A recent federal funds rate cut by the Federal Reserve of 50 bps has created a bit of optimism in the M&A and capital development arena for senior living and senior housing. The expectation of more Fed rate cuts going forward undergirds the optimism BUT…Overall economic conditions remain sketchy including inflation which, ticked a notch higher last week. In turn, the 10-year Treasury yields moved higher. Suffice to say, the outlook, especially for non-profit providers, remains a tad murky.
The senior living sector is currently confronting a significant amount of debt maturities, estimated at around $19 billion over the next two years. Consequently, the recent rate cut is poised to advantage companies that have financed their communities with floating-rate loans during 2020 or 2021. Lender risk appetites, particularly banks, is the ultimate determinant of cost of capital and deal terms (still likely less favorable than pre-2020).
For non-profits, especially those that have older facilities and significant leverage, affiliation or merger may be the best strategy going forward. Labor conditions remain tight, inflation will remain sticky high for the near future, and despite recent rate cuts, capital will remain “pricy” for the next twelve to twenty-four months (separate from an all-out recession that tanks rates).
In April of 2023 I wrote a post regarding mergers and affiliations in health care – hospitals and senior living. As demographics shift, reimbursement and health policy dynamics change, organizations continue to evaluate the benefit of remaining independent or developing strategic partnerships via affiliation or merger. Size and scale are not the lone determinants as we have seen via large hospital system affiliations.
In my post I noted the affiliation upcoming between Froedtert/Medical College and Theda Care, both large hospital and physician group systems in eastern Wisconsin (Milwaukee to Fox Valley). Both had market presence sufficient to remain independent yet each saw trends and possible synergies that suggested an opportunity to partner was more advantageous to their respective missions than remaining independent. Was longer term survival for each and issue, not necessarily. Was longer term growth and market development a bigger issue? More than likely. This is the essence of merger/affiliation strategy. The April post is here: https://wp.me/ptUlY-tH
For non-profits, sales or acquisitions of the primary parent are difficult and complex. A non-profit can readily acquire a for-profit organization rather simply but being acquired creates different tax implications and liquidation of the net purchase proceeds into some charity or range of charities.
The dissolution of a non-profit is not an event where owners or individuals are beneficiaries of the sale. The final beneficiary or beneficiaries are charities, likely pre-named in the original organizing documents or an updated version thereof. As mission is the primary driver of why the non-profit provider organization exists, outright sales are uncommon. Mergers/affiliations that don’t produce a purchase price whereby cash (or similar) is exchanged is the preferred methodology for changes in control or quasi-collaboration such that acquisition does not occur.
My strategy framework applies basically to non-profits whereby, the approach is not outright a purchase of assets (acquisition). This is not to say that elements of a common acquisition don’t occur such as change of governance and ultimate control perhaps, of subsidiary organizations and goodwill elements such as name, brand, certain contracts, etc. This is why readers will note that my strategy framework contains similar elements to an acquisition strategy.
The worksheet for analyzing and conducting a merger or affiliation is attached here. It is free to download, circulate, and of course, use or reference. Merger Affiliation Worksheet