Senior Housing Value-Add Opportunities May Total $5B, Could Grow

One year ago, senior housing mergers and acquisitions activity came to a screeching halt as a result of Covid-19.

But there are signs that the M&A landscape will experience a strong rebound in 2021, and the rebound will be spearheaded by a wide range of buyers seeking value-add opportunities as well as stabilized assets.

Mergers and acquisition activity already started to rebound in the first quarter of 2021 and will gain further momentum as the year progresses, Ted Flagg, senior managing director of M&A and co-head of the health care group for real estate services firm JLL (NYSE: JLL), told Senior Housing News.


He estimates there are nearly $5 billion in value-add opportunities in the market, comprising occupancy-impacted portfolios and non-core assets that no longer fit the investment strategies of public traded and non-traded real estate investment trusts (REITs).

Most sellers followed the lead of lenders and hit pause last year, and focused on mitigating operational and occupancy pressures either brought on or exacerbated by the pandemic. With vaccinations in senior housing ongoing and proving effective, buyers are returning to the space and finding ample opportunities.

“One of the main factors is that sellers did not want to be painted with the brush of distress in 2020,” Flagg said. “These same sellers now have the cover to pursue ambitious disposition plans today.”


There remain obstacles to closing deals, according to Flagg and other senior housing deal advisors and lenders. An imbalance in the capital markets persists as lenders, notably national and larger regional banks, demand more recourse from borrowers to underwrite deals. Some are slowly loosening their recourse restrictions, but not to pre-pandemic levels.

Also, a predicted surge in distressed senior housing properties coming to market has yet to occur, even as a growing number of funds are being raised to target these assets.

One-off sales dominate, deals taking longer to close

Sellers are pruning their holdings during the pandemic. REITs are disposing of underperforming assets that no longer fit with their investment strategies. Mom-and-pop owners operating under pandemic-enabled stress are looking to reduce their scale or exit the industry completely.

And buyers are swarming to capitalize on these opportunities, Senior Living Investment Brokerage (SLIB) Managing Director Matthew Alley told SHN. The Glen Ellyn, Illinois-based brokerage reported a stronger first quarter of 2021, with 17 completed transactions compared to 12 in Q1 2020.

The majority of these deals are single-site or small portfolio sales, presented as value-add opportunities with untapped upside.

SLIB’s deal pipeline is also strong, with more of these deals arriving with regular frequency, which Alley believes will bode well for buyers in the late second and early third quarters.

“We’re poised to have a strong May and June,” he said.

The pursuit of single-site sales is extending to stabilized buildings that experienced slight operational pressures stemming from the pandemic, HJ Sims Executive Vice President Curtis King told SHN. For example, a community that historically reported an occupancy of greater than 90% may have experienced a dropoff over the past year, and is now being sold as a core-plus product with quick upside potential.

King believes there is a proven market for these communities that will bear out in future months, as restrictions are lifted, rebounds in occupancy take shape, and lenders are more willing to underwrite lending because of positive demographic momentum.

“There’s a lot of attractiveness for that type of asset,” he said.

But those deals are taking longer to close. Lenders are still demanding more recourse from borrowers, and due diligence is more thorough, Flagg told SHN. Still, they are getting done.

His team completed nearly $500 million in deal volume in the first quarter of 2021, including a number of single-site transactions. Moreover, JLL’s pipeline is growing, and Q1 deal volume puts the firm on pace to exceed 2020 totals, which were impacted by Covid-19.

“This will not be hard to [accomplish], given the depressed volumes of 2020,” he said.

But the preferences for value-add and core-plus products has created a barbell effect, where mid-list assets are staying on market longer and not being pursued by buyers.

However, the overall buyer pool for senior housing is nearly as deep as it was in late 2019, which saw a record number of investors in the space, with ample dry powder on hand to put into play.

“Private equity, REITs and sophisticated family offices are the most prevalent right now,” Flagg said.

Portfolio deals are out there for buyers, and at favorable pricing, Newmark (NYSE: NMRK) Vice Chairman Chad Lavender told SHN. He is co-leader of the firm’s health care and alternative assets practice.

His team facilitated a $664 million sale in January of 32 communities formerly owned by Healthpeak Properties (NYSE: PEAK) and operated by Sunrise Senior Living, and closed a $350 million sale last week. And more portfolio sales are on the way, once sales clear due diligence.

