Consolidation activity among smaller continuing care retirement community systems has been low in recent years despite some compelling reasons for doing so, but it may ramp up as interest rates climb. Rather than mergers or outright acquisitions, through, CCRCs may look toward affiliation.
There’s been a surprisingly low level of M&A activity among CCRCs in the last five years considering the economic circumstances, says Andy Kohlberg, president and CEO of Kisco Senior Living, LLC, who believes low interest rates have probably kept a number of struggling CCRCs intact.
“I’ve been surprised at how little activity there’s been over the last five years, and I’m not sure it’ll speed up a whole lot over the next five years,” he says. “The biggest variable is interest rates: if they were to continue to go up, that may make some of the struggling CCRCs have more difficulty.”
Interest rates on 30-year fixed mortgages have spiked from 3.41% at the beginning of the year to 4.51% by the end of August, according to Freddie Mac’s weekly Primary Mortgage Market Survey. Many expect rates to stay around current levels or keep rising, although so far they remain at historical lows.
One reason there’s not more M&A, according to Bill Pomeranz, managing director at Cain Brothers, is that there are a number of distressed or “marginally financially performing” facilities, but banks aren’t willing to discount their debt.
“Why would someone take on the full debt of a facility that’s over-leveraged? They just don’t [want to],” he says. “As interest rates increase, banks are going to get frustrated. When the cost of capital was 2%, you could [afford to be] 80% occupied. When it’s 4.5, 5% [and occupancy remains the same], some banks are going to have to throw in the towel.”
In an industry where roughly 80% of CCRCs are operated by not-for-profit organizations, according to LeadingAge, for-profits acquiring CCRCs sponsored by not-for-profits is not very common. In the past few years, Kisco Senior Living has acquired the debt of three CCRCs—two for-profit, one not-for-profit—before gaining ownership of two of them.
“There are a limited number of for-profit companies interested in CCRCs,” Kohlberg says. “The majority of the nonprofit consolidation will probably be amongst nonprofits, although some for-profits will be involved as well.”
Consolidation could help organizations achieve economies of scale, invest capital back into properties to position them for the future, participate in emerging healthcare networks, or share expertise, says Pomeranz.
But instead of mergers and acquisitions, it’s more likely the CCRC sector will see activity akin to what’s going on with hospitals: entering into affiliations. Those could look like joint management agreements, partnerships to provide or contract out certain healthcare components, or consolidated financial leadership and expertise sharing.
“The world is getting more complex. For most CCRCs, executives only know so much—it’s hard to know hospitality, dietary, skilled nursing, social media, marketing, etc.,” Pomeranz says. He thinks this will prompt partnerships for various components, whether it’s for healthcare expertise or financial. “They could contract out—just like they might do for dietary services—where boards stay in place, but their expertise is shared,” he says.
It’s been happening pretty quickly in the hospital sector, he says, where the last several deals Cain Brothers have done haven’t been mergers but rather joint affiliation agreements.
“People merge for strategic reasons,” Pomeranz noted. “The strong merge with the weaker, when the weaker’s value has been discounted significantly.”
The Chester County Hospital and Health System just recently completed its affiliation with the University of Pennsylvania Health System, for example, advised by Cain Brothers. The system’s board of directors and management team had been seeking a strategic partner “in light of the challenging environment faced by many stand-alone hospital systems”—including changes imposed by healthcare reform and increased needs for strategic capital.
“One entity may turn to a larger one, typically to become part of their electronic medical record system, or hand over their treasury and financial functions, or to join medical groups,” says Pomeranz. “You’ll see that to some extent in senior living.”
The flip side of the interest rate coin: “You never know—in some ways, high interest rates help residents because they’re earning more on fixed income,” Kohlberg says. “It’s more billable income.”
Written by Alyssa Gerace