For more than a year, LTC Properties stood largely on the sidelines, waiting for key signs pinpointing a smart time to plunge back into the mergers and acquisition market.
Like many investors — as well as regional operators and some nonprofit organizations — leaders with the California-based real estate investment trust are entering the second half of 2021 feeling optimistic about opportunities for strategic growth.
Struggling providers who have finally begun to chip away at occupancy recovery are 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 rose from $78,000 pre-pandemic to $92,000 in Q2 of 2021, and it is just one factor at play as consolidation continues at a fast clip. Experts say occupancy, labor challenges and growing inflation concerns 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 for the National Investment Center for Seniors Housing & Care. “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 pike as we progress through the decade.”
At Ziegler, Dan Revie and Steve Johnson were handling record numbers of M&A engagements in mid-May, with no anticipation of a slowdown.
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. Revie said buyers best positioned to make acquisitions in months ahead have “strong balance sheets, resources, including experience doing acquisitions, and strong existing lending relationships.”
Privately held or privately capitalized buyers will be the most active, predicted Stephen Taylor, principal and senior living segment leader for healthcare at CliftonLarsonAllen. But in-sector buyers may also face 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 also makes nursing homes more attractive to investors comparing both spaces, 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.
“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.”
While creative financing — LTC likes mezzanine and preferred equity options — will continue, COVID-era concessions 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. Still, for the most part, they’re not looking to buy major portfolios.
Throughout the pandemic, The Ensign Group has seized 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 that added 108 mostly private beds.
“We are opportunistic — growing when we have a healthy bullpen of leaders and when we see pricing that makes sense,” CEO Barry Port told McKnight’s in May. “That said, we see good opportunities on the horizon and a very healthy pipeline.”
Taylor said to expect more concentrated approaches. Stakeholders want deeper market presence in their primary operating areas.
“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. They “are specifically pursuing their ability to capitalize on understanding local market payors, referrals, consumer demand and labor dynamics.”
Strong regional operators and mid-sized groups are in the best position to execute in the short term, but Taylor adds it will only get more difficult for single site operators to survive. Johnson, managing director of Ziegler’s senior living team, works largely with nonprofits. He said single sites already struggling with occupancy or an aging facility pre-COVID are most challenged.
“Some see opportunities there,” Johnson said. “Others look at the logistical challenges and won’t want to touch it.”
Having a niche service, a developed brand or a fraternal mission can help make distressed properties more appealing. Ultimately, what buyers will continue looking for, said Taylor, are quality operators in attractive markets with solid underlying fundamentals.
Plenty of worries remain
One of those market musts: a strong labor pool. Labor was a top-three painpoint pre-pandemic, but wages now are growing “much faster” than reimbursement rates, Taylor said, noting that the Centers for Medicare & Medicaid Services is planning to cut reimbursement rates after reassessing its Patient Driven Payment Model. And pandemic relief, specifically the final $24.5 billion in CARES Act provider funds, also will dry up soon, making it harder to supplement pay. Even when offering high wages, many providers report vacancies.
“Labor is one of the top priorities right now,” Kauffman said. “If you buy that property, are you going to be able to staff up the building? It could actually hinder that deal.”
Another major concern comes from the construction industry, which could drive would-be developers toward acquisitions instead. Combine labor prices with hikes in lumber and other construction-related costs — as well as longer project completion times — and buying starts to look attractive.But only for so long. If inflation persists, it will also drive up costs for operators and purchasers.
Kauffman noted the availability of loans that allow owners to mortgage up to 90% of their debt at historically low interest rates has helped support activity during the pandemic.
“If you’re getting 3% on your mortgage and cap rates are 12% or 13%, that’s still a very attractive spread over time,” he said. But if those rates start to move upward and cap rates begin to fall, borrowing becomes less attractive.
Some see inflation as transitory, while others view it as a longer lasting threat, one that could drive rates up for both borrowers and investors with income to bank.
Underwriting, already more challenging than in years past, could become even more conservative in specific markets or for certain kinds of properties.
“There are definitely people that are going to come to market if they believe inflation is going to stay for a while,” Korey said. “We haven’t seen a wholesale effort yet by some of the brokers yet, but people are thinking about what is going to happen in the future to us, and maybe the best thing to do right now is to take advantage of the low rates.”
It’s all part of the equation for buyers and sellers who have been biding their time.
“For now, there are fears about rising interest rates, but they’re still relatively low,” said Ziegler’s Revie. “I would expect M&A will continue to grow through 2021.”
