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Senior Living M&A Thawing as Buyers, Sellers Align Expectations for 2024

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In 2023, senior living mergers and acquisitions were challenged thanks to market distress, a wide bid-ask spread and a lack of clarity about the road ahead. That appears to be changing in 2024.

For one, many owners of distressed properties are finally out of financial runway and are making tough decisions about what to sell and hold. Another factor thawing M&A markets is the prospect of interest rate cuts in 2024. Although the U.S. Federal Reserve did not cut rates in January, financial experts are at least hopeful that cuts might occur later this year.

As a result of these trends, buyers and sellers are moving increasingly closer together with regard for their expectations on the road ahead. And after months of back-and-forth, stop-and-start M&A talks, more deals are being made across the industry, with a quarterly rebound in total dealmaking based on the latest data.

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“Buyers and sellers have accepted the market that we’re currently in and are just figuring out ways to get transactions done,” said Ryan Saul, managing director at SLIB.

Latest M&A numbers show deal rebound

The previous year was relatively slow for senior living mergers and acquisitions, but the pace of M&A appeared to quicken toward the end of the year, according to the latest data from deal brokers and industry watchers.

On the whole, the industry logged 12% fewer public deals in 2023 than in 2022, according to data from LevinPro LTC. Senior housing represented nearly two-thirds of the total deals last year.

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In the third quarter of 2023, the senior living industry hit its slowest period for industry deal-making since 2021. But in the fourth quarter of 2023, the industry saw 140 deals, representing a 22% increase from the 115 transactions made public in 3Q23, and a 32% increase from the 106 deals made in 4Q22.

All told, LevinPro LTC tracked $3.95 billion changing hands in the fourth quarter of 2023 based on disclosure prices, representing a 464% increase from the third quarter of the year.

Recent anecdotes from on the ground also suggest a rebound in deal activity.

Transaction volume for senior housing communities was 20% higher in January, 2024, than in the same month in 2023, according to Zach Bowyer, senior managing director at Cushman & Wakefield. The company currently is engaged in ongoing transactions totaling $1.3 billion, he added.

Senior Living Investment Brokerage (SLIB) is also seeing a general increase in the number of transactions taking place, according to Senior Vice President Dave Balow. The company recorded 10 transactions in January alone, just four fewer deals than what SLIB recorded in the entire first quarter of 2023.

“February, March will be good months for us in terms of getting deals wrapped up,” Balow said. “It’s a pretty good indication of how … the year is starting.”

Coming year a ‘realignment in perspective’

Helping create an expected M&A uptick in 2024 are all the deals that didn’t get made in 2023. Owners of distressed properties have since the start of the pandemic attempted to hold off from selling certain communities in the hopes that they will fetch a better price down the road.

After years of distress, lenders have largely run out of patience as the trend known as “extend and pretend” has reached its end. And there are a number of forces incentivizing companies to make deals this year in light of that, according to CBRE Vice Chairman of Capital Markets Aron Will.

“There’s a lot of institutional capital now that has fund maturities or are in the extension option of finite funds,” Will said.

Will added there is a sense of the market “leveling out” with the Federal Reserve’s apparent intent to cut rates, which will lead to more deals being available due to the lower cost of business.

Another source of dealmaking in 2024 could come from real estate investment trusts (REITs), many of which are in a strong position due to their balance sheets. The industry is also facing a wave of debt maturities in the coming year that will push more companies to make deals with deep-pocketed partners as they seek to refinance or recapitalize.

Some investors might be looking to purchase the debt from properties that are not stabilized for “somewhat of a discount,” Bowyer said. Owners of properties with positive operating margins may have held off from selling in 2023. But in 2024, they may be willing to transact them for “pretty good pricing,” he explained.

As long as lenders keep lending and interest rates flatten out or decrease, there will be more transactions in 2024 than in 2023, according to Ryan Saul, managing director at SLIB. He added the companies SLIB have been talking with are generally more optimistic about a more active and fluid market throughout 2024.

Will predicts the number of M&As could double in 2024 compared to 2023, and that the market could gain even more momentum in 2025 if those trends hold.

“The next two or three years in the sector are going to be really, really busy,” he said.

Transaction activity should pick up this year as certainty in the treasury market returns, according to Zachary Britton, director in the real estate lending group at MidCap Financial. Overall, the industry is “entering a period of transition where cap rates are starting to progress upward, and historic levels of debt are being repriced in a higher cost of capital environment,” he wrote in a recent capital market update for the National Investor Center for Seniors Housing & Care (NIC).

“2024 may represent an attractive entry point to senior housing as prices adjust lower and fundamentals remain attractive,” he wrote.

The coming years will likely bring about further “realignment in perspective,” both for capital and property markets, according to Bowyer.

“That will allow transaction volume to regain some momentum,” he added.

The market is also primed for additional transactions over the next two years due to the general lack of new construction starts, which could bottom out this year. As development remains tough, acquisitions will for some be a more attractive and cost-effective option for growth.

Demand for senior housing is anticipated to continue to increase in the coming years as well, given the influx of the baby boomers. The lack of new starts is having an effect on banks, with Bowyer saying they are positioning themselves to see higher loan volume again after slowing down in 2022 and 2023.

All of those forces have driven companies to go bigger in M&A.

“Now that a lot of development projects have been frozen, we are aware that a lot of groups that typically prefer to develop are getting more aggressive in the acquisitions in order to be prepared for … when a lot of these demographics get to the point we’ve been talking about for the last several years,” Balow said.

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