For more than a year, LTC Properties had stood largely on the sidelines, waiting for key indicators to pinpoint a smart time to plunge back into the mergers and acquisition market.
Like many investors — as well as regional operators and larger nonprofit organizations — leaders with the California-based real estate investment trust are entering the second half of 2021 feeling optimistic about strong activity and opportunities for strategic growth.
As struggling providers finally began to chip away at occupancy recovery in late spring, they started coming to market in increasing numbers, hoping to take advantage of high per-bed averages. Diligent buyers, however, continue to evaluate whether those values are real or whether they’ll still need significant time and investment to pay off.
“We all are very positive about the future of our industry,” Doug Korey, executive vice president and managing director of business development for LTC Properties, told McKnight’s Long-Term Care News. “The question is, ‘When is the date when that traction really starts to kick in post pandemic?’ We have to enter that part into the equation.”
Per-bed pricing, which rose from $78,000 pre-pandemic to $92,000 in the second quarter of 2021, according to the National Investment Center for Seniors Housing & Care (NIC). That’s just one of the factors at play as consolidation continues at a fast clip. Experts say post-COVID occupancy, labor challenges and growing concerns about inflation and interest rates will also influence how willing investors are to make major moves in what are still uncertain times.
“The expectation is that activity [will] pick up,” said Bill Kauffman, senior principal at NIC. “You have a lot of strong interest from private buyers. The view has been that this is a short-term (but severe) challenge. But what they see is there’s still a lot of demand coming down the pipe as we progress through the decade.”
High seller and buyer engagement
At Ziegler, Dan Revie and Steve Johnson were both handling a record number of M&A engagements in mid-May, with no anticipation that the crunch would soon abate.
Revie, managing director and co-practice head of Ziegler’s Senior Housing & Care Finance Practice, is representing corporate sellers looking to offload distressed campuses or single sites. Johnson, managing director of the senior living team, works largely with nonprofits looking to align or expand, depending on how they’ve fared during the pandemic.
Revie said the buyers best positioned to make acquisitions in the months ahead are those “with strong balance sheets, resources, including experience doing acquisitions, and strong existing lending relationships.”
Privately held or privately capitalized buyers will be the most active in the second half of 2021, predicted Stephen Taylor, principal and senior living segment leader for healthcare at CliftonLarsonAllen. But in-sector buyers may also face more competition from those new to the segment, he said, citing “dry powder on the sidelines” from would-be commercial real estate investors whose preferred market remains in flux.
A 500- to 600- basis point difference between SNFs and senior housing activity also makes nursing homes more attractive to investors comparing the two asset classes, said Jeff Davis, chairman and CEO for Cambridge Realty Capital.
“Skilled nursing operators generally are among the most unique and nimble buyers of any product type we have seen,” Davis added. “The savvy buyers have no problem moving forward, and for many reasons, truly love this market.”
Size matters
For LTC Properties, much of the focus during this re-entry period has been on smaller, single assets — not portfolios.
“And they have been priced more towards where we see the performance today than where we see it in 12 months,” Korey said. “It’s a fairly simple math equation: You’re going to pick up an asset and you’re going to have to cover some period of time for that operator to bring that asset back to stabilization.”
The REIT is also reviewing packages in which entities that began leasing up during COVID are looking for an escape plan. In some cases, they may be just 30% to 40% occupied, meaning there’s room to grow but that operators may also expect free rent or other concessions. While creative financing — LTC likes mezzanine and preferred equity options — will continue, COVID-ear gimmies are likely coming to an end as the pandemic wanes.
Then, well-resourced providers may find themselves in an even better position to drive activity in coming months. Still, for the most part, they’re not looking to pick up major portfolios.
Throughout the pandemic, The Ensign Group has seized on opportunities created by low occupancy and other market conditions stressing smaller operators. That’s been especially true in Texas, where the post-acute specialists purchased a string of standalones, including a May pick-up adding 108 beds, some in private studios.
“We are optimistic about the acquisition landscape although it’s impossible to be too prescriptive about the future in an environment like we’ve been in over the past year and few months,” CEO Barry Port told McKnight’s Long-Term Care News in May. “We never make growth goals, rather, we are opportunistic — growing when we have a healthy bullpen of leaders and when we see pricing that makes sense. That said, we see good opportunities on the horizon and a very healthy pipeline.”
Taylor said to expect more concentrated approaches like Ensign’s. He believes stakeholders now want deeper penetration and market presence in their primary operating markets.
“There is value in deeply understanding local market dynamics and nuances, so I think you will see a shift from some that have broad footprints, to more consolidated and focused market presence,” he said.
The idea that it’s becoming increasingly difficult for single-site operators to survive, says Taylor, could make selling to a regional operator sooner rather than later more appealing.
Johnson said that’s especially true of single sites that were already struggling with occupancy or an aging facility pre-COVID. But not all buyers will be interested in those kinds of properties.
“Some see opportunities,” Johnson said. “Others look at the logistical challenges and won’t want to touch it.”
