Mergers and acquisitions activity in the seniors housing and care sector set a new quarterly record with 183 publicly announced transactions in the second quarter of 2024, as reported by LevinPro LTC. This represents a 21% increase over the 151 transactions from the first quarter of 2024, and a 49% rise compared to the 123 deals in the second quarter of the previous year. Seniors Housing and Care M&A Activity Reaches Record 183 Deals in Q2:24 (prweb.com)
Last year, 2023, was a lean year for M&A activity in the senior living space. Most of the transaction regression was due to uncertain economic and policy conditions, particularly cost of capital, inflation, and interventionist regulatory activity such as the CMS staffing mandate. Yet, as the year ended, signs of a potential escalation of activity were present.
Factors limiting the transaction volume of seniors housing have impacted all classes of real estate assets. In terms of property acquisitions, seniors housing remained one of the most stable sectors in the United States for 2023. Nationwide commercial real estate sales declined by 51 percent last year, with office and multifamily sectors experiencing the steepest drops, at 56 percent and 61 percent respectively, as reported by MSCI (Morgan Stanley Capital Index).
MSCI’s data derives from independent reports on property and portfolio sales exceeding $2.5 million. This data encompasses private-pay senior housing and skilled nursing care facilities, excluding active adult properties.
The question that begs is what has changed since 2023. The answer is less fundamental more instinctual. Investors believe that demand remains strong and the same is true, especially for products with enhanced service features/care access. Investors also believe that interest rates will soon drop, and capital access will improve. There is also an outlook that the recent SCOTUS Chevron decision will neuter over time, negative regulatory activity and interventionist policy like the CMS staffing mandate for SNFs.
In the second quarter, assisted living communities represented 45% of M&A transactions, with skilled nursing facilities following at 35%. Deals involving independent living communities made up 11% of the total, while affordable senior housing communities comprised 5% of the transactions. Continuing care retirement/life plan communities and active adult community deals constituted 3% and 1% of the quarter’s transactions, respectively, per the Levin press release.
While overall activity is up, the private investor is less participative. The access and cost of capital for private investors remains a significant headwind. Equity investors, however, continue to fill the M&A gap, both private equity and REITS.
In a separate report, Levin highlighted that private equity (PE) investments have continued to significantly influence the healthcare mergers and acquisitions (M&A) market. In the second quarter of 2024, PE firms and their sponsored companies completed 186 deals, which is about 38% of the total 496 healthcare deals announced, as per the latest data from the LevinPro HC database. This marks a 24% increase from the first quarter of 2024, which saw 150 acquisitions by PE buyers. However, activity in Q2:24 shows a 17% decrease from Q2:23, when there were 224 transactions involving PE buyers.
One of the more interesting twists within this data and the general story of increased M&A activity is the role private equity is playing and how that role, is presently viewed negatively in Congress (at least by Democrats). Stories have made the press regarding a looming concern that private equity owned providers are more likely to understaff, cut other expenses, at the potential harm of residents and patients. In June, I wrote a post on the regulatory activity and the Washington Capitol Hill view of private equity in healthcare. https://rhislop3.com/2024/06/13/private-equity-investment-in-nursing-home-sector-generates-regulatory-scrutiny/
Overall, I anticipate M&A activity will continue to increase as more providers find current operating conditions to be challenging with no significant change in the environment forthcoming. The motivation will be to find partners or buyers that will bring resources to bear and ideally, lower costs of capital and improved capital access. As long as labor challenges remain, inflationary pressures on commodities and general administrative costs remain (food, energy, insurance), more and more providers, especially single site or smaller scale, multi-site will seek strategic options to exit the industry.
In an upcoming post, I’ll look at the general economic conditions that will exist for the balance of 2024 and into 2025.