“If the deals are priced right, we’re receiving plenty of offers,” he said.

Loosening underwriting restrictions

Lending activity is gaining momentum. While borrowers have a range of options at their disposal, however, an imbalance in the debt and equity markets persists, Walker & Dunlop (NYSE: WD) Managing Director Mark Myers told SHN.

Myers’ Chicago-based team has a growing deal pipeline with approximately $800 million in volume, and came off a strong first quarter of 2021.

Banks, in particular, were demanding more recourse from borrowers for acquisition and construction financing. If the borrower has a proven track record, however, those requirements are loosened, especially if the borrower brings a sizable amount of equity to a transaction.

“If a property has a loan-to-value [ratio] of 55%, perhaps there’s no need for personal or corporate recourse — the reality is for that particular borrower, it’s almost a non-recourse loan, anyway,” he said.

New lenders have rushed to fill the void left behind by the larger banks, giving borrowers more options to acquire debt and complete an acquisition. And interest rates remain near historic lows, which lessens a bit of the sting borrowers feel if they choose to seek financing from a bank.

“We’re seeing more term sheets per deal,” SLIB’s Alley said.

Further loosening of lending restrictions will mostly depend on how quickly operators can recover from Covid-19 operating pressures. The pace of gains in occupancy and net operating income (NOI) will give lenders a better understanding on how to underwrite census recovery. HJ Sims is already seeing some promising signs.

“That allows us to get more aggressive in our underwriting and maybe eliminate some of the reserves or other factors that we had to incorporate, when there was much more uncertainty around that potential performance,” King said.

No increased signs of distress

The signs of distress that emerged last summer among providers already struggling before the pandemic have not increased in scale, even as more funds are being raised to capitalize on the possibility.

Experts believe that a tide of distress is still growing, but are unsure when it will crest. That belief is anchored in statistics like those released by the National Center for Assisted Living (NCAL). In survey results disseminated in Aug. 2020, 37% of respondents said they could continue to operate at their current pace only for another sox to 12 months without additional financial support.

One reason the pace of distress has not accelerated is because lenders opted for a patient approach with operators during the pandemic, Lavender said. Banks spent their time on the sidelines working with existing clients on their loans. Operators that faced growing distress approached lenders early and, in many cases, received one-year extensions on their loan terms, which gave them flexibility to stabilize operations and put communities on firmer footing once the industry enters a post-pandemic environment.

The pragmatism exhibited by lenders will not last forever, however. Lenders that continued operating in a manner that put their loans in jeopardy before Covid-19 swept the country will find limited options available to them, and then the pace of distress will accelerate.

“Lenders are engaged in a tug of war between having compassion for borrowers and having to take action on loans that are in danger of growing distress,” he said.

What may determine the timing and extent of distress is whether these communities can rebound from both Covid-19 operational pressures and their pre-pandemic struggles. Additionally, King sees a wide gap between asking prices for distressed assets and what buyers are willing to pay. But that may narrow as operators continue to struggle with stabilizing operations, and lenders may encourage borrowers to entertain sales in order to ensure that loans are paid off.

When that occurs, the funds will be ready.

“There is plenty of dry powder and capital available for those opportunities,” he said.

As a sell-side broker, SLIB is representing as many larger operators as mom-and-pop providers in their one-off offerings, Alley told SHN. One of the lessons Covid-19 taught larger operators is that the more core assets they have in their portfolios, the better positioned they will be to withstand the next extreme event.

“It’s a direct response to the fact that when Covid-19 hit, it was really hard to manage those facilities that were geographic or operational outliers,” he said.

Walker & Dunlop is not seeing high levels of distressed assets on the market, which has surprised other observers of the space. But Myers views this as a positive.

Distressed assets suggest winners and losers, and sellers are often the latter. While Myers prefers an environment where the seller and the buyer both achieve their goals, he understands there are times in a real estate cycle where sellers will come up short, because they are in dire straits.

He believes that funding from the various Covid-19 relief packages passed by Congress has helped stem the tide of distressed assets. As that subsides, though, he agrees with King that lenders will gradually pressure borrowers to do something with their assets that avoids lengthy and costly court proceedings.

When that happens, Myers expects his team to be very busy advising potential sellers on their options, and bringing some communities to market.

“I would call that an environment where lenders are encouraging sellers to, if a community is not going to be quickly turned around and brought back into covenant, to consider either a sale or refinance,” he said.

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