This story is part of your SHN+ subscription.
Another REIT has joined the RIDEA bandwagon.
During a third quarter earnings call on Oct. 29, LTC Properties (NYSE: LTC) CEO Wendy Simpson said she was a “new convert” of the RIDEA operational structure.
“For those of you who have followed us a long time, you know how anti-RIDEA I have been in the past. I am a new convert, and you know what converts do? They go in big time,” Simpson said during the company’s recent earnings call.
LTC is the latest REIT to pivot toward RIDEA. In recent years, other senior living ownership groups have sought to have a greater hand in operational performance and create shared upside using these arrangements.
REITs are currently seeking to return to and exceed pre-Covid margins and occupancy, and that suggests to me they will continue to embrace RIDEA agreements in the months and years ahead.
In this week’s subscribers-only, SHN+ Update, I give an update on RIDEA agreements today and track the following:
– LTC’s pivot to RIDEA after years of avoidance
– Recent RIDEA activity by other REITs
– Why current conditions favor more RIDEA structures
LTC seeks ‘catalyst for growth’ with RIDEA
Westlake Village, California-based LTC is starting its RIDEA conversions with operating partners that aren’t under fixed rent agreements, or have a shorter maturity duration in existing lease agreements. What follows entails $150-$200 million in RIDEA conversions across “multiple operators.”
That is the “quickest path” to building a new operating portfolio, according to LTC Co-President and Chief Investment Officer Clint Malin. He added that he sees RIDEA as “a catalyst for growth in 2025.”
“If you look at our peers – private equity and competition in our space – if you don’t have this platform, you’re excluding yourself from a lot of investment opportunities right off the bat, and that’s what we’ve experienced,” Co-President Pam Kessler said during the 3Q24 earnings Q&A.
Malin noted that the REIT is “going through budgets right now with operators and looking at both the capital side … as well as looking at implementation by operators and rate increases, to see what the bottom line would look like.”
As for how it is tackling its new foray into RIDEA, Simpson said LTC is following the example of its competitors which have already done so.
“We’ve reached out to almost every one of them … they’ve been very helpful in telling us what we need, what type of systems you might have to add on,” she said during the company’s earnings call. “We’re not going into this blind. We’re using our connections with the industry, and it’s really helping us to focus on what we need.”
Malin noted that operators are pushing for RIDEA in some cases.
“Different operating companies are interested in growing on a RIDEA basis – we’ve had people talk to us about this over the past couple of years,” he added.
LTC is not alone in changing a once-unfavorable position of RIDEA into a tool to drive NOI. NHI, for example, had previously taken a more cautious approach and had favored “an embedded triple-net lease that mitigates the volatility of the underlying operation” over RIDEA, CEO Eric Mendelsohn told SHN in early 2020.
But Mendelsohn eventually changed his tune in 2021, as new challenges born from the Covid-19 pressured operators in new ways. Today, the company has a burgeoning senior housing operating (SHOP) portfolio made up of 15 communities in “RIDEA-like” arrangements, with operating partners, some of which include Bickford Senior Living and SLC.
In 2024, RIDEA conversions are still occurring at a rapid pace elsewhere in the industry.
Welltower, for example, has converted 41 leases to RIDEA arrangements in the last two quarters of this year, with another 11 more to go in 2024. The company has honed its method in recent years, culminating in the company’s latest iteration of the management structure, which it dubs “RIDEA 4.0.”
Irvine, California-based American Healthcare REIT also sees RIDEA as a “favorable structure” of investment, with “over half” of the company’s portfolio structured through RIDEA investments to “participate directly” in the operating performance generated from its strongest operating partners, the company stated in its second-quarter 2024 investor presentation.
I also think it is notable that operators themselves are often attracted to the management structure, as it allows them to monetarily benefit from their efforts improving performance.
Looking ahead, I believe that will continue to push REITs and operators closer together – and with good reason, as the industry seeks better returns and higher margins.
‘Alignment of interest’ for REITs
Senior living operators and REITs still have a way to go before the industry returns to pre-pandemic margins. And the hill those companies must climb is perhaps even higher than before, with new expense and occupancy pressures that didn’t exist just 5 years ago.
Also take into account the fact that operators themselves are sometimes unhappy with the typical triple-net lease and incentives, with some in the industry even calling it “broken.” And operators like Brookdale Senior Living (NYSE: BKD) are generally seeking more ownership in the communities they operate.
“There’s an alignment of interest [for REITs] on the rent, on the way income is shared and there’s also alignment from the operator’s perspective,” Walker and Dunlop Managing Director Mark Myers recently told me. “This puts everyone’s knuckles on the line and there’s alignment of being an owner and not just a manager.”
That means REITs must be choosy in their operator selections for conversion in order to safeguard bottom-line performance, and operators must fulfill their obligations through driving NOI at stabilized communities with strong lease-up and reaching new customers.
“[RIDEA] is a good way to address difficult situations where a lease is simply so onerous for the operator that the building is suffering, the care of residents may be suffering if they don’t do something about it,” Myers told me. “By converting it into a shared risk arrangement and shared benefit arrangement, you can negate some future pain for everyone.”
Regardless of the pace at which REITs enact RIDEA structures with operators, I think this is going to continue to be an increasingly big part of their growth playbooks given all that the industry has left to do in the new year and beyond.
But RIDEA also is not a surefire structure, and demands not only a logical financial alignment in terms of how contracts are structured but also positive working relationships between REITs and operators, which involves the vagaries of company cultures and personalities of leaders. As players like NHI and LTC get in the RIDEA game, this will be something to keep an eye on, as these teams hone their playbooks and find new ways of working together toward shared goals.
