Long-Term Care

The number of mergers and acquisitions grew somewhat consistently throughout the 2010s in the seniors housing and care industry, peaking in 2018 and 2019. The pandemic led to an understandable drop in M&A activity, but signs in 2021 point to a recovery that may soon arrive.

Investor interest in the senior care sectors has boomed since the Great Recession, rising steadily from 89 publicly announced transactions in 2009 to a then-high of 365 deals in 2015, according to statistics from LevinPro LTC. After a couple of years of lower activity, deal making took off again in 2018 reaching 436 deals (a 44% increase over the 302 transactions announced in 2017) and peaking at 450 deals in 2019. Including transactions that were confidentially disclosed or took place off-market, that total would be even higher.

The party had to end, but no one could have predicted how it actually did. Despite the first confirmed case of COVID-19 being announced early in the first quarter of 2020 (January 21, officially), dealmaking was not yet impacted. A total of 104 transactions were made public in the quarter, which was equal to or less than every quarterly total of 2019, albeit being a healthy figure. However, investors halted almost all activity in the second and third quarters, especially as COVID-19 raged through the population (particularly the frail and elderly), economic lockdowns forced providers to shut their doors, unemployment soared, political uncertainty persisted through the summer and fall, and much was still unknown about the virus or the prospect for vaccines.

With all of that, dealmaking still reached 61 transactions in the second quarter and 60 in the third quarter, although nearly all of these deals were all-but consummated before the pandemic. Hundreds of deals were put on the backburner, many just abandoned by the parties involved. For many, the math just did not work anymore based on the agreed-upon purchase price and current financials. The gap between bid and asking prices widened so that the few willing buyers and sellers left could not get deals done. Plus, the CARES Act funds and Medicare prepayments kept

many facilities financially afloat and postponed many sellers’ exit plans.

Then, after the presidential election in November, Pfizer announced that its vaccine was 90% effective, followed shortly by Moderna’s and AstraZeneca’s positive vaccine news. Then, the FDA agreed to emergency use authorization for the Pfizer vaccine on December 11 and the Moderna shot on December 18, with shots commencing for healthcare workers just days after that. So, the end was in sight, or at least the problem became more manageable, especially with nursing home and assisted living residents starting to receive the vaccine.

As a result, investors flooded back into the market, announcing 35 deals in the month of November and a whopping 59 in December, a record for any month, ever. That represented 71% of the entire first quarter of 2020’s total, which was 83 publicly disclosed transactions, a healthy number considering the caution in the market as vaccinations were still being tranched out across the country. In the end, the fourth quarter brought 2020’s deal volume to 353 transactions, a 22% decline from the 453 deals made public in 2019.

Dealmaking then cooled in the first quarter, with 26, 27 and 30 transactions made public in the first three months of the year, respectively. We had heard there was a gap in the transaction pipeline, with so few deals entering the pipeline in the spring and summer of 2020, understandably few could come out in early 2021 (especially with so many closing in December).

Activity remained modest in April and May, with 33 and 32 transactions, respectively. But the market seemed to have turned a corner in June 2021, when 45 separate transactions were announced. It was not only the number of transactions that was notable, but the kind of deals that investors and lenders were able to get done.

To put it in perspective, the market had not seen a billion-dollar deal in two years, partly because few were even available in the market, but also because buyers were more cautious about committing that amount of capital. Then June saw $5.08 billion in total disclosed value, with three billion-dollar-plus deals. That equates to about 65% of the total dollar value of publicly announced LTC deals (with disclosed prices) in all of 2020.

REITs were buyers in two of these. Welltower (NYSE: WELL) announced the acquisition of Holiday Retirement’s owned portfolio of 86 independent living communities for $1.58 billion, or just about $152,000 per unit. That is yet another portfolio acquired “below replacement cost,” which was a common theme of 2020.

The Holiday-owned portfolio consists of 86 properties, 80 of which are nearly identical independent living communities, and six have a mix of IL and assisted living units. There are around 10,400 units

10 LARGEST LONG-TERM CARE TRANSACTIONS, 2000-Sept 2021

Target

Acquirer

Nationwide Health Properties, Inc. Ventas, Inc.

