Sr. Living M&A Update – Third Quarter

This topic fits a line from the old police serials of my younger days. These are the favorites I watched religiously like Adam-12, the Rookies, The FBI, etc. The line, generally at a crime scene: Move on folks, nothing to see here. That line fits today’s topic.

The mid-year report illustrated softness in activity principally due to three elements. First, high cost of capital. Second, soft performance for most providers looking/needing to sell or affiliate. Prices were/are down due to occupancy levels that in some cases, still have not rebounded to pre-pandemic levels. Third, forward uncertainty such that headwinds in the sector may worsen rather than improve. Here is my mid-year post on this same topic:

Per the Senior Care Investor, a newsletter from the Levin Group: “Seniors housing and care M&A activity fell to 115 publicly announced transactions in the third quarter of 2023, according to data from LevinPro LTC. That is 4% lower than the 120 transactions recorded in the second quarter of 2023, but 18% lower than the 140 deals in the third quarter of 2022.”

Dollar volume wise, deal strength was softer. Third quarter volume of $700 million spent on transactions fell from $1.29 billion spent in second quarter transactions (down 46%).  This is a dip of 82% from the $3.87 billion spent last year, same timeframe, based on disclosed prices. This is the lowest quarterly volume recorded in ten years. The Levin/Senior Care Investor press release is available here:

Among the challenges within the market that are crimping deals, the “basket” of issues remains COVID influenced.  COVID had/has multiple ongoing (negative) impacts on the senior living industry. Inflation remains high and appears to be, fairly sticky now. Staffing is a challenge in terms of numbers, retention, and thus, increasing compensation costs. Capital costs/interest rates are the highest they have been in a decade, restricting buyers. Finally, cap rates have risen putting a halt to many lower cap rate sales (active adult, straight housing unit communities), and as a result values are low keeping many possible sellers from selling,

The outlook for more or increased activity is not likely as the conditions dampening deal flow do not appear to have an immediate or for that matter, near term end. The Federal Reserve posture appears to be higher rates for a longer timeframe as a hedge against inflation that is still running 2 plus points higher than the Fed target (2%).  While occupancy rates are generally improving, overall provider financial performance is not.

Personally, I think the following is the best outlook I can provide for the fourth quarter (not a prime quarter for deals, typically) and through the mid-year of 2024.

  • Assisted Living as a sector, has more opportunity than say, SNFs.  I see more possible buying opportunities here, especially some private equity plays for multiple unit portfolios with decent occupancy and some good market diversification.  Assisted Living doesn’t have the regulatory burdens and staffing challenges, as least not as much, as other care segments such as SNFs and Home Health.
  • Expect not much activity in the SNF sector as closures continue to outpace sales.  The headwinds post COVID remain too strong to make deals viable.
  • Senior housing has lots of opportunities but mostly around lifestyle housing trends and some, free standing properties with decent occupancy in good market areas (demographically and economically solid). The problem is the price/return relationship for many, especially Life Plan/CCRCs.  This is the cap rate disconnect that is occurring as cap rates are rising synthetically and fewer transactions completed exist to create comparable values. Plan on continued affiliations among single site, smaller platform non-profit CCRCs and other larger organizations, including perhaps, some health systems.  Hospitals went through their cleansing phase (removing all non-hospital businesses) to now, thinking perhaps, controlling more components could be a strong value-based care play.  What goes around, comes around.
  • Home health and hospice look to continue to patter along with transaction volume slowly increasing but realized dollar volume staying lower than last year or certainly, pre-pandemic times.  As with SNFs, home health has a reimbursement challenge (forecast cuts for 2024 in Medicare payments), increasing regulatory pressure, and staffing challenges such that, in some really tight labor markets, caseload growth is almost impossible (need staff to grow caseload). Basically, the deals out there are smaller, fewer outlet/office location opportunities.  Hospice has less challenges, but labor is still a struggle.  Reimbursement outlooks in hospice are good and (there is) not much stifling new regulation is in the works.




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