Why a Big Year for Operator Consolidation Could Spur Senior Living Innovation

One of the 10 most-read stories on Senior Housing News last year was our coverage of the Cogir and Cadence merger, announced in November. In 2023, expect more deals of this type — and larger ones — to reshape the senior living operator landscape.

In fact, Senior Housing News today broke the news of Solvere and AgeWell joining forces.

This trend will accelerate as operators are straining under cost pressures after nearly three years of Covid-19, and seeking efficiencies of scale. Loan defaults and loan maturity dilemmas also will create M&A opportunities that growth-minded operators with access to the right equity capital can seize in the next year. 

The unfolding situation could lead to a rash of “stupid M&A,” as Aegis Living CEO Dwayne Clark warned. Clark could certainly be correct, but I also see a more optimistic case, for this period of operator consolidation to drive innovation.

In this week’s exclusive, members-only SHN+ Update, I further analyze the outlook for operator transitions and consolidation in 2023 and offer key takeaways, including:

• Closer examination of factors driving operators to pursue scale
• The profile of providers that are likely to expand
• How consolidation in 2023 could support faster innovation

Factors driving M&A in 2023

The need for scale was among the hot topics under discussion last fall at the National Investment Center for Seniors Housing & Care (NIC) conference in Washington, D.C. With costs going up sharply and limits to how much providers can keep pushing rate, gaining operating efficiencies emerged as an imperative. These dynamics helped spur the Solvere-AgeWell combination, after the two organizations first considered the possibility a few years ago.

“Nobody can do this alone, and as things continue to get harder, I’m really excited about having a full team of partners to work together to be better,” Kristin Kutac Ward, co-CEO of the newly formed AgeWell Solvere Living, told Senior Housing News. “It is energizing after three energy-draining years.”

And in 2023, operators are seeking ways to build scale at the same time that economic conditions — namely rising interest rates and painfully high inflation — could precipitate transactions at lower valuations in 2023.

Just yesterday, minutes were released from the December 2022 Federal Reserve meeting, indicating that “a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time.”

Several operator CEOs flagged these economic and financial issues in their 2023 outlooks, as shared with Senior Housing News.

Senior Lifestyle CEO Jon DeLuca expects loan defaults to “increase dramatically,” given the prevalence of floating-rate debt in the sector. He also cited loan maturity as a looming issue in 2023.

A REIT executive I spoke with recently also flagged the loan maturity situation, saying:

“That maturity risk is different than what we’ve seen in other cycles, because right now, banks just want their money back.”

Greater predictability after the last few years of Covid-related uncertainty also could buoy dealmaking in 2023. This time last year, a wide bid-ask gap existed in the market, but reality may now be setting in, as portfolios have had time to gain back ground, and buyers and sellers can agree on what future performance will look like.

For instance, TPG and Sabra had been holding off on marketing their Enlivant JV portfolio, as the communities’ occupancy and other key metrics recovered from pandemic lows. But the intention was to start marketing the portfolio before the end of 2022, armed with “believable” numbers for 2023 performance, Sabra CEO Rick Matros said on the company’s last earnings call.

Profile of buyers

The stage appears to set for operators backed by private capital to grow this year, as rising interest rates and a general pullback in the availability of bank debt place a premium on equity-driven deals.

“You could see some investors with very long-term views that aggregate capital … from an equity standpoint to take down [a large] transaction,” a REIT executive told me.

Two organizations— Discovery Senior Living and Lloyd Jones’ Aviva Senior Living — come to my mind as examples of companies likely to buy in 2023, potentially in large acquisitions of other operators.

Discovery recently executed a recapitalization with Coastwood and Lee Equity Partners. Flush with cash, Discovery CEO Richard Hutchinson has been blunt that growth is in the cards. And consider the history of Lee Equity: In 2013, the firm invested in Aimbridge Hospitality, subsequently executing on a growth strategy that saw the company become the largest third-party hotel manager by 2017.