Year

Price

2011 $7,400,000,000

Acquirer Sector

REIT

Holiday Retirement Corp. Manor Care, Inc. Fortress Investment Group, LLC 2006 $6,600,000,000 Investment firm The Carlyle Group 2007 $6,300,000,000 Private Equity

HCR ManorCare real estate assets HCP, Inc. 2010 $6,100,000,000 REIT

CNL Retirement Properties, Inc.

Health Care Property Investors, Inc. 2006 $5,300,000,000 Griffin-American Healthcare REIT II NorthStar Realty Finance Corp. 2014 $4,000,000,000 Quality Care Properties Care Capital Properties, Inc. Welltower Inc. 2018 $4,000,000,000 Sabra Health Care REIT, Inc. 2017 $3,996,000,000 REIT REIT REIT REIT

DigitalBridge Group's healthcare assets Investment group Atria Senior Living real estate assets Ventas, Inc. 2021 $3,210,000,000 Investment firm 2010 $3,100,000,000 REIT

across the portfolio, and occupancy averaged 76%, not far off of the pandemic low. The initial cash cap rate was reported at 6.2%, putting cash flow at around $98 million for the 86 properties.

Simultaneously, Atria Senior Living announced that it was acquiring Holiday’s operating business for an undisclosed price. Welltower also entered into a RIDEA agreement with Atria/Holiday. The contract aligns incentives for both companies, with top- and bottom-line financial metrics. There are also substantial promote opportunities to Atria upon achievement of certain long-term financial metrics. If achieved, that would improve a nominal yield in excess of 9% to Welltower and a net economic yield over 8% after capex and payment of the promote. And this shows some optimism for the future of the industry.

Meanwhile, Atria grew into the second-largest operator in North America, from just over 200 properties to 447 communities in 45 states and seven Canadian provinces. The portfolio could be separated into two groups: Atria’s legacy properties of higher-price communities in coastal markets and its collection of more middle-market communities, which is a segment of the market that will be growing wildly in the 2020s (or at least should be).

Shortly after, Ventas (NYSE: VTR) bought New Senior Investment Group (NYSE: SNR). New Senior owns 77 Holiday-managed communities, 21 communities that have recently been switched from Holiday management to Atria, 15 other communities managed by three other providers, one large community triplenet leased to Watermark Retirement Communities, and four communities managed by other companies. The total purchase price, including assumed debt of $1.5 billion, came to $2.3 billion, or about $185,400 per unit.

But another June deal signified the market had really turned a corner. In that transaction, Harrison Street Real Estate Capital paid $1.2 billion for 24 senior living communities located in California (23) and Nevada (1). The price point was one of the highest ever for a portfolio of that size, at $546,700 per unit, and certainly the highest in the previous two years. One of the reasons for the high price was that half the portfolio averages four years in age and the other half of the properties were recently built or are under construction. New usually translates into a high price, especially in the California market.

The seller of 12 properties was Healthpeak Properties (NYSE: PEAK), which divested several billion dollars of senior living assets in the past two years, and Gallaher Companies for the other 12. Oakmont Management Group managed all 24. But, the fact that Harrison Street would pay that high of a price, and in a $1.2 billion transaction, showed a lot of confidence in the market, and in the future.

Plus, at nearly twice the dollar value of the Harrison Street deal, Ventas, which has struggled a lot with its SHOP portfolio, spending $2.3 billion for a portfolio of mostly dated independent living communities in secondary markets that targets a middle-market population – that will be in a RIDEA structure – means they are starting to see the world through a different lens than the past few years.

Finally, with the vaccines working and more than 80% of residents in senior living having been fully vaccinated, the confidence that they are once again safe will be huge for the customer, the lender, the investor, the operator, staff and anyone else who walks through their doors.

But one major issue that only worsened during and after the pandemic is the industry's labor shortage. Unfilled job openings have already slowed the census recovery for a number of operators, and seniors housing and care owners face increased competition (from a wage standpoint) from other industries. Major changes in the wage structure, culture, retention strategies and career paths, as well as clearly communicating these changes to prospective workers, will be essential to the industry's growth in the next decade. Investors will also likely need to budget for higher staffing costs, which could affect returns.