Will Non-Profits Shake Up The Senior Living M&A Landscape?

Not-for-profit senior living organizations have been increasing their acquisition activity over the past several years, but signs suggest they now are pursuing even more deals — and they may be bucking the conventional wisdom about the types of properties they target.

There were fewer than 20 affiliations, dispositions and sponsorship transitions involving nonprofit owners or sponsors in 2011, but transactions have been on an upswing since, according to data from Ziegler. The number of deals ticked above 50 last year, and if the current pace continues, there could be 75 this year, according to figures the Chicago-based investment bank shared with SHN.

This trendline is not unique to nonprofits, as the financial crisis and its aftermath affected M&A activity across the board. But with private capital flowing into the senior living sector and with borrowing costs low, for-profit organizations seized on acquisition opportunities as the economy rebounded. There are several likely explanations for why nonprofits moved more slowly, explains Kyle Hemminger, principal at Ohio-based financial advice and solutions firm Lancaster Pollard.

They may have been going through an adjustment period after the Affordable Care Act was passed in 2010, which added new layers of complexity to the health care system. Some nonprofit organizations in Texas, which is the market Hemminger watches most closely, even decided to divest senior living to focus more on social services.

“Nonprofits typically are a little more conservative by nature,” Hemminger adds.

Now, these organizations seem to be more confident that the economy is on a surer footing and more comfortable with health system changes, and are again ready to grow.

In particular, recent deals suggest that nonprofit activity not only is surging, but that it could have unexpected impacts on the entire acquisitions playing field, Hemminger believes.

Buying For-Profits

The common perception is true, which is that when a not-for-profit organization pursues an acquisition, it most typically involves another not-for-profit, note Hemminger and Lisa McCracken, senior vice president of Senior Living Research and Development at Ziegler. This stands to reason, as the organizations are likely to share similar missions and cultures.

That’s why three recent transactions stood out to Hemminger: They each involved a nonprofit acquiring a for-profit operation.

“Examining these instances helps shed light as to the motivations of nonprofit organizations as well as the implications of nonprofits’ increased activity on the broader acquisitions market,” Hemminger and two of his colleagues at Lancaster Pollard wrote in a recent newsletter.

Each of the deals involved a high-performing for-profit operator, with occupancy rates around 90% and strong operating income ratios. This likely is not a coincidence: Nonprofits usually do not have the “appetite for risk” needed to acquire a distressed or underperforming property, Hemminger says.

Not-for-profits also typically are looking for acquisitions that both will help them extend their mission and also maintain their reputation, and these goals can be accomplished by purchasing a high-quality facility or portfolio, whether from another nonprofit or from a for-profit organization. The buyer in one of the recent deals was explicit about this dual motivation.

“The acquisition enabled the nonprofit to extend its mission within its primary market by strategically expanding its portfolio with a best-in-class facility or facilities,” Hemminger and his co-authors wrote. “In addition to acquiring quality physical plants, it was equally important to the acquirer that the seller was well-respected in the market in order to minimize any perception issues.”

Of course, nonprofits also are motivated to undertake deals that are financially beneficial. But this does not mean they only are in the market for bargains — in fact, the opposite may be true, and for-profit providers that are divesting might be wise to target a high sales price if a viable not-for-profit buyer is in the picture.

Premium Prices

A recent acquisition in Texas demonstrates that certain nonprofits are able to pay premium prices for high-performing assets and compete in a “frothy market,” according to Lancaster Pollard.

Glen Hope Harbor, a nonprofit based in the Lone Star State, purchased nine assisted living/memory care facilities from AutumnGrove Cottage, located in the greater Houston and San Antonio areas. The purchase price was $29.5 million, or about $205,000 per unit. Each location has about 16 units. The cap rate was about 7.3%.

Those numbers far surpass usual benchmarks, according to Lancaster Pollard. Looking at 18 recent deals for AL facilities with fewer than 69 units, the average price-per-unit was $124,700, and the average cap rate was 9.11%.

In fact, the AutumnGrove deal looks more like acquisitions involving much larger facilities. The average price-per-unit for assisted living buildings with more than 70 units stands at about $201,455, and the average cap rate is 7.49%, the Lancaster Pollard data show.

There are several reasons why a not-for-profit might target this type of acquisition — and be able to pay for it.

For one, they may be eligible for property tax exemptions. Glen Harbor expects to reduce future expenses by $250,000 annually, due to a full property tax exemption for each of the AutumnGrove facilities, according to Lancaster Pollard.

Not-for-profits’ financing options and liquidity also come into play. They can issue tax-exempt bonds in both private and public markets to raise affordable capital, which is what Glen Hope Harbor did. The bonds had a true interest cost of 4.96%, according to Lancaster Pollard.

Nonprofits also have distribution of cash flow restrictions, so they have liquid assets on hand that could be used for an acquisition.

“I think that nonprofits with the ability to distribute cash flow might be able to go places that for-profits might not,” Hemminger tells SHN.

A for-profit organization considering a sale might utilize the website guidestar.org, which collects nonprofits’ tax returns and makes useful data available to those who register. The site is a way for a potential seller to investigate nonprofits’ revenues, expenses, outstanding debt and other financial metrics, to help determine if there is a potential buyer to market to, Hemminger says.

“If you’re an executive at a for-profit looking to divest, I don’t think it’s all that common to think that a sale to a nonprofit makes sense,” he says. “Given what we’re seeing, it’s at least worth entertaining.”

Some nonprofit executives also might be held back by the conventional wisdom around acquisitions, he adds. While the three recent deals represent only a limited pool of information, they do send a message.

“The stereotype is that nonprofits want to develop from conceptual design through lease-up,” Hemminger says. “That’s certainly fine. But acquiring attractive [for-profit] facilities shouldn’t be shunned.”

Written by Tim Mullaney