Business model transformation of REITs in the senior housing sector
Abstract
This study examines the transformative impact of the REIT Investment Diversification and Empowerment Act (RIDEA) of 2007 on Real Estate Investment Trusts (REITs) and their partnerships with operating entities in the U.S. senior housing industry. We explore how REITs, functioning as both asset owners and managers, adapt their business strategies in response to the evolving business landscape. Employing a case study approach rooted in Zott and Amit’s (2010) conceptualization of business models, the study identifies and analyzes notable shifts in market participants’ recognition of value-enhancing approaches, encompassing not only traditional rental income but also the operational performance of property managers. The findings reveal an expanded risk and profit-sharing mechanism propelled by the newly implemented business framework based on RIDEA, fostering enhanced alignment of interests between REITs and operators compared to the traditional business framework. While this effect under the new model holds the potential for significant enhancements in operational efficiency for asset managers, it concurrently introduces complexities arising from heightened financial and market risks, as well as challenges related to workforce management. Our findings offer valuable insights to industry experts, including REITs, operators, investors, and policymakers, enriching their comprehension of the evolving business models within the senior housing sector.
Keyword : REITs, healthcare, senior housing, business model, RIDEA
How to Cite
Yoo, J., & Jeon, J. S. (2024). Business model transformation of REITs in the senior housing sector. International Journal of Strategic Property Management, 28(1), 64–75. https://doi.org/10.3846/ijspm.2024.21095
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Pettigrew, A. M. (1990). Longitudinal field research on change: Theory and practice. Organization Science, 1(3), 267–292. https://doi.org/10.1287/orsc.1.3.267
Rajakallio, K., Ristimäki, M., Andelin, M., & Junnila, S. (2017). Business model renewal in context of integrated solutions delivery: A network perspective. International Journal of Strategic Property Management, 21(1), 72–86. https://doi.org/10.3846/1648715X.2016.1249533
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Yin, R. K. (2003). Case study research: Design and methods (3rd ed.). SAGE Publications, Inc.
Young, C. A., & Brewer, K. P. (2002). Marketing continuing care retirement communities. Journal of Hospitality and Leisure Marketing, 9(1–2), 133–151. https://doi.org/10.1300/J150v09n01_09
Zaner, L. O. (1997). Housing for seniors: Managing care. Urban Land.
Zietz, E. N., Sirmans, G. S., & Friday, H. S. (2003). The environment and performance of real estate investment trusts. Journal of Real Estate Portfolio Management, 9(2), 127–165. https://doi.org/10.1080/10835547.2003.12089679
Zott, C., & Amit, R. (2010). Business model design: An activity system perspective. Long Range Planning, 43(2), 216–226. https://doi.org/10.1016/j.lrp.2009.07.004
Appelbaum, E., & Batt, R. L. (2014). Private equity at work: When Wall Street manages Main Street. Russell Sage Foundation.
Batt, R., Appelbaum, E., & Katz, T. (2022). The role of public REITs in financialization and industry restructuring (Working Paper No. 189). Institute for New Economic Thinking. https://doi.org/10.36687/inetwp189
Beals, P., & Singh, A. J. (2002). The evolution and development of equity REITs: The securitization of equity structures for financing the U.S. lodging industry. Journal of Hospitality Financial Management, 10(1), 15–33. https://doi.org/10.1080/10913211.2002.10653758
Bruch, J. D., Katz, T., Ramesh, T., Appelbaum, E., Batt, R., & Tsai, T. C. (2022). Trends in real estate investment trust ownership of US health care properties. JAMA Health Forum, 3(5), Article e221012. https://doi.org/10.1001/jamahealthforum.2022.1012
Buzzell, R. D. (1983, January). Is vertical integration profitable? Harvard Business Review, 61(2), 92–102. https://hbr.org/1983/01/is-vertical-integration-profitable
Buzzell, R. D., & Gale, B. T. (1987). The PIMS principles: Linking strategy to performance. The Free Press.
Cox, R. (2013). Gendered spaces of commoditised care. Social & Cultural Geography, 14(5), 491–499. https://doi.org/10.1080/14649365.2013.813580
Cushen, J., & Thompson, P. (2016). Financialization and value: Why labour and the labour process still matter. Work, Employment & Society, 30(2), 352–365. https://doi.org/10.1177/0950017015617676
CREJ. (2018, October). Senior facilities: Operator management agreements. Colorado Real Estate Journal. https://crej.com/news/senior-facilities-operator-management-agreements/
Duffy, M. (2005). Reproducing labor inequalities: Challenges for feminists conceptualizing care at the intersections of gender, race, and class. Gender & Society, 19(1), 66–82. https://doi.org/10.1177/0891243204269499
Edwards, T., & Bernstein, D. (2008). “REITs empowered”. Tax Management Real Estate Journal, 24(11), 1–14. https://www.reit.com/sites/default/files/media/Portals/0/PDF/REITSEMPOWERED.pdf
Eichholtz, P. M. A., Kok, N., & Wolnicki, B. G. (2007). Who should own senior housing? The Journal of Real Estate Portfolio Management, 13(3), 205–218. https://doi.org/10.1080/10835547.2007.12089782
Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 14(4), 532–550. https://doi.org/10.2307/258557
Feng, Z., Price, S. M., & Sirmans, C. F. (2011). An overview of equity real estate investment trusts (REITs). Journal of Real Estate Literature, 19(2), 307–343. https://doi.org/10.1080/10835547.2011.12090304
Feng, Z., Hardin, W. G. III, & Wang, C. (2022). Rewarding a long-term investment strategy: REITs. Journal of Real Estate Research, 44(1), 56–79. https://doi.org/10.1080/08965803.2021.2001896
Froud, J., Johal, S., Leaver, A., & Williams, K. (2006). Financialization and strategy: Narrative and numbers. Routledge. https://doi.org/10.4324/9780203414941
Gupta, A., Howell, S. T., Yannelis, C., & Gupta, A. (2021). Owner incentives and performance in healthcare: Private equity investment in nursing homes (NBER Working Paper Series No. 28474). National Bureau of Economic Research. https://doi.org/10.3386/w28474
Horton, A. (2022). Financialization and non-disposable women: Real estate, debt and labour in UK care homes. Environment and Planning A: Economy and Space, 54(1), 144–159. https://doi.org/10.1177/0308518X19862580
Krippner, G. R. (2011). Capitalizing on crisis. Harvard University Press. https://doi.org/10.2307/j.ctvjk2x23
LTC Properties. (2023a). Transcript of LTC Properties, Inc. Q2 2023 Earnings Call. Investor Presentations. https://ir.ltcreit.com/investor-presentations
LTC Properties. (2023b). Form 10-K: Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2022. U.S. Securities and Exchange Commission. EDGAR. https://www.sec.gov/Archives/edgar/data/887905/000155837023001423/ltc-20221231x10k.htm
Lutz, S. (1989). Healthcare LBO bid not your usual deal. Modern Healthcare, 19(18), 60–62.
