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Publicly traded senior living companies are readying vast sums to deploy in new growth ventures in 2024 and beyond.
CEOs with companies including Welltower (NYSE: WELL), Ventas (NYSE: VTR) and National Health Investors (NYSE: NHI) laid out their companies’ respective plans and strategies during earnings calls in the last two weeks. All three companies are investing in senior housing operating portfolios and keeping their collective eyes open for new opportunities to grow.
The current wall of debt maturities coming due through 2026, low construction starts and rising occupancy places deep-pocketed companies, including REITs, in the driver’s seat for new transactions this year.
That said, these favorable conditions alone have not been enough to fully fuel growth engines. That was the case with LTC Properties, which had fewer investment opportunities in the second quarter of 2024 than executives had hoped.
“Part of that is from owners that have had to invest additional money, see the potential for maybe some rate cuts and are holding out hope on that,” LTC Co-President and Chief Investment Officer Clint Malin said. “There’s still a disparity between the bid and ask on those types of opportunities.”
Although public companies have all reported strong deal flow and a market chock full of opportunities, I think LTC’s experience exemplifies one of the current challenges of senior living M&A growth strategies, and the in-between period that potential buyers of senior living properties are finding themselves in at this point in 2024.
In this week’s members-only SHN+ Update, I analyze earnings calls of public companies from the last two weeks and offer the following takeaways:
- How current investment strategies of public senior living companies stack up to one another
- Why senior living REITs are being selective about new M&A opportunities despite big amounts of money put toward growth
REITs execute on growth strategies
Over the last two weeks, leaders of public REITs struck an optimistic tone about investments in the year ahead, with most laying out ambitious plans to grow in the coming months.
Given the advantageous investment environment for big companies, it’s not hard to see why. But I have also noticed that some public companies haven’t executed on their plans as they had hoped by this point in 2024.
On the more active side was Welltower, which during its late-July earnings call outlined an additional $1.1 billion in investments in the second quarter of this year. The company has made investments totaling almost $5 billion in 2024 so far.
The company’s transactions in the second quarter had a median size of $65 million and included 82 communities with an average age of seven years.
“There continues to be no dearth of capital deployment opportunities in front of us at extraordinarily attractive economics,” Welltower CEO Shankh Mitra said during the company’s second-quarter earnings call.
Included in those opportunities are investments within the Welltower portfolio, and the company spent the quarter in part by converting 47 triple-net lease properties to a RIDEA management structure. Notably, the company is also refocusing its leasing efforts on lower-acuity assisted living communities with its larger margins in mind.
Welltower’s closest peer, Chicago-based Ventas, invested $300 million in senior housing properties in the second quarter of 2024, with an expectation to hit $750 million in total this year “given the favorable market conditions and the strength of our pipeline for quality acquisitions,” CEO Deb Cafaro said.
Like Welltower, the company is assembling a sizable senior housing operating portfolio (SHOP). The company has “line of sight” on $400 million of senior housing investments stemming from asset holders with imminent fund maturities along with both active and reluctant sellers, according to leadership.
Executive Vice President of Senior Housing and Chief Investment Officer Justin Hutchens said the company is actively trying to ramp up the number of investments it’s doing, and to that end has a “wide variety” of threads to tug on to achieve that goal.
Other, smaller REITs also closed on investments in the second quarter of the year, including National Health Investors (NYSE: NHI), which has closed on $56.6 million in investments and has letters of intent for deals valued at $155.4 million; and Omega Healthcare Investors (NYSE: OHI), which completed $115 million in real estate acquisitions in 2Q24, nearly all in skilled nursing.
LTC Properties’ more limited transaction volume in the second quarter was a relative outlier when weighed against the other REITs. Though the company’s executives were previously excited about the prospect of capitalizing on an advantageous market in 2024, Malin said “we haven’t seen the opportunities come to fruition as we thought.”
He added that the company is still “actively monitoring and watching” for new deals, and that “hopefully these opportunities come to fruition.”
Of course, even the most active REIT buyers are exercising prudence. One of the big themes among all of the recent earnings calls is that REITs are staying selective with new opportunities and searching for a low cost basis on which to transact. That includes Welltower, which Executive Vice President and Chief Investment Officer Nikhil Chaudhri noted “couldn’t find alignment on the current valuation” of a portfolio of properties it wanted to buy.
The company did agree on a $456 million mortgage loan for the nearly 1,000-unit property portfolio, which included “several newly built, marquee senior housing properties,” Chaudhri said.
But I think the example from Welltower, along with LTC’s difficulties with the bid-ask spread so far in 2024, exemplifies the kinds of difficult discussions senior living REITs and other buyers are having as they try to execute on growth strategies. Still, as the year unfolds, investment activity could ramp up to become more uniformly intense.
Early stages of a hot cycle
For now, the senior living investment markets seem stuck in a kind of status quo, with development remaining tough and federal interest rates still at the 5.25% to 5.5% range. The industry has waited patiently for rate cuts over the past year, and indeed a cut of 50 basis points would likely add a “healthy amount” of M&A fuel, according to Grant Blosser, managing director at Columbus, Ohio-based Vium Capital.
In the past, the Fed has tied any future rate cuts to improvement in inflation, which hit an important three-year low in July, potentially setting up the industry for rate cuts in September.
Furthermore, “the bid-ask spread has normalized now, and intelligent buyers are jumping in and snapping up properties for all-cash deals,” Walker & Dunlop Managing Director Mark Myers recently told SHN. He cautioned that the industry was still “not out of the woods,” and that it had “a lot of wood left to chop.”
I have heard for months now how interest rates would give new life to a relatively stagnant M&A market, and think it’s likely this could be a very active M&A year if sellers and buyers can finally come together over pricing.
But that leaves a challenge in the near-term. As LTC’s Malin noted, sellers are potentially holding out for rate cuts to take hold before they transact. If that trend continues, I think that buyers may have trouble accelerating much-needed growth plans in the immediate future.
That said, every REIT executive I know frequently talks about playing the long game. And I took note of NHI CEO Eric Mendelsohn’s words on the company’s most recent earnings call, when he said that “we’re in the early days of exceptional growth for several years to come.”