And through Coastwood, Discovery added Dan Decker to the board, gaining someone with deep experience in scaling up a senior living operating company, including through his time on Brookdale’s board.

Discovery also can cast a wide net as it looks to grow. Older communities in secondary markets could be added to one of the company’s middle-market operating companies such as Morada and TerraBella, which function largely as independent regional businesses. Class A communities in high-barrier markets could be added to one of Discovery’s national brands, such as Discovery Villages or Choregraph.

Similarly, Lloyd Jones has made no secret of its growth ambitions. The Miami-based firm last year announced a plan to shed about 80% of multifamily holdings to focus more on senior living. The company recently rebranded its senior living arm to Aviva Senior Living and added leaders, including David Grady as president and Julie Lombardo as COO.

Grady’s experience includes time as the president of Somerby Senior Living, which in 2019 was acquired by Bridge Investment Group and subsequently rebranded as Bridge Senior Living. This deal brought an operating company under the auspices of a private investment firm (Bridge has since gone public).

It’s easy to imagine Lloyd Jones executing a similar play, acquiring a sizable management company to support the firm’s ambitious senior living growth with a ready-made operating platform.

Spurring innovation

No doubt, bad deals will be made — maybe many, as Aegis’ Clark warned. But I’m also optimistic about the chances for innovative operators to grow. I would put Discovery and Lloyd Jones in that category.

Discovery is harnessing business intelligence to offer an “experiential living” model with more a la carte options; has been a pioneer in its sales processes; has an in-house home care company; and is trying to combine the strengths of regional operations with the benefits of national scale through its novel corporate structure.

Lloyd Jones is bringing substantial multifamily experience into the senior living space, is breaking new ground in active adult, is pursuing hotel conversions as a key strategy, and is focused on finding ways to serve the massive middle market.

I think the Cogir and Cadence merger also could help drive innovation. Cogir USA CEO David Eskenazy has been a changemaker throughout his senior living career, including during his time leading Merrill Gardens, with a focus on technology and drawing on lessons from other industries. And Cadence has also pursued innovation, particularly in memory care, and in its Covid management approach.

As these innovators expand, I expect that they might either acquire less dynamic operating companies outright or start to take over their communities in a more piecemeal fashion. The sale of the Enlivant portfolio, assuming that happens in 2023, could be instructive.

To be fair, Enlivant appears to be a solid operator that also is driving change, particularly with regard to its workforce practices. But the company has a portfolio of smaller and older buildings largely concentrated in secondary markets. It is similar in some ways to the portfolio of Sonida Senior Living (NYSE: SNDA) and the former Elmcroft/Eclipse portfolio. Sonida also has struggled to find a strong footing, losing significant market capitalization in 2022 despite management taking multiple steps over the past few years to evolve operations and restructure financially. And we all know what happened to Eclipse, with the company closing its doors and the communities divided among other operators.

The question becomes how long aging properties will remain viable, and how well they can support newer operating models that speak to a rising generation of consumers. Perhaps the Enlivant portfolio will trade intact, and with current executive management in place, to a private capital firm that believes it can inject necessary CapEx resources and achieve meaningful upside as the demographic wave comes.

But I could also see the portfolio being split up, with other operators taking over certain communities. A company like Discovery Senior Living might add some communities to a regional brand, or a provider like Cogir might see an opportunity to gain greater density in particular markets. Such a process could result in a smaller Enlivant that is more nimble and even more creative in operations, and expedite the process of flushing some of this real estate from the senior living sector entirely.

Of course, I’m cognizant that innovation typically flourishes more easily in smaller rather than larger organizations, and there is real risk that today’s innovators become tomorrow’s dinosaurs.
But as HumanGood CEO John Cochrane preached throughout last year, the future of senior living is dependent on greater scale and faster innovation being able to co-exist. Dealmaking in 2023 will be driving toward these twin goals, and I hope that on balance, more transactions are smart than stupid.