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Senior Living M&A Market ‘Wide But Not Deep,’ Development Deals Coming Back

Lenders and investors are again ready to deploy capital into the senior living industry, and for senior living operators and owners looking to grow, 2022 could be a pivotal year.

But what capital providers are looking for in a senior living development or acquisition opportunity has changed with the Covid-19 pandemic, as have the kinds of deals these companies see come across their desks.

With a pandemic still in the foreground, lenders and investors have taken an even keener focus on community operations and performance. At the same time, they are deploying funds with the prospect of future demographic trends in mind — namely, an expected flood of baby boomers moving into senior housing communities in the coming years.

In particular, the demographic trends have companies like Berkshire Residential Investments eager to deploy capital into the sector, according to Managing Director and Chief Investment Officer of Senior Housing Investments Matthew Whitlock. But the arrival of the baby boomers also means that communities will have to be prepared to meet their expectations of more luxury and lifestyle services and amenities, or risk falling out of favor when seeking capital for new projects.

“What we’re seeing post-pandemic is the initial wave of the baby boomers coming of age and demanding an architecture and a lifestyle that wasn’t demanded two or three years ago,” Whitlock said during a panel at the recent Senior Housing News BUILD event in Chicago.

With 2022 around the corner, banks are bullish on the long-term prospects for senior living and seeing “the light at the end of the tunnel, particularly for new developments,” according to Donald Husi, Managing Director at Ziegler.

“If you think about how long it takes to build and stabilize a community, it’s kind of a four- to seven-year process,” Husi said during the panel at BUILD. “And likely four to seven years from now, there will be huge demand.”

The market for new acquisitions is heating up, and certain communities are trading at premium prices. And while Berkshire is seeing many potential acquisition targets, “the market is not particularly deep,” meaning that the best opportunities have been few and far between, Whitlock said.

  • Matthew Whitlock. Photo by RoboToaster for AMN. (Click to advance slideshow)
  • Donald Husi. Photo by RoboToaster for AMN. (Click to advance slideshow)

Strategies for deployment

When the pandemic hit in 2020, capital sources froze as uncertainty gripped the market. Fast forward to the tail end of 2021, and there are potentially billions of dollars of equity waiting to be deployed into the sector.

As a private equity provider, Berkshire looks for development and acquisition opportunities with a focus on specific geographic regions. For example, the company is engaged in a five-property development arrangement in the Boston area with LCB Senior Living, one of its six development partners.

On the acquisition side, Berkshire is open to new relationships with operators, when it can find those kinds of opportunities. With construction and development costs still substantially elevated, acquisition has emerged as a way to vault over those pressures. But that has led to a red-hot market for deals where bidding wars flare up over stabilized properties.

For example, Berkshire was a finalist in a bid for a Midwest community that was 98% occupied and carrying a waitlist of about 40 people, without the use of concessions. While Berkshire in the pre-pandemic days would see one or two opportunities of this nature per month, Whitlock said that well has dried up with the arrival of Covid-19.

“That was literally the only opportunity I’ve seen in the last 14 months for a fully stabilized community, fully staffed, no concessions and a waiting list,” he said. “There was one deal.”

Although Berkshire’s acquisitions team reviews about 15 to 25 deals a month, Whitlock said many of those communities have closed, are pending bankruptcy, have occupancy in the mid-70s, or are communities that are years — sometimes decades — older than their peers.

“The breadth of opportunities is significant,” he added. “The depth of the opportunities is very shallow.”

In terms of the kinds of communities that might fetch the best prices, it’s about what one might expect if they are familiar with recent pricing senior housing trends.

“The folks that get to 85%-plus [occupancy] the fastest are likely going to have the most luck attracting the best prices,” Husi said. “The best marketers out there are going to derive significant value, at least in the near term, because … there’s a lot of capital out there looking for stabilized assets.”

Despite all the remaining uncertainty, Ziegler has been busy with a variety of transaction types, particularly in the independent living and life plan/CCRC sectors.

“We will have closed about eight entrance-fee deals this year, which I think is a record,” he added.

So far, Neither Husi nor Whitlock have seen high widespread levels of distress in the industry, and they believe it is due to a number of factors, including funding and support from the federal government and the ability of some communities to refinance and use bridge financing.

That said, “every market is different,” according to Husi, and the level of distress felt from one market to another will likely be uneven. What he called the “extend and pretend” approach has been possible due to Covid relief funds, but going forward, distress will largely be a function of how quickly a given community can get back to around 85% occupancy.

But the cost of capital is still favorable, making it possible even for non-stabilized assets to meet financing needs at attractive terms, Whitlock added.

“I think that there is stress out there,” he said. “I wouldn’t call it distressed yet, but there are so many opportunities to blend and extend or to kick the can down the road based on the relative cost of capital, that I don’t think you’ll see distress really surface in any meaningful way in the near future.”

Alignment of interest

Both Ziegler and Berkshire are open to forging new relationships with senior living operators, and both companies are actively seeking opportunities for the year ahead. Investors and lenders are seeking partners with operations amenable to dealing with the pandemic.

“The things that we’ve had to do because of Covid are not going to go away tomorrow,” Husi said.

Some of the trends materializing in the senior living industry right now include communities with larger units and amenities, outdoor spaces and specialized HVAC systems built to deal with Covid-19. While LP capital partners like Berkshire typically don’t have as much input in a deal as other stakeholders, Whitlock said “we’re hopeful that our development and operating partners are thinking about this stuff.”

“​​We’re looking to do developments that have more square footage on a per-unit basis, [and] we’re looking for more common spaces that can either have adaptive reuse or cultural impact to the community,” Whitlock said.

Capital providers are also now more keenly interested in arrangements where operators are more closely aligned with ownership by having so-called “skin in the game.”

“They’d like to see 5%, 10%, 15% of the equity stack invested in by the owner, operator or developer,” Husi said. “The preference with the banks is they have to have some skin in the game, particularly if it’s a fill-up situation.”

Whitlock agreed, and added that alignment of interest is a core part of Berkshire’s investment thesis.

“If it’s good for you, it’s good for us,” he said. “And vice versa — if it’s bad for you, we’ve got to protect our capital.”

Looking ahead, Husi sees a slow return to capital market activity, and he sees “plenty of capital out there.” But he believes the biggest challenge ahead — particularly with regard to development financing — is interest rates, and where they are in the year ahead.

“How quickly will they move up? And what impact will that have on new developments going forward?” Husi said. “I don’t think anyone has an answer to that question.”

From his perspective, Whitlock believes that construction financing will remain available in 2022 barring any other calamitous events. Like Husi, he also sees lots of capital sitting on the sidelines, ready to be deployed into the development of new projects. And to that end, he believes that there will be plenty of development opportunities ahead.

“Generally speaking, it’s going to be a function of what does that alignment of interest look like? Where’s the property? What is it approved for, and will there be a construction lender willing to take that risk based on what that capital stack is?” Whitlock said. “But generally speaking, I think that there is very strong demand for new seniors housing … so I’m very bullish on the development market.”

The post Senior Living M&A Market ‘Wide But Not Deep,’ Development Deals Coming Back appeared first on Senior Housing News.

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