Why the Outlook for Senior Living M&A Is Better Than It Seems

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New M&A data released this week showed that senior living dealmaking in the third quarter of 2023 sank to levels not seen since the darkest days of the pandemic.

I don’t think I need to belabor the forces holding senior living dealmaking down in 2023, starting with the high cost of debt.

The senior living industry has been clouded in uncertainty since the start of the pandemic, like all other business sectors, and that has made accurately predicting the timing of an M&A rebound tough. But in recent months, a growing chorus of voices have become more confident that the industry is headed for better times, potentially enough to turn a corner from recovery to growth.

And despite the downbeat Q3 data, the last week also brought notable news of two notable deals suggesting that M&A already could be on the upswing: AgeWell Solvere is acquiring Sonata Senior Living, and Kisco struck an affiliation with Balfour.

I can also tease that we’ve received news of yet another ownership change that has occurred, which we will be reporting on in the coming days.

Based on recent announcements from early growth movers, I have caught glimpses of the strategies that I think will help reshape the senior living industry in 2024 and beyond. And I am not the only one who sees the beginnings of a much wider period of growth for the senior living industry, both in terms of margins and occupancy and in the size of senior living companies.

In this week’s exclusive, members-only SHN+ Update, I analyze the current transaction market and offer key takeaways, including:

• Conditions setting the stage for a more active year in 2024
• How recent deals could exemplify the kind of transactions that occur in the coming 18 months

Industry’s growing status as a ‘darling child’

Although the federal government, ownership groups and capital providers provided much-needed support to senior living operators through the Covid-19 emergency, those dollars only extended so far. New growth, once seen as immediately critical to meeting the demand of the incoming baby boomer generation, was put on the back burner in favor of occupancy and margin recovery.

Fast-forward to the tail-end of 2023, and the industry appears much closer to turning the corner than it ever has in nearly four years.

For one, occupancy is on the upswing, with the latest NIC projections assuming that senior living operators in the country’s largest metro markets will recover to pre-pandemic occupancy levels by the fourth quarter of next year if they stay the current course of recovery. That view is bolstered by the fact that the rate of new construction has remained low and that senior living communities have a growing pile of evidence showing they are effective at keeping older adults safe during hard times.

Senior living operators have spent the better part of three years raising residents’ rates and finding new and creative ways to earn revenue to keep up with a radically changed expense landscape. In the year ahead, I think that will give operators flexibility with which to grow margins, which will only help make the industry a better bet in the eyes of investors.

Of course, demand does not change the cost of capital. And high interest rates are perhaps the primary reason for the dismal Q3 2023 dealmaking figures released this week by LevinPro LTC.

But there, too, the industry could soon see relief — or at least more predictability. In a recent interview with NIC, Cambridge Realty Capital Managing Director Tony Marino noted that he believes the industry is coming to a “peak” in rates, with potential dips ahead after the Federal Reserve’s meeting this fall.

“In an election year, the Federal Reserve tries to take a hands-off approach unless a serious event causes a policy change,” he told NIC’s Bill Kauffman this week. “Next year, I think rates will be flat from where they land in December.”

More predictability and a more stable cost of financing could lure buyers off the sidelines. At the same time, sellers are still facing difficult decisions with assets that continue to struggle or aren’t meeting pro forma expectations, which will serve to further narrow the bid-ask spread.

According to LevinPro LTC data, buyers and sellers in the third quarter inked just nine transactions that involved five or more senior housing properties. In the second quarter of the year, there were four transactions with more than 10 properties, and in the first quarter of the year, nine transactions with more than 10 properties. Based on the kinds of conversations I have with senior housing operators, there are likely more big portfolios left to transact in the coming months.

Those conditions have led some industry watchers, like CBRE’s Aron Will, to predict potentially “gangbusters” levels of senior living M&A in 2024 as the industry becomes a real estate “darling child.”

“I expect a lot of sales of assets in lease-up that are not the valuations people would have hoped,” Will said during a recent CBRE webinar. “There is going to be some core-plus capital that re-emerges in the space, making relative value plays for senior housing given where it’s priced now — for really, really good stuff.”

M&A growth strategies take shape

While the industry’s next M&A cycle has yet to turn, recent moves from senior living companies have given me an inkling as to how the next 18 months could play out.

One strategy I see in play is small and mid-sized operators joining forces to confront operational challenges, gain more efficiencies of scale, and shore up balance sheets.

Among the most recent examples of this kind of growth is AgeWell Solvere’s deal to acquire Sonata Senior Living and take over the company’s management contracts, putting the company on track to hit the 40-community mark soon. Just days prior, Balfour Senior Living affiliated with Kisco Senior Living, a move that effectively formed an operator with 35 communities.

While they represented different avenues for scaling up, the companies grew because they have complimentary regional footprints and similar operational trajectories.

Obviously, it doesn’t take an MBA to understand that is a viable strategy for companies that can achieve it. But I think that, like providers in the nonprofit sector have realized, today’s challenges will require a new way of thinking about operations and scale. And I think that has altered the plans and mindset of companies that otherwise had previously planned to go their own way.

The other way I see senior living companies scaling up is by taking on a large number of communities at once, likely as a turnaround project. Given the pent-up demand for larger portfolio transactions and financing conditions becoming more stable, I think it is likely that more big deals will make it to the finish line next year, potentially at “gangbusters” levels as CBRE’s Will had noted in the recent webinar.

The dissolution of operators like Pathway to Living and Enlivant has created opportunities for such plays. Newer companies like Evolve Senior Living are hungry to take on a decent number of communities at once as they build their initial platforms. And other more established newcomers, like Trustwell Living, headed up by former Capital Senior Living CEO Larry Cohen, are looking far and wide for new opportunities to significantly upsize their portfolios.

Next week, executives and other leaders from senior living companies will meet in Chicago for the annual NIC Fall Conference. Each year, we typically hear at least one rumor that a big portfolio in the hundreds of millions of dollars range is about to change hands, but those rumors rarely pan out. Although I’m not sure conditions have shifted enough since the end of the third quarter to make such an outcome more likely, I wouldn’t be surprised, either, if this year the rumors turn out to be true.