Lynn, D., & Wang, T. (2008). The U.S. senior housing opportunity: Investment strategies. Real Estate Issues, 33(2), 33–51.
Martin, R. (2002). Financialization of daily life. Temple University Press.
Montgomery, A. (2023, May 3). Welltower sees momentum on margins as self-managed platform plans become ‘more tangible’. Senior Housing News. https://seniorhousingnews.com/2023/05/03/welltower-touts-gains-in-senior-housing-portfolio-operating-model-pilot-underway/
Mueller, G. R., & Anikeeff, M. A. (2001). Real estate ownership and operating businesses. The Journal of Real Estate Portfolio Management, 7(1), 55–66. https://doi.org/10.1080/10835547.2001.12089628
Mueller, G., Fisher, J., & Wincott, D. R. (2013). Point of view: Benchmarking and attracting institutional capital to seniors housing. Journal of Real Estate Portfolio Management, 19(3), 255–263. https://doi.org/10.1080/10835547.2013.12089958
Mullaney, T. (2021, July 11). Welltower CEO: We are more bullish than ever on senior housing, with conditions from double-negative cycle. Senior Housing News. https://seniorhousingnews.com/2021/07/11/welltower-ceo-we-are-more-bullish-than-ever-on-senior-housing-with-unusual-conditions-created-by-double-negative-cycle/
Mullen, A. (1999). A note on underwriting and investing in senior living and long-term care properties: Separating the business from the real estate. Journal of Real Estate Portfolio Management, 5(3), 299–302. https://doi.org/10.1080/10835547.1999.12089582
National Association of Real Estate Investment Trusts. (2022, January). REITWatch: A monthly statistical report on the real estate investment trust industry. https://www.reit.com/sites/default/files/reitwatch/RW2112.pdf
National Association of Real Estate Investment Trusts. (2023, July 1). What is a REIT? https://www.reit.com/what-reit
National Investment Center for Senior housing and Care. (2020). NIC investment guide: Investing in senior housing and care properties (6th ed.). National Investment Center for Senior Housing & Care.
Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implications for future research. Journal of Marketing, 49(4), 41–50. https://doi.org/10.2307/1251430
Pettigrew, A. M. (1990). Longitudinal field research on change: Theory and practice. Organization Science, 1(3), 267–292. https://doi.org/10.1287/orsc.1.3.267
Rajakallio, K., Ristimäki, M., Andelin, M., & Junnila, S. (2017). Business model renewal in context of integrated solutions delivery: A network perspective. International Journal of Strategic Property Management, 21(1), 72–86. https://doi.org/10.3846/1648715X.2016.1249533
Terris, D. D., & Myer, F. C. N. (1995). The relationship between healthcare REITs and healthcare stocks. The Journal of Real Estate Research, 10(4), 483–494. https://doi.org/10.1080/10835547.1995.12090797
Welltower. (2023a, February 15). Business update. https://welltower.com/february2023-business-update
Welltower. (2023b, May 2). Business update. https://welltower.com/may2023-business-update
Welltower. (2023c). 10-K: Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2022. U.S. Securities and Exchange Commission. EDGAR. https://welltower.com/wp-content/uploads/2023/02/2022-10-K-2023-FINAL.pdf
Yin, R. K. (2003). Case study research: Design and methods (3rd ed.). SAGE Publications, Inc.
Young, C. A., & Brewer, K. P. (2002). Marketing continuing care retirement communities. Journal of Hospitality and Leisure Marketing, 9(1–2), 133–151. https://doi.org/10.1300/J150v09n01_09
Zaner, L. O. (1997). Housing for seniors: Managing care. Urban Land.
Zietz, E. N., Sirmans, G. S., & Friday, H. S. (2003). The environment and performance of real estate investment trusts. Journal of Real Estate Portfolio Management, 9(2), 127–165. https://doi.org/10.1080/10835547.2003.12089679
Zott, C., & Amit, R. (2010). Business model design: An activity system perspective. Long Range Planning, 43(2), 216–226. https://doi.org/10.1016/j.lrp.2009.07.004