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Publicly traded senior residing corporations are readying huge sums to deploy in new progress ventures in 2024 and past.
CEOs with corporations together with Welltower (NYSE: WELL), Ventas (NYSE: VTR) and Nationwide Well being Traders (NYSE: NHI) laid out their corporations’ respective plans and techniques throughout earnings calls within the final two weeks. All three corporations are investing in senior housing working portfolios and maintaining their collective eyes open for brand new alternatives to develop.
The present wall of debt maturities coming due by 2026, low development begins and rising occupancy locations deep-pocketed corporations, together with REITs, within the driver’s seat for brand new transactions this 12 months.
That mentioned, these favorable situations alone haven’t been sufficient to completely gas progress engines. That was the case with LTC Properties, which had fewer funding alternatives within the second quarter of 2024 than executives had hoped.
“A part of that’s from homeowners which have needed to make investments extra cash, see the potential for possibly some charge cuts and are holding out hope on that,” LTC Co-President and Chief Funding Officer Clint Malin mentioned. “There’s nonetheless a disparity between the bid and ask on these forms of alternatives.”
Though public corporations have all reported sturdy deal stream and a market chock stuffed with alternatives, I feel LTC’s expertise exemplifies one of many present challenges of senior residing M&A progress methods, and the in-between interval that potential consumers of senior residing properties are discovering themselves in at this level in 2024.
On this week’s members-only SHN+ Replace, I analyze earnings calls of public corporations from the final two weeks and provide the next takeaways:
- How present funding methods of public senior residing corporations stack as much as each other
- Why senior residing REITs are being selective about new M&A alternatives regardless of massive quantities of cash put towards progress
REITs execute on progress methods
During the last two weeks, leaders of public REITs struck an optimistic tone about investments within the 12 months forward, with most laying out bold plans to develop within the coming months.
Given the advantageous funding surroundings for large corporations, it’s not exhausting to see why. However I’ve additionally observed that some public corporations haven’t executed on their plans as they’d hoped by this level in 2024.
On the extra energetic facet was Welltower, which throughout its late-July earnings name outlined a further $1.1 billion in investments within the second quarter of this 12 months. The corporate has made investments totaling nearly $5 billion in 2024 to this point.
The corporate’s transactions within the second quarter had a median measurement of $65 million and included 82 communities with a median age of seven years.
“There continues to be no dearth of capital deployment alternatives in entrance of us at terribly enticing economics,” Welltower CEO Shankh Mitra mentioned in the course of the firm’s second-quarter earnings name.
Included in these alternatives are investments throughout the Welltower portfolio, and the corporate spent the quarter partially by changing 47 triple-net lease properties to a RIDEA administration construction. Notably, the corporate can also be refocusing its leasing efforts on lower-acuity assisted residing communities with its bigger margins in thoughts.
Welltower’s closest peer, Chicago-based Ventas, invested $300 million in senior housing properties within the second quarter of 2024, with an expectation to hit $750 million in complete this 12 months “given the favorable market situations and the energy of our pipeline for high quality acquisitions,” CEO Deb Cafaro mentioned.
Like Welltower, the corporate is assembling a large senior housing working portfolio (SHOP). The corporate has “line of sight” on $400 million of senior housing investments stemming from asset holders with imminent fund maturities together with each energetic and reluctant sellers, in keeping with management.
Govt Vice President of Senior Housing and Chief Funding Officer Justin Hutchens mentioned the corporate is actively making an attempt to ramp up the variety of investments it’s doing, and to that