under naming constructs, such as Aston Gardens, that do not include Discovery
In the future, it is possible that a regional brand and a national brand could both have a presence in the same metropolitan area, but they will be serving different parts of the market, Hutchinson said.
Other senior living providers — including Atria; Lake Oswego, Oregon-based Eclipse Senior Living; and Chicago-based Pathway to Living, to name a few — are also moving toward multi-brand portfolios. Mississauga, Ontario-based Revera, the parent company of Sunrise Senior Living, also could go down the multi-brand route, CEO Tom Wellner recently said.
Leaders with these companies have cited similar reasons as Hutchinson for pursuing this strategy. They aim to serve different market segments by balancing the advantages of scale with more focused operational teams.
Hutchinson explained the difficulties in trying to find the “unicorn person” who can run both a large continuing care retirement community and a health care-focused, 60-unit building in a secondary market. Separating those very different types of assets into distinct brands that are run by leaders with specialized skill sets simply makes sense, he said.
“The thesis is simple,” he said. “… We plan on continuing to make smart transactions as opportunities present themselves, but we are focused on making sure that whatever the acquisition is, it finds a home either as a Discovery national brand or one of our regional brands.”
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