Seniors Housing & Healthcare Trends

MELBOURNE: A major investor is now prioritising the conversion of skilled nursing units into seniors living communities.

Diversified Healthcare Trust will prioritize its investment efforts on converting skilled nursing wings in its existing portfolio to senior housing over acquisitions or dispositions, CEO Chris Bilotto said Tuesday on the Newton, MA-based real estate investment trust’s third-quarter earnings call. He cited returns as the reason.

That doesn’t mean buying and selling properties won’t occur, however. Bilotto noted that the REIT is selling some properties and in “small, select cases” will consider whether an acquisition “makes sense.”

The skilled nursing wings are being converted to independent living, assisted living and memory care units. “We have now approved projects across 13 communities that we expect will add approximately 356 units,” Bilotto said. “We expect these investments to generate stabilized cash returns in the mid teens or better while converting vacant space into revenue-generating units.”

Regarding redevelopment in its portfolio, the CEO said that spending this year will be on “soft costs related to design and consultants,” with “the swinging of hammers” beginning next year, “and then we’ll start to see delivery of some of those towards the back half of the year.”

During the quarter, DHC invested $22.6 million in its senior housing operating portfolio communities, Chief Financial Officer and Treasurer Matt Brown said.

Now that DHC has spent two years repositioning its portfolio through asset sales, operator transitions and targeted capital investment, the REIT increasingly will turn its attention to optimizing individual properties, Bilotto said.

“The clearest example this quarter is our transition of seven skilled nursing facilities in Colorado to a 15-year triple net lease with the Ensign Group effective on Oct. 1,” he said, noting that the move “sharpens our SHOP portfolio.”

“Skilled nursing relies primarily on government reimbursement and is more labor intensive, which is why these facilities generated only about a 5.8% margin for the quarter,” Bilotto said. “Skilled nursing is also more commonly under triple net leases with specialized operators.”

Bilotto attributed the REIT’s third-quarter results to its continued execution on its strategy.

“That strategy shows up across stronger operating results in our SHOP, active optimization of how we own and operate individual assets, and a steadily improving financial profile,” he said.

In the third quarter, same-property net operating income in the SHOP increased 50.4% year-over-year to $48 million. “This growth was driven by a 200 basis point increase in occupancy to 84.4% and a 5.2% increase in average monthly rate, which together expanded same-property NOI margins by 470 basis points to 15.8%,” Bilotto said. “We used targeted move-in incentives this quarter to accelerate occupancy, which kept average monthly rate flat sequentially. As communities stabilize, we expect to reduce these concessions and allow rate growth to flow through more fully.”

On the expense side, the CEO said, DHC’s dietary procurement initiatives contributed to an expense reduction by approximately $1.3 million compared with last year.

“Importantly, we believe significant embedded upside remains,” Bilotto said. “With same-property occupancy at 84.4%, we estimate 500 to 600 basis points of occupancy upside as our operators close the occupancy gaps between our communities and the respective NIC [National Investment Center for Seniors Housing & Care] markets.”

The CEO said that DHC was putting new management agreements in place across 76 communities managed by legacy operators in its SHOP. “Implementation is expected Jan. 1,” he said.

The agreements, extending the operator framework the REIT initiated across its transitioned communities in 2025, include “more closely aligned incentive structures and appropriately sized base management fees,” Bilotto said. “We expect them to initially generate approximately $2 million of annual cost savings while further aligning operator incentives with shareholder interests.”

As of Sept. 30, DHC’s SHOP contained 199 properties with a collective 22,445 units; of them, 9,964 were independent living and active adult, 9,111 were assisted living, and 2,462 were memory care. But 908 of the units were skilled nursing.

Occupancy was 83.8%. The average monthly rate was $5,670.

The same-property SHOP as of the end of the third quarter included 184 properties with a total of 21,000 units. Occupancy was 84.4%, and the average monthly rate was $5,696.

Of the units in the same-property SHOP, 18.4% of them were in Florida, 8.5% were in Texas, 6% were in North Carolina, 5.6% were in Maryland, 5.1% were in Georgia, 4.9% were in Colorado, and 4.8% were in Virginia. The remaining 46.7% of the units were in other states.

Also in the same-property portfolio, Discovery Senior Living-managed properties accounted for 28.5% of NOI; Sinceri Senior Living accounted for 20.2%; Stellar Senior Living, 9.1%; WellQuest Living, 8.4%; Tutera Senior Living, 7.1%; Charter Senior Living, 6.7%; and Phoenix Senior Living, 6.6%. Other managers collectively were responsible for 13.4% of NOI.

The REIT announced Tuesday that it was raising its same-property SHOP NOI guidance by $5 million at the midpoint and lowering its SHOP recurring capital expenditures by $10 million.