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Final week, Invesque (TSX: IVQ.U and IVQ) introduced it’s promoting its curiosity in Commonwealth Senior Residing and 20 communities managed by the operator.
Invesque’s deal additionally follows two different sizable transactions: One from Brookdale Senior Residing (NYSE: BKD) to purchase 41 communities it operates for $610 million, and one other from Nationwide Well being Buyers (NYSE: NHI) to purchase 10 communities managed by Spring Arbor for $121 million.
Invesque CEO Adlai Chester famous in a current interview with Senior Housing Information that decreasing leverage was the corporate’s major aim within the Commonwealth transaction. Equally, Brookdale as a part of its acquisition recapitalized and pushed its debt maturities down the street.
However whereas each Brookdale and Invesque had monetary wants for enterprise such giant offers, I feel they received’t be the one corporations making sizable strikes in an more and more lively marketplace for transactions in 2024 and 2025.
On this members-only SHN+ Replace, I analyze these traits and provide the next takeaways:
- Why I anticipate REITs and operators to proceed transacting big-portfolio offers
- The sorts of offers senior dwelling corporations are chasing
- What may blunt large-scale M&A heading into 2025
M&A simply getting began
Invesque and NHI’s portfolio-moving offers are among the many newest huge strikes – however looking forward to the remainder of 2024 and into 2025 and analyzing the traits, it appears clear that that is simply the beginning of a busy dealmaking interval.
First, take into account that senior dwelling M&A has already picked up in 2024, and has reached doubtlessly report ranges. In line with the most recent tally from Irving Levin Associates, there have been 560 publicly recorded senior housing and care transactions up to now in 2024.
Whereas the Fed’s September charge minimize has up to now amounted to “psychological aid” for the senior dwelling trade, giant international traders like Goldman Sachs consider there might be extra cuts on the best way.
Though some REITs have been gradual to the draw with regard to new investments in 2024, the prospect of rate of interest cuts may spur rather more exercise from REITs hungry for extra development now that their senior dwelling portfolios are in a greater place after years of extra restricted acquisitions.
NHI is a working example. Popping out the Covid-19 pandemic, the REIT pursued a portfolio restructuring meant to create a “jewel field” of belongings; that effort included paring down the variety of communities managed by sure operators, disposing of different properties, and forging new RIDEA-like agreements with different operators. The trouble was not at all times clean, however NHI now’s poised to enter a extra lively development interval in a local weather favorable to REITs.
In an Oct. 10 NIC weblog submit, NHI Assistant Vice President of Enterprise Growth Brittany Spicer laid out the case for why REITs are gearing as much as purchase extra senior dwelling belongings in 2024. (As an apart, NHI introduced its largest transaction in 4 years within the type of its Spring Arbor acquisition on the identical day that weblog submit was revealed.)
“Extra just lately, the publicly traded healthcare REITs with a deal with senior housing and expert nursing have skilled a major enchancment of their price of fairness, and traders are displaying optimism that they’re in a novel place to deploy accretive capital whereas their competitors has remained sidelined,” she wrote. “Many REITs at the moment are actively engaged as consumers, and a few predict to satisfy or exceed pre-pandemic funding quantity in 2024.”
Fewer lending choices out there from conventional banks are additionally giving REITs extra capability to step in as lenders, “capitalizing on high-yielding debt and ideally striving to create a pipeline for future development by buy choices on properties at stabilization,” she wrote.
“Given present market circumstances and what’s anticipated within the short-term, we envision an lively function for REITs in senior housing all through the tip of 2024 and into 2025,” Spicer famous.
NHI has an roughly $305 million pipeline of potential offers consisting primarily of SHOP, sale-leaseback and mortgage alternatives. Notably, the REIT mentioned that the $305 million determine excludes “a number of bigger portfolio alternatives,” which means the corporate may doubtlessly transact on huge offers exterior of its pipeline greenback quantity if the chance is true.
Within the case of Invesque, the corporate bought its curiosity in Commonwealth to scale back its general leverage. After the discharge of $222 million in mortgage debt and $58.6 million in most popular fairness and another changes, the REIT is utilizing the proceeds of the Commonwealth deal and 20-property sale partly to scale back its debt below its credit score facility with KeyBank.
Invesque’s leverage would dip beneath 50% if all goes in accordance with plan, and would characterize a greater than 30% discount in leverage for the reason that finish of June.
