Pricey Acquisitions Lead Small Operators to Bank on Construction

Senior living acquisitions have become pricier as the economy has rebounded, prompting smaller operators to focus more on renovation and new construction, suggest recently released findings from Lancaster Pollard.

The investment banking and financial advisory firm surveyed about 250 senior living providers in December. About 80% said they would likely pursue a new construction project in 2015, with 62% saying they are “extremely likely” to do so. Additionally, 55% said it is extremely likely they will initiative a renovation project in the next 12 months.

In contrast, respondents were “fairly indifferent” to acquisition projects, the report states. Only 23% said they are “extremely likely” to pursue an acquisition this year.


These results make sense given market conditions and the profile of survey respondents, Lancaster Pollard Managing Director Steve Kennedy tells SHN.

“When you consider who responded to this survey, mostly owner-operators of a single facility or small chain with less than 250 beds, it doesn’t surprise me that some are scared off by the prices they see in the market right now,” he says.

Lancaster Pollard just worked on the sell-side of a skilled nursing facility deal that was priced at more than $100,000 a bed. Sales of assisted living and other private-pay operations are commanding similarly high prices, “without a doubt,” Kennedy notes.


He points to a variety of factors that have come into play in the last five years. A stronger economy has put more disposable income in seniors’ pockets and boosted their investment portfolios, allowing them to pay out-of-pocket for senior living, even becoming a “notable portion” of the payer mix for skilled nursing care. At the same time, the increasing activity of real estate investment trusts (REITs) and private equity groups means there are buyers at higher price levels.

“A lot of impetus for M&A activity is large strategy buyers, but even more important are the financial buyers,” he says. “For the strategic buyers, the non-financial buyers, if you have the economy of scale that large organizations have, it’s pricey but you can make sense of acquisitions given the low cost of capital that’s available.”

Smaller operators’ focus on construction likely stems not only from prohibitive acquisition prices but a recognition that they need to reinvest in their physical plants to remain competitive — in part because some markets are seeing many new projects come on line, Kennedy says.

Most construction projects in the next year will be for memory care or assisted living, the survey showed. In all, 88% of respondents said they have a planned project in one of those areas.

In terms of how construction projects will be funded, 51% of respondents said they would turn to a local or regional bank for debt financing. The No. 2 source of debt financing was government agencies such as Fannie Mae/Freddie Mac, named by 38% of respondents.

With regard to equity financing options for construction, 43% said they would rely on internal equity and 39% named private domestic investors.

“Of course REIT financing has continued to be primarily acquisition or sale-leaseback financing, not as much for construction, although some forms of REIT-type financing have entered into the market,” Kennedy notes. “For instance, we have a fund for new construction projects, and that fund was in part borne from a dearth of operator-friendly new construction alternatives.”

Still, banks have become more competitive as lenders for new construction, and local banks’ knowledge of the market makes them the natural choice in many cases, Kennedy says. Large national banks participate on a more occasional basis.

The survey also included questions on occupancy, accountable care organization participation and potential changes in the mix of services offered. Click here to access the complete document.

Written by Tim Mullaney

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