More than half all provider sponsorship transactions saw senior housing and care organizations switch from not-for-profit to for-profit status from 2010 through 2020.
But providers squeezed by COVID-19 or other industry pressures don’t have to view loss of mission as inevitable, experts said.
“Oftentimes, organizations wait too long, and there isn’t an opportunity to turn the corner in time, so an asset sale becomes the most logical solution,” said Steve Johnson, managing director for Ziegler Investment Banking. “We encourage you to think there are ways to do this in advance of that. Some of you are doing collaborations and alliances. Increasingly, there are organizations taking on management contracts in advance of an affiliation, knowing that eventually, an affiliation is going to have to come down the pike.”
Johnson’s comments came during a webinar on sponsorship transitions — to include affiliations, mergers, acquisitions and dispositions — held during the recent 2021 Ziegler LeadingAge National Virtual Senior Living CFO Workshop.
Already this year, Ziegler reported 590 sponsorship transitions affecting 782 communities nationwide. In 2019, the firm reported 537 similar transactions for the entire year. That’s a sure sign that providers are facing intense consolidation pressure, which has been growing since 2000.
The last eight or nine years saw sales driven by low interest rates and “relatively cheap capital,” said Dan Revie, Ziegler’s managing director in Milwaukee. Now, however, stressors such as local health system consolidation, the need to diversify service lines, and financial challenges are being exacerbated by increasing complexities of care and the pandemic itself.
All of those forces combined have “facilitated thinking, at single sites in particular, about the need to get greater sophistication, access to talent, integration of technology, board strength and a lot of times, the retirement of long-time leaderships causes the organization to reflect on what they need to be doing,” Johnson said.
LTC is No. 1
The long-term care sub-sector remains the healthcare industry’s highest in deal volume, a trend professional services firm PwC dates to at least 2014. With per-bed prices down to $79,700 during COVID-19 — about equal to 2017 and 2018 prices — skilled nursing providers are still in a fairly active market.
PwC noted in its 2021 health services outlook that M&A targets will come from a “growing pool of sellers,” including distressed businesses, private investors who held assets through the pandemic and now want to exit, and companies that might part with non-core assets as valuations remain high.
For nonprofit providers who feel isolated and increasingly challenged, now may be an ideal time to make a strategic move that heads off an outright sale to a buyer whose vision doesn’t align. It’s also a great time for providers with a solid track record to explore growth moves, Ziegler’s speakers said.
Rolling with the punches
The key to controlling the destiny of the both daily operations and resident experience is to plan a relationship rather than to fall into one, said Johnson and Concordia Lutheran Ministries Chief Financial Officer Michael Falbo, who joined the April 21 webinar.
Since the 1980s, Falbo’s nonprofit corporation has gone from operating a single site in the Pittsburgh area to running 15 senior care communities with enough beds to land at No. 22 on the most recent LZ200.
Backed by $250 million in operating revenues, Falbo said he has pursued an acquisition, start-up or membership changes each year since 2009.
“Our primary diving goal … why we believe we need to continue to grow is to spread our mission,” Falbo said. “That does have certain business benefits too. Diversification is huge for us.”
Concordia now has 18 corporations across three states, giving the parent organization a presence in multiple service lines and geographic markets, which helps insulate from a regional approach where many similar facilities might take the same hit from a natural disaster or economic downturn.
The protective factor was especially important for one Concordia corporation that had two major COVID-19 outbreaks and suffered $900,000 in losses for the year. The facility, previously an independent owned by a Catholic Sisters organization, might have been crippled without a partner, Falbo said.
“It could have ceased their mission,” he said. Instead, “it was able to stand with the punches when that (was) going on.”
Concordia doesn’t necessarily look to replace staff at its new affiliates, and Falbo said retaining culture is important. When the organization took over a largely Jewish continuing care retirement community, the Lutheran organization retained High Holy days and introduced Christian holidays, too. The community still draws a large Jewish population, Falbo said.
Concordia has also experienced certain economies of scale, ranging from reducing administrative costs to negotiating corporate-style contracts. That has also transferred to insurance plans as Concordia agrees to daily rates. With better rates in hand, Falbo said, Concordia can then take those coverages into new facilities or communities it acquires.
Falbo said his efforts are guided by a strong, board-driven mission, and Concordia has made its desire to grow well known. Some refer to the organization as the “Christian consolidator,” a moniker that draws offers from around the country.
The best candidates have similar principles, complement the existing operating structure, have ideal debt to occupancy levels and have younger buildings — or at least buildings with a timeless appearance. On the other hand, he added, facilities that waited so long that they had to take on too much long-term debt or have pledged to return entrance fees are major turnoffs.