Tight Lending, Many Deals: Making Sense Of Cross-Currents In Senior Living M&A

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Tight Lending, Many DealsFinancing for senior living acquisitions has been tight – and yet, the data says many deals are being made.

A recent report from the National Investment Center for Seniors Housing & Care (NIC) was the latest evidence showing “inconsistent” financing for new deals, fueled by ongoing challenges in lending. Even so, May 2024 transaction data from Irving Levin shows the industry is on track to have an active year in terms of the number of deals.

A cross-current of forces is the reason why. The runway for property distress appears to have finally run out with billions of dollars in loan maturities due this year and refinancing difficult or impossible, compelling deals to be made. At the same time, REITs and other deep-pocketed companies are selectively investing in communities and amassing their ideal portfolios, often not through big portfolio deals.

Although borrowing is still a challenge for many companies, that too could change this year, especially if the U.S. Federal Reserve cuts interest rates this year. On the other hand, the Fed has stated it intends to wait for inflation to further cool down, with recent indications that rate cuts may not materialize this summer.

For senior living companies needing to grow quickly, there do seem to be viable deals out there. But I am also struck by the fact that 2024 does not seem to be playing out as some more optimistic industry watchers had hoped earlier in the year.

In this week’s exclusive, members-only SHN+ update, I analyze these recent trends and offer key takeaways, including:

Unpacking the uptick of deals despite ongoing lending challenges
What deals made in 2024 so far say about the second half of the year
Other forces that may impact senior living lending and M&A this year

Tight Lending

M&A ongoing despite lending challenges

One of the big limiting factors of new senior living M&A in recent quarters has been the lack of available financing. On that front, there has been little movement.

A recent report from NIC based on the contributions of 17 lenders showed that lending remained at low levels for the senior housing and care sectors in the fourth quarter of 2023.

Permanent financing for senior housing and care projects “remained inconsistent” in the fourth quarter of last year, reflecting challenges in the sector that included stricter standards from lenders, wider bid-ask spread,s, and lower loan proceeds. Since then, I have heard from companies in the space that lending is still tough, with interest rates being a big reason why.

The issuance of mini-perm and bridge loans and new construction financing ticked up slightly in 4Q23, though both remained far below historical levels, according to NIC’s analysis. The number of delinquent loans in the fourth quarter of last year declined 13% from the previous quarter, with delinquencies as a share of total loans falling to 4.1% for senior living operators.

And yet, all these challenges do not appear to be limiting certain transactions from getting over the finish line. Financial publication Irving Levin has tracked 250 transactions for the year, putting the industry on a pace to hit 600 publicly announced deals in 2024.

What is driving these deals, according to LevinPro Senior Care Analyst Ben Swett, is “sellers [that] still need to sell, usually because they have a non-stabilized property with maturing debt.”

“Another reason for the high deal totals could also be that many of these individual transactions would have normally been combined into a single portfolio deal in the past,” he said earlier in May.

I have seen several smaller transactions and deals to trade distressed assets in the last few months.

One that comes to mind is senior living newcomer Adava Care’s recent deal to acquire a subset of communities in the Milwaukee and the Green Bay, Wisconsin, metropolitan areas. Although the deal included a dozen communities, the portfolio in sum totaled only 279 units, and the properties were underperforming though historically cash-flowing.

As I have noted in the past, public REITs and other deep-pocketed companies are in a position to selectively pick up assets or give operators a cash infusion. Indeed they have, with the leaders of companies including Welltower (NYSE: WELL), Ventas (NYSE: VTR), National Health Investors (NYSE: NHI,) and LTC Properties (NYSE: LTC) all noting the advantage they have about new investments.

Given their positions with high amounts of “dry powder,” I don’t foresee these companies having much difficulty executing their plans if there are enough communities to buy and operators to back.

I do think smaller and mid-sized companies looking to buy communities as a growth strategy might have more trouble. Development – and sourcing financing for it – remains tough, and as a result, many senior living companies have shifted to acquisitions as a growth strategy. And at the start of the year, several executives forecast that 2024 would see a lot of acquisition activity among operators. But economic conditions have not helped propel dealmaking, and the overall outlook is murky for the second half of the year.

Interest rates still in limbo

One of the biggest forces keeping senior living M&A from taking off in recent years has been interest rate hikes.

On that front, the U.S. Federal Reserve has been hard to read. Although many in the senior living industry were hopeful that rate cuts would unlock more acquisition activity this year, that has not materialized.

It does seem clear that the Fed would like to see more on inflationTherere is a possibility – though a low one – that interest rates tick up once more.

“I don’t think anybody hay taken rate increases off the table,” said Federal Reserve Bank of Minneapolis President Neel Kashkari at a recent meeting in London, according to commercial real estate news publication GlobeSt. “I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.”

According to NIC, the Fed at a May meeting reiterated its stance on interest rates, “stating that it does not expect to cut rates until it has greater confidence that inflation is moving sustainably toward 2%.”

“While recent months have delivered mixed results on key inflation indicators, many market expectations include a potential rate cut by late 2024 or early 2025,” the NIC lending report noted.

I have heard many mixed messages about inflation in the last 12 months, but the industry may be waiting longer for interest rate cuts given that consumer prices rose 3.3% in the first quarter of 2024Thehe Beige Book report issued this week does not offer much reason for hopefulness about interest rate relief or general business conditions.

“Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risk,” the report states, summing up the sentiment of businesses surveyed by the Fed.

Meanwhile, new inflation numbers are set to be released on Friday, May 31. But regardless of what that data shows, the economy appears to be a decidedly mixed bag at the moment. For instance, consumer spending is tightening, adding to businesses’ margin pressure, but labor market conditions and wages are easing.

In other words, predictions about how economic conditions will shake out in the second half of 2024 – and their effects on senior living dealmaking – are difficult to make. But it appears that those who anticipated a “higher for longer” interest rate environment were correct, and as we look ahead to the summer and fall, that unfortunately can be revised to “higher for even longer.”