While senior housing M&A activity hit a record high last year, in 2023 dealmaking has slowed significantly as broader economic challenges make transactions harder to execute.
Interest rates are a primary source of pain for many companies in the first half of the year, and that in effect has driven up the cost of capital for new ventures. But that’s not to say that deals won’t happen in 2023 — they will, capital market experts with National Investment Center for Senior Housing and Care (NIC), White Oak Global Advisors, VIUM Capital and Senior Living Investment Brokerage (SLIB) told Senior Housing News.
The only difference will be in the cadence and breadth of activity.
While higher interest rates and some financial market volatility will dampen dealmaking this year, well-positioned buyers will still be able to execute on their plans, they said. For those buyers, there may well be many opportunities ripe for the taking this year, possibly leading to a flurry of deals in the second half of the year.
But although the pendulum may still be swinging toward a buyers’ market, not everyone will get a seat at the table. And those who do must have more access to equity and debt than perhaps ever before as regional banks get more cautious in the wake of the Silicon Valley Bank SVB and Signature Bank collapses.
Seemingly gone — at least temporarily –are the days of the blockbuster deals like the $1.58 billion Welltower (NYSE: WELL) acquisition of Holiday Retirement in 2021.
“No one’s willing to be the first one out of the box [in 2023] to put their properties out there to see how much the market has changed,” NIC Chief Economist Beth Mace told Senior Housing News. “The market is still pretty stalled and it’s a very challenging environment.”
Prepare for ‘tougher all around’ deals
In 2022, senior housing and care M&A activity hit an all-time high with 527 transactions, 17% higher than the 450 publicly-reported deals in 2021, according to data from Levin Pro. However, the slowdown plaguing the market currently started late last year as 4Q22 M&A activity stalled with 106 deals, down from 136 deals in 3Q22 and 141 deals in 4Q21.
In its most recent market fundamentals report, NIC MAP Vision data shows a total of $963.7 million in transactions in 4Q22.
Last month, Waterton announced it was transitioning all of the Pathway to Living portfolio to other senior living operators — but not because of broad underperformance. The operator was driving results above industry averages and that Waterton’s decision ultimately came down to capital market difficulties.
Pathway’s example makes it clear that senior living operators no matter the size can face financial fallout, even if they are hitting their marks. And while Pathway’s instance did not include a sale of communities, other operators are at risk for a similar scenario that could drive an outside capital partner to substantially prune or even offload a senior living portfolio.
There are also still plenty of distressed properties that could hit the market in 2023. Not all operators are equipped to take one problem asset and initiate a turnaround, so buyers must be careful in their evaluation of deals and rely on debt and capital relationships to get the right deal done, according to SLIB Managing Director Ryan Saul.
In the past, companies in search of a transaction could show up at conferences and back-channel deals with 15 term sheets on an acquisition or a refinance— but that isn’t the case anymore, he noted.
“Buyers are really needing to turn to their one or two important relationship banks to get the financing done,” Saul said
In 2022, SLIB completed 54 transactions, down from 84 transactions in 2021. For 2023, Saul said he anticipates approximately 50 to 60 deals, depending on if debt markets stabilize and financing becomes more readily available. That number could also jump if the current gap between buyer and seller expectations narrows.
A similar slowdown in dealmaking was reported by White Oak Global Advisors, with the firm logging in total $11 billion across 200 transactions in 2022. Through March of this year, White Oak has logged $1.7 billion in transactions over 32 requests from clients or brokers, according to White Oak Managing Principal Jason Dopoulos, who added that “75% of the deals screened in 2022 were for acquisition financing requests.”
“The buyer pool is going to be tilted towards those with equity right now like the big institutional sponsors where they only underwrite to 60% leverage,” Dopoulos said. “They have a bunch of capital and dry powder in equity so I think it’s going to be a great buying year for those groups that have capital.”
While private investment may be more flexible than traditional banks, that flexibility comes at a cost. With rising wage compression, elevated expenses and razor-thin margins, some operators could be left on the outside looking in at the plethora of available properties.
