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Last year, operators and properties, particularly in rural and tertiary markets, faced “death spirals” of stagnant occupancy and rising expenses.
In 2024, conditions behind that trend have not abated, and some of those properties are now being snatched up by well-capitalized players. In the meantime, there has been positive signaling from the U.S. Federal Reserve that more relief is on the way. The Fed has indicated it’s open to two potential interest rate cuts — one before the year’s end and another potentially in 2025.
This has caused some senior living companies to prepare sidelined development efforts as the starting block for future development, and it has spurred on others to take advantage of the ongoing distress.
“While we’re not out of the woods yet, we have a lot of wood to chop, and the activity over the last six months has been tremendous,” said Walker & Dunlop Managing Director Mark Myers in a recent interview with SHN. “I think the pent-up demand that was there for the last 18 months finally decided to come into the market and start transacting.”
Despite a lingering unfavorable interest rate environment, lenders and operators both told SHN that while market conditions are tough, expectations have reset. In the latter half of 2024, firms are working to sell distressed assets and, failing that, position them with strong third-party management companies to triage and later stabilize operations.
“There are more realistic expectations on both sides of the coin compared to 2023 when sellers wanted higher prices, and buyers were a little more pessimistic,” said Grant Blosser, the managing director at Columbus, Ohio-based VIUM Capital. “I think that alignment has improved as everyone’s a little more sober about the conditions.”
Creativity key in operations, deals penciling out
Senior living operators and capital providers have weathered many challenges in the last four years, from increasingly costly operating environments as acuity rises and staffing costs increase, to debt service obligations becoming a harder long-range challenge to manage against the backdrop of daily operational hurdles.
Sodalis Senior Living’s smaller properties, each around 60 units, have had an average occupancy of 97.5% over the last two years, successfully managing staffing pressures through intense recruitment and centralizing operating costs with home office support, according to CEO Traci Taylor Roberts.
“What we did was take the community-level cost out of the smaller communities, and that allowed cash flow to remain steady,” she recently told SHN.
Roberts said she didn’t think rural communities face a more challenging path than those in metro markets–if they take key steps in streamlining operations and staffing. While challenges remain, operators in those markets must “get creative on your financing” and “change how we staff” to prepare for a new operating environment with higher costs.
“You have to be very thoughtful in centralizing a lot of those positions and getting all the support while not bearing all the costs, and that’s the strategy you have to look out for in smaller markets,” Roberts said. “Unfortunately, it still feels like it did last year—we’re not developing, construction costs are still high, and we have high interest rates, so it seems very status quo.”
That creativity has also extended to the transaction side of the business. Leaders with investment bank Vium Capital in 2024 observed a range of successful, distress-driven transactions in which capital providers bring in a third-party manager to stabilize property performance and net cash flow until a property is attractive for resale.
VIUM reported higher deal levels compared to last year.A further 50-basis-point interest rate cut by the Fed in the fall would “get momentum in the right direction.”
“I think that will add a healthy amount of activity to the M&A market going forward,” Blosser said.
M&A activity in senior housing and care hit a new quarterly record with 183 publicly announced transactions in the second quarter of 2024, according to LevinPro LTC data. This marks a 21% increase from the 151 transactions in the first quarter of 2024 and a 49% jump from the 123 deals recorded in the second quarter of 2023.
Myers also reported that for Walker & Dunlop, the firm as of July has completed 17 transactions with a total transaction volume greater than $598.8 million with an additional $360.9 million under contract for sale across 11 states spanning 2,955 units.
While well-capitalized companies like Welltower (NYSE: WELL) and Ventas (NYSE: VTR) are able to borrow and transact at more attractive rates due to their scale, smaller organizations are still struggling to source financing in today’s interest rate climate.
“The bid-ask spread has normalized now, and intelligent buyers are jumping in and snapping up properties for all-cash deals,” Myers said.
Myers knows all too well the challenges of managing a small rural community, having recently shuttered a Minnesota property that will be sold and transitioned to an alternative use for addiction recovery or behavioral health services.
“That’s one of the avenues that owners of small properties are going to have to consider—simply a change of use,” Myers said.
For Dallas, Texas-based third-party management company 12 Oaks Senior Living, while the bid-ask spread has improved, it still remains a “significant impediment” to getting new deals completed with ownership groups, according to CEO Greg Puklicz.
“Elsewhere, what we see is a lot of chairs being moved around the deck of the Titanic,” Puklicz said.
Currently, 12 Oaks is in conversation with a “large equity group” regarding the transition of a portfolio of Texas communities seeking a new operator.
12 Oaks typically brings on communities that are recently transitioned and works to stabilize care revenues and get staffing challenges under control. Now at nearly 40 properties, 12 Oaks is able to transition properties from a distressed state to operating performance.
In the last year, 12 Oaks reported a 4% decrease in operating expenses, while its operating margin is “doing rather well,” with net operating income margin increasing 40% compared to 2023, Puklicz shared.
“It’s been a hard road to navigate over the last couple of years to get here,” he said. “We had communities with negative cash flow, and that’s turning around. We’re not done yet, and there’s more work to be done.”
Still a ‘big difference’ between rural and metro markets
Senior housing operators have vied for high-barrier-to-entry markets, looking to add density with multiple locations and offering luxury amenities. At the same time, smaller unit-count communities in rural markets face a steeper climb towards operating performance, from improving occupancy to widening operating margins.
Myers noted that the stories between large metro areas and rural markets remain akin to “A Tale of Two Cities” by Charles Dickens, in reference to a recent transaction involving a 70-facility sale to Cascade Healthcare.
“It’s an example of a transaction where the owner simply couldn’t survive the ramifications of being rural and having staffing challenges and staffing costs,” Myers said. “You find that was the straw that broke the camel’s back.”
It’s the “best of times” for cash-flowing facilities, Myers said, especially those in urban locations with stable operations, as well as skilled nursing facilities (SNFs) in states with favorable Medicaid reimbursement rates, such as Maryland, Florida, and Ohio. Conversely, it’s the “worst of times” for facilities struggling with operational and financial challenges that were exacerbated by COVID-19, Myers added.
Regarding Class-A, stabilized, luxury properties for sale, Myers said many ownership groups have held off on selling well-performing assets due to pricing not being as attractive as in the past, meaning that many transactions happening today are often driven by distress and span multiple low-unit communities, often in rural markets.
The struggle of battling daily operating challenges amid rising expenses, particularly in staffing, has led to a “big difference” in market conditions for properties in rural markets compared to their metro counterparts, Blosser said.
“Fannie and Freddie are definitely more heavily scrutinizing secondary and tertiary markets, and they have strong performance in primary markets, but HUD is still doing deals in rural areas,” Blosser added.
