A clear consensus is emerging in the senior living sector: Nonprofits are bouncing back after the recession, and leaders in the industry are taking note of their aggressive push for affiliations.
More nonprofit senior living providers are choosing to consolidate or partake in joint ventures for strategic reasons, as opposed to the financial pressures that have driven mergers in recent years, according to trend data collected by Chicago-based specialty investment bank Ziegler.
In fact, Ziegler projects 90 affiliations, dispositions and sponsorship transitions by the end of 2015, Dan Hermann, senior managing director and head of investment banking for Ziegler, tells SHN. This is compared to roughly 60 total last year.
Health care complexities, leadership turnover and technology demands have most significantly influenced consolidation within the nonprofit sector following the recession, according to the data, which was presented at the recent 18th Annual Ziegler Senior Living Finance and Strategy Conference. In 2010, Ziegler listed financial distress as the top driver for affiliations and acquisitions.
“While there might be some stragglers, we definitely are seeing a shift to more strategic affiliations,” Hermann says. “They’re strategic in terms of organizations deciding they can have more leverage or bargaining power if two systems come together.”
Ziegler isn’t alone in its observations of the nonprofit acquisition game. Greystone Communities President Mark Andrews recently sat down with SHN to discuss M&A activity and what the future holds for nonprofit providers, and he noted two main trends: Single-site campuses affiliating with regional or national not-for-profits, and others merging to establish a stronger asset or capital base.
But the reasons that affiliations are currently outpacing new development go even deeper, Hermann says. Between Affordable Care Act requirements, managed care pressures and bundled payment initiatives, he says health care delivery has become increasingly difficult to navigate alone, particularly for single-site providers. And technology geared toward consumers leaves senior living providers with the decision to invest in order to remain competitive or be left in the dust.
Executive shakeups also play a key role, which Hermann says was demonstrated through the major merger between California-based nonprofit senior living providers American Baptist Homes of the West (ABHOW) and be.group. The affiliation came at an opportune time, when ABHOW CEO Dave Ferguson announced his retirement, allowing for a smooth leadership transition, Hermann says.
Other sponsorship transitions that currently are in process include Friends Home Inc., which is transitioning to The Presbyterian Homes Inc., and Northern California Presbyterian Homes & Services, transitioning to Episcopal Senior Communities.
More mergers of significant scale can be expected, too, though they largely depend on the market, Hermann says. In particular, he predicts more systems with two or three campuses being absorbed by larger providers, especially in local settings.
The advantages of affiliations and acquisitions currently outweigh those of new developments, Hermann says, not only because of construction costs, but also turnaround. Whereas the time between breaking ground and stabilization can take years, he says an organization experienced in M&A activity can integrate an existing facility within a few quarters while still reaping the benefits of expansion.
“When they affiliate, that becomes like having a new campus,” he says.
Leading nonprofit operators certainly recognize the power of affiliations and acquisitions: The 2015 LeadingAge Ziegler 150 (LZ 150), the companies’ annual research project analyzing the largest not-for-profit senior living providers in the U.S., indicates that 72 of the top 150 providers have grown through at least one affiliation or acquisition, 42 through two or more and 26 through three or more. And in 2014, there were 16 affiliations or acquisitions recorded among the top 150 as compared to two in 2013, according to the LZ 150. And that’s compared to only five providers in the LZ 150 that grew through new developments in 2014.
Concordia Lutheran Ministries, Augustana Care Corporation and Presbyterian Homes and Services are among the big-name nonprofit providers that have been especially active in affiliations and acquisitions in recent years, according to the Ziegler data. Concordia has recorded 11 total transactions, making it the most active among the LZ 150.
“It’s going to come down to motivating forces in more competitive markets that create healthy mergers that make more aspirational sense,” Hermann says about which operators will be involved in transactions going forward.
Competition, it seems, is the common denominator driving nonprofit M&A activity, and that sentiment has been emphasized by others in the industry.
“Everybody realizes they must adapt, they must change, they must grow in order to remain market-aligned and market-relevant,” Andrews told SHN. “So we’re seeing significant planning and expansion activity now on the not-for-profit side.”
Written by Kourtney Liepelt