“For the final 18 months, Invesque has been laser centered on bettering our stability sheet, and this proposed transaction is in-line with that technique,” Chester informed SHN.
Already, one purchaser of a portion of the portfolio has been recognized: Logos Residing Capital, a New York based mostly personal fairness agency, is shopping for eight communities within the Commonwealth portfolio. Invesque additionally famous {that a} single to-be-identified purchaser is buying the portfolio’s 20 different properties in addition to the Commonwealth administration firm.
Take into account additionally the case of operators like Brookdale. I can’t bear in mind the final time a senior dwelling operator invested as a lot cash 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 different operators consider that proudly owning extra of their very own communities will assist fulfill their long-term targets.
The underside line is that I nonetheless see a giant urge for food for brand new M&A from publicly traded REITs and operators, and I consider that we’re on the cusp of an much more lively interval of senior dwelling transactions in 2025. This era of exercise might be spurred by decrease rates of interest, however offers additionally beget different offers, and these current transactions already are setting the stage for additional motion. For instance, Brookdale is extensively anticipated to hunt a purchaser for not less than a number of the 25 belongings that it just lately acquired from Diversified Healthcare Belief (Nasdaq: DHC).
Obstacles to large-scale M&A stay
Though the senior dwelling M&A wheel is popping quicker right now than it was a 12 months in the past, there are nonetheless headwinds to new giant offers that might serve to gradual momentum in 2025.
For one, the rate of interest state of affairs stays fairly dynamic. This week, the 10-year Treasury yield rose to 4.2%, up about 58 foundation factors from its one-year low final month and the best stage since July. There are numerous components at play right here, together with shifting expectations concerning the Fed’s coming strikes and uncertainty concerning the upcoming presidential election.
An October M&A replace from Baker Tilly discovered that “most of the headwinds and questions that the [healthcare] trade confronted on the finish of 2023 carried ahead into H1 2024.”
A “noteworthy theme” recognized within the report was the “decline within the variety of bigger offers.” Within the first half of 2023, the healthcare trade – comprising every part from senior dwelling and long-term care to house well being and hospice – there have been six offers with transaction greenback quantities over $1 billion, in comparison with simply two such transactions within the first half of 2024.
“Regardless of seeing fewer giant transactions in H1 2024, healthcare suppliers and healthcare companies deal volumes did stabilize. This evidences a broader pattern – that consumers and sellers are starting to maneuver nearer on valuation expectations, however these valuations are usually decrease than they have been in current peak durations,” the Baker Tilly report reads. “Moreover, Federal Commerce Fee (FTC) and state-level oversight stay challenges for closing bigger offers.”
This displays the state of affairs on the bottom on the NIC convention final month. Popping out of that occasion, one fairness analyst put out a word observing that optimism was palpable, brokers have been busy, and deal circulate appears positive to choose up, however there have been no $1 billion-plus portfolios available on the market.
In the meantime, the REITs’ benefit out there may very well be fleeting, with personal fairness and different institutional consumers additionally ramping as much as deploy capital as rates of interest drop and market circumstances enhance.
“PE should get again within the sport, it’s not an choice,” Dexter Braff, president and founding father of healthcare M&A advisory agency The Braff Group, mentioned on the current Behavioral Well being Enterprise INVEST convention. “They don’t need to return the cash to their restricted companions. In the event that they return the cash to the restricted companions, their restricted companions received’t give them cash for the following fundraise. In order that they’re spending that cash.”
Braff cited PitchBook information displaying that in the course of the monetary disaster of 2008 and 2009, the downturn in dealmaking lasted 9 consecutive quarters, then exercise ramped up and finally hit a brand new report. As of Q2 2024, the market was in its ninth consecutive quarter of an M&A downturn.
“Now doesn’t imply that previous is prologue, however the reality of the matter is, due to the notion that PE has to get again within the sport, 9 quarters was [about] so long as they might keep out, and so they began to get again in,” he mentioned.
As PE exercise ramps up, competitors for offers may likewise warmth up, and I’ll have an interest to see what impact that might have on purchaser expectations associated to deal costs.
Finally, though extra rate of interest cuts appear to be on the horizon, there are nonetheless hurdles for corporations to beat in making giant M&A offers. Moreover, the panorama may change meaningfully over the course of the following few months. Offers will certainly nonetheless get finished, however the technique of getting throughout the end line may change into extra circuitous as this 12 months ends and 2025 unfolds.