“It’s just this perpetual cycle that’s happening right now and we’re being a little bit more conservative because it’s hard to predict growth to keep up with rates on some deals,” Dopoulos added. “It’s been just tougher all around.”
Wider uncertainty dampens activity, market ‘stalled’
With the headwinds coming from outside the industry on rising interest rates and banking sector volatility, Mace said she believes the buyer pool for M&A in senior housing has “shrunk significantly.”
That’s due to the pace at which the Fed has increased interest rates to battle inflation and the recent banking collapses of SVB and Signature Bank, both of which will have implications on senior housing lending for the remainder of the year.
“I think the market’s been shocked and still trying to absorb what’s been happening,” Mace said. “As a result, you’re seeing buyers and sellers on the sidelines.”
She added: “Thus far in 2023, the market is still pretty stalled.”
Without pricing transparency, Mace said the industry could expect to see fewer deals and lower valuation adjustments.
“There’s difficult decisions for portfolio managers probably right now on what to retain looking at their entire portfolio of properties,” Mace said.
That could lead to a pruning of portfolios as operators hold onto their strongest, Class-A assets and consider selling challenged communities. But that doesn’t mean it’s only sellers who are challenged right now as buyers face higher debt costs.
The ability to secure debt service is critical to make a deal, but lenders are getting more cautious unless they can really see solid cash flows at a community.
“If you’re anything less than strong, it’s more challenging right now,” Mace added.
The fallout from SVB and Signature Bank has caused tighter credit conditions because banks are paying even more close attention to the health of their borrowers, Mace said.
For the rest of the year, VIUM Capital Executive Managing Director Kass Matt said he anticipates banks will continue to pull back and get more conservative on their deals.
“We’re starting to hear rumblings of a number of banks saying they need to take a pause because of commercial real estate exposure,” Matt told Senior Housing News. Saul added, “Just the availability of debt is going to cause some headwinds.”
In 2022, VIUM closed $1.9 billion in bridge loans for senior housing and health care, with over half of that volume coming in the second quarter of last year. Kass said VIUM projects between $900 million and $1 billion in bridge loan volume for the remainder of 2023. To-date, VIUM has approximately $300 million in loans engaged or closed.
Deals to come — but timing unknown
The runway for distressed properties is clearly getting shorter as underwriters get more strict on their debt obligations to operators. That could lead to a flurry of properties coming online all at once. But when that might happen is anyone’s guess.
Properties with sub-75% occupancy and facing 8% to 10% increases on expenses are likely to have to face the music when it comes to selling and forego getting top-dollar for their assets. Dopoulos speculated that some properties could hold out another year or two, with an anticipated flurry of deals in 2024 or 2025.
“I think sellers aren’t going to take a discount just because the Fed went nuts this year on interest rates, and that could give operators more time to get properties to a place operationally where they could sell,” Dopoulos said.
Saul said that even as interest rates remain a barrier for entry for some looking to transact, the Fed’s clear roadmap for what’s ahead following recent meetings could bring stability on the rates side, in turn creating opportunity in the future.
“I don’t know when that’s going to happen, but when it does, we think that’s going to bring a lot of activity to the market,” Saul said. “I think we’ll see that once rates come down and folks start taking advantage of that downward movement.”
It’s hard to tell yet just what the remainder of 2023 will hold for senior living M&A, but one thing is clear: uncertainty is dragging the entire market down.
“Businesses don’t like uncertainty and there’s a lot of that right now,” Mace said. “We will probably see a flurry of trading activity, but until that happens people are waiting on the sidelines.”
Kass said operators and owners could look to position their portfolios into Housing and Urban Development (HUD) deals, with anticipated deal activity possibly in the third or fourth quarter of this year.
“But I think logically, if you don’t have to sell, there has to be a very compelling reason to sell,” Matt said. “I think the second-half of the year will be very interesting.”
