‘Nobody’s Buying, Nobody’s Selling’: Tepid Market for Distressed Senior Living M&A in Early 2023

The M&A market for distressed senior living communities has cooled in recent months despite the fact that buyers and sellers are hungry to make deals. And as the industry waits for interest rate hikes to slow, the tepid market could continue into the latter half of 2023 or beyond.

The stagnation in the senior living M&A market is largely driven by the U.S. Federal Reserve’s anti-inflationary measures – namely, increased interest rates, according to BOK (Nasdaq: BOKF) Financial Managing Director for National Senior Housing Taylor Russ.

“Nobody’s buying and nobody’s selling,” Russ told Senior Housing News.

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Russ believes that the majority of sales that will be executed in the coming months will be forced sales resulting from a need to either drop an underperforming asset or quickly gain access to capital via liquidation. But he doesn’t think the lack of closed deals in the past few months is akin to a standoff. 

The clients in BOK’s portfolio that want to unload senior living communities can’t find buyers that quote an appealing price.

Sellers aren’t interested in moving communities off their books at the prices buyers are offering. But, buyers can’t offer higher prices because banks are hesitant to underwrite financing with high-interest rates and uncertainty ahead.

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For buyers in the marketplace, the price has to be low enough to make the deal feasible by structuring the returns in a way that requires more equity and less debt.

“They’re not seeing the returns that they’d like to see and that their investors have come to expect,” Russ said.

Interest rates are also impacting the cost of new developments in senior living, though. In addition to interest rates, senior living developers face tight labor markets, supply chain headaches and inflation on development costs. In light of the development market, many in the industry are looking to prioritize acquisitions.

Still, there is some optimism that the federal reserve could slow interest rate hikes in the next few quarters.

“The Fed has so far indicated that what they were trying to achieve is happening now – slowly – but it’s happening,” said Russ. “Once we have certainty over where rates are going, the banks will be in a better position to understand how to underwrite these deals and where to deploy capital.”

Every bank currently “has a similar story” in that they’re signaling hesitancy to lend in an uncertain operating environment, according to Russ.

“They’d love to deploy capital into the industry because the future looks bright three, five, and 10 years out,” he added. “But, they’re not seeing anything come off the balance sheet.”

The Fed hints at interest rate movement every 90 days or so with recent indicators like a positive January retail spending report suggesting that the Fed could slow anti-inflationary interest rate hikes.

If the Fed continues to raise rates at an aggressive pace, Russ said buyers will hesitate “to buy at a certain price, because they don’t know that they can get their fight fit and the right capital structure to make their returns work.”

Still, Russ is optimistic that the market will shake loose later this year, and certainly by this time next year.

“I think things will get better in the latter half of the year,” Russ said. “Once we see some stabilization, I think the Fed will cool off and things will get better and capital markets will start to free up.”

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