Senior Housing M&A Market Wasn’t “Overheated,” But it’s Cooling Down

The senior housing market saw a record year of activity in 2011, with billions of dollars of acquisitions, joint ventures, and RIDEA-structured partnerships that served to consolidate the industry. And while the market has cooled down, the action isn’t over, said industry experts during a November panel hosted by The SeniorCare Investor and the American Seniors Housing Association.

With all the consolidation frenzy, did the M&A market become “overheated”? asked panel moderator Stephen Monroe, editor of The SeniorCare Investor.

To one panelist, there’s no such thing as a market that’s too hot.


“I don’t think there’s ever a risk of being overheated,” said Patrick Hurst, national director of Houlihan Lokey’s Healthcare Group. “I think you’re going to see a lot more M&A occurring, and a lot of consolidation for operational efficiencies that the market’s changing.”

He mentioned “dramatic” changes in reimbursements, such as the 11.1% Medicare cuts implemented in October, that he says will cause consolidation on the skilled nursing side.

“The conversation is more of a merger, an exchange of stock because capital markets aren’t there to finance it completely,” said Hurst, adding that consolidation by “best practices” would make providers more efficient in their markets.


“I think you’ll see consolidation continue,” agreed Gray Hampton, managing director of Bank of America Merrill Lynch. “As [operators] look for ways to grow the business, the logical way to do so is to pursue scale.”

At this point, most of the big deals have been done, but for REITs to stay on track, they’ll have to keep buying.

“There’s skepticism about the ability of large REITs to continue to grow,” said Jerry Doctrow, an analyst with Stifel, Nicolaus, & Co. “I think we’re going to continue to see big deals. They need big deals to grow.”

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However, there might not be any more spectacular deals, like HCP’s $6.1 billion sale-leaseback of more than 300 HCR Manorcare properties, or Ventas purchasing Nationwide Health Properties for $7.4 billion.

“Most of the headline deals that are gonna happen, happened at this point,” said Jon Santemma, managing director at Jefferies & Company. “Smaller deals are more likely to go to smaller, more creative REITs that aren’t competing with big REITs for must-have assets.”

And, he continued, there’s a focus a smaller REIT can bring to the table that a larger trust can’t, which sometimes enables them to get deals at more attractive rates.

Others agreed, noting that cap rates have risen to about 10 or 11%.

“Pricing has come off over the summer, and spreads have gapped out,” said Matthew Lustig, CEO of Lazard Freres & Co., who pointed to demand currently outpacing supply. “It’s a very selective lending market at the moment.”

The panel’s analyst noted that dynamic market pricing will likely continue to settle down.

“In hindsight, some might think [the deals] were too aggressively priced… people are skeptical of growth for growth’s sake,” said Doctrow. “But there is some discipline in the market place; I don’t see it going wild.”

View the Evening with Wall Street and Seniors Housing panel here.

Written by Alyssa Gerace

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