Lenders Jittery, But Coronavirus Could Ultimately ‘Catapult’ Senior Housing M&A

The senior housing mergers and acquisitions market continued to hum along as the first cases appeared in communities, and even if a temporary slowdown occurs as the crisis deepens, dealmaking could surge dramatically when the pandemic wanes. 

“We may see deals get delayed if a lender decides to sit tight and wait, but I truly believe you’re not going to see deals die because of it,” Jeremy Stroiman, CEO of brokerage Evans Senior Investments, told Senior Housing News. “Frankly, I think it’s going to be quite the opposite … I think this is going to create a tremendous amount of deal flow.”

Other M&A brokers and advisors in the sector echo Stroiman, saying that almost all deals are moving forward at the moment, with capital market disruption a larger immediate threat than fears that coronavirus will have a lasting negative effect on communities. And, they believe the Covid-19 crisis could motivate more owners to sell, at a moment when interest rates make acquisitions attractive.

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‘Conveyer belt’ of deals moving, pricing firm

Covid-19 infections are rapidly spreading across the globe, including in the United States. The first major coronavirus cluster occurred in a Seattle area skilled nursing facility, which has been devastated with more than two dozen deaths and many ill residents and workers. 

While this situation demonstrates the huge threat that Covid-19 poses to senior housing and care communities, relatively few other locations have been hit so far. The number of infections is almost certain to grow in the coming days and weeks, given that over half of senior living communities in the country are located in or adjacent to a county with a confirmed case of coronavirus. However, providers are working around the clock to maintain extraordinary infection control procedures. So far, only buyers pursuing very large deals are taking a wait-and-see approach, which represents a “very small fraction of the buyer universe,” according to Ted Flagg, senior managing director at JLL in New York City.

No part of the “conveyer belt” of the deal advisory business at JLL — from origination, to marketing and talking to buyers, to pricing and closing — has slowed down, Flagg told SHN. Pricing also is holding firm.

“The firm has closed several billion dollars in the last two weeks, across investment, sales and debt financing,” he said. “We’ll see where that goes … as [coronavirus] starts to escalate and take different forms in the market.”

Glen Ellyn, Illinois-based Senior Living Investment Brokerage (SLIB) also has not seen any major Covid-19 effects yet. The firm had three deals close/fund in the last 30 days, including one that closed as recently as March 9, Managing Director Ryan Saul told SHN.

“While owner/operators are preparing for action plans if their communities are directly impacted, we haven’t heard or seen buyers say they aren’t looking for opportunities,” he said. “That said, we did have one lender indicate they wanted to wait to see how things shake out in a local market before issuing a term sheet. That was for a building in a market that was seeing higher than average cases of coronavirus.”

The lending environment is one question mark in light of widespread capital market disruption, Stroiman pointed out.

“I think where the concern is, is the capital market,” he said. “Is the stock market going to affect how lenders look at the risk of doing a deal … no operator, no quote-unquote buyer, has walked yet, or given us any indication that they’re going to walk.”

The Federal Reserve has cut the benchmark rate and took additional steps last week after markets tanked. These actions may be reassuring some buyers who are pursuing deals — which have been priced richly of late. In Q42019, senior housing price-per-unit eclipsed $200,000 on a rolling four-quarter basis.

“From my seat, I’d say if anything, whatever trepidation was giving someone pause around pricing is being absorbed by rates on debt financing declining and improving underwritten returns,” Flagg said.

A jolt to M&A going forward

While deals so far have not been impeded by Covid-19, the pandemic only reached the United States recently and the situation could change in the coming weeks.

“My guess is that this issue might slow down dealmaking a bit while things run [their] course and groups are distracted, but the hope is things return to normal quickly,” SLIB’s Saul said.

There is a possibility that deal flow will increase as coronavirus infections start to tail off, Stroiman and Flagg pointed out.

“We have an infrastructure to talk to independent owners and regional owners, and the majority of the folks that we’re talking to, because of the virus, their exit strategy is changing,” Stroiman said.

In particular, owners who have a portfolio of five homes or fewer are under enormous stress related to Covid-19, and many will be motivated to “get out and retire,” he predicted.

“As buyers start to get more visibility into recovery, and financing terms are favorable, and you’ve got owners maybe looking to get out, the could be a confluence of things,” he said. “Our industry is already crazy hot, this could just catapult it.”

Flagg echoed these sentiments. It’s impossible to predict how long the coronavirus crisis will last in the United States, and he is particularly worried about how it will affect staffing levels and labor expense. Still, he is confident that Covid-19 will be a short-term shock to the system, and the long-term demographic argument for senior housing does not change.

“As we work through this thing, the middle to late innings, however long this temporary blip lasts, on the other side of it you can catch the low rates and have more visibility into your investment horizon, those are some of the best conditions for investing,” he said. “ … You’ll likely get a bounce in activity as you’re toward the middle to late part of this coronavirus situation.”

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