This article is part of your SHN+ subscription. Last week, Invesque (TSX: IVQ.U and IVQ) announced it is selling its interest in Commonwealth Senior Living and 20 communities managed by the operator. Invesque’s deal also follows two other sizable transactions: One from Brookdale Senior Living (NYSE: BKD) to acquire 41 communities it operates for $610 million, and another from National Health Investors (NYSE: NHI) to acquire 10 communities managed by Spring Arbor for $121 million.
Invesque CEO Adlai Chester noted in a recent interview with Senior Housing News that reducing leverage was the company’s primary goal in the Commonwealth transaction. Similarly, Brookdale as part of its acquisition recapitalized and pushed its debt maturities down the road.
But while both Brookdale and Invesque had financial needs for undertaking such large deals, I think they won’t be the only companies making sizable moves in an increasingly active market for transactions in 2024 and 2025.
In this members-only SHN+ Update, I analyze these trends and offer the following takeaways:
- Why I expect REITs and operators to continue transacting big-portfolio deals
- The kinds of deals senior living companies are chasing
- What could blunt large-scale M&A heading into 2025
M&A just getting started
Invesque and NHI’s portfolio-moving deals are among the latest big moves – but looking ahead to the rest of 2024 and into 2025 and analyzing the trends, it seems clear that this is just the start of a busy dealmaking period. First, consider that senior living M&A has already picked up in 2024, and has reached potentially record levels. According to the latest tally from Irving Levin Associates, there have been 560 publicly recorded senior housing and care transactions so far in 2024.
While the Fed’s September rate cut has so far amounted to “psychological relief” for the senior living industry, large global investors like Goldman Sachs believe there will be more cuts on the way. Although some REITs have been slow to the draw with regard to new investments in 2024, the prospect of interest rate cuts could spur much more activity from REITs hungry for more growth now that their senior living portfolios are in a better place after years of more limited acquisitions.
NHI is a case in point. Coming out the Covid-19 pandemic, the REIT pursued a portfolio restructuring meant to create a “jewel box” of assets; that effort included paring down the number of communities managed by certain operators, disposing of other properties, and forging new RIDEA-like agreements with other operators.
The effort was not always smooth, but NHI now is poised to enter a more active growth period in a climate favorable to REITs. In an Oct. 10 NIC blog post, NHI Assistant Vice President of Business Development Brittany Spicer laid out the case for why REITs are gearing up to buy more senior living assets in 2024. (As an aside, NHI announced its largest transaction in four years in the form of its Spring Arbor acquisition on the same day that blog post was published.)
“More recently, the publicly traded healthcare REITs with a focus on senior housing and skilled nursing have experienced a significant improvement in their cost of equity, and investors are showing optimism that they are in a unique position to deploy accretive capital while their competition has remained sidelined,” she wrote. “Many REITs are now actively engaged as buyers, and some are expecting to meet or exceed pre-pandemic investment volume in 2024.”
Fewer lending options in the market from traditional banks are also giving REITs more ability to step in as lenders, “capitalizing on high-yielding debt and ideally striving to create a pipeline for future growth through purchase options on properties at stabilization,” she wrote. “Given current market conditions and what is anticipated in the short-term, we envision an active role for REITs in senior housing throughout the end of 2024 and into 2025,” Spicer noted.
NHI has an approximately $305 million pipeline of potential deals consisting primarily of SHOP, sale-leaseback and loan opportunities. Notably, the REIT said that the $305 million figure excludes “multiple larger portfolio opportunities.”
In the case of Invesque, the company sold its interest in Commonwealth to reduce its overall leverage. After the release of $222 million in mortgage debt and $58.6 million in preferred equity and some other adjustments, the REIT is using the proceeds of the Commonwealth deal and 20-property sale partly to reduce its debt under its credit facility with KeyBank. Invesque’s leverage would dip below 50% if all goes according to plan, and would represent a more than 30% reduction in leverage since the end of June.
“For the last 18 months, Invesque has been laser focused on improving our balance sheet, and this proposed transaction is in line with that strategy,” Chester told SHN. Already, one buyer of a portion of the portfolio has been identified: Logos Living Capital, a New York-based private equity firm, is buying eight communities in the Commonwealth portfolio. Invesque also noted that a single to-be-identified buyer is acquiring the portfolio’s 20 other properties as well as the Commonwealth management company.
Consider also the case of operators like Brookdale. I can’t remember the last time a senior living operator invested as much money in its portfolio as Brentwood, Tennessee-based Brookdale did when it acquired 41 communities for $610 million. As my colleague Austin Montgomery outlined earlier this month, Brookdale and other operators believe that owning more of their own communities will help fulfill their long-term goals.
The bottom line is that I still see a big appetite for new M&A from publicly traded REITs and operators, and I believe that we are on the cusp of an even more active period of senior living transactions in 2025. This period of activity will be spurred by lower interest rates, but deals also beget other deals, and these recent transactions set the stage for further action.
For example, Brookdale is widely expected to seek a buyer for at least some of the 25 assets that it recently acquired from Diversified Healthcare Trust (Nasdaq: DHC).
Obstacles to large-scale M&A remain
Although the senior living M&A wheel is turning faster today than it was a year ago, there are still headwinds to new large deals that could serve to slow momentum in 2025. For one, the interest rate situation remains quite dynamic. This week, the 10-year Treasury yield rose to 4.2%, up about 58 basis points from its one-year low last month and the highest level since July.
There are various factors at play here, including shifting expectations about the Fed’s coming moves and uncertainty about the upcoming presidential election. An October M&A update from Baker Tilly found that “many of the headwinds and questions that the [healthcare] industry faced at the end of 2023 carried forward into H1 2024.”
A “noteworthy theme” identified in the report was the “decline in the number of larger deals.” In the first half of 2023, the healthcare industry – comprising everything from senior living and long-term care to home health and hospice – there were six deals with transaction dollar amounts over $1 billion, compared to just two such transactions in the first half of 2024.
“Despite seeing fewer large transactions in H1 2024, healthcare providers and healthcare services deal volumes did stabilize. This evidences a broader trend – that buyers and sellers are beginning to move closer on valuation expectations, but these valuations are generally lower than they were in recent peak periods,” the Baker Tilly report reads.
“Additionally, Federal Trade Commission (FTC) and state-level oversight remain challenges for closing larger deals.” This reflects the situation on the ground at the NIC conference last month. Coming out of that event, one equity analyst put out a note observing that optimism was palpable, brokers were busy, and deal flow seems sure to pick up, but there were no $1 billion-plus portfolios on the market.
Meanwhile, the REITs’ advantage in the market could be fleeting, with private equity and other institutional buyers also ramping up to deploy capital as interest rates drop and market conditions improve.
“PE must get back in the game, it’s not an option,” Dexter Braff, president and founder of healthcare M&A advisory firm The Braff Group, said at the recent Behavioral Health Business INVEST conference. “They don’t want to return the money to their limited partners. If they return the money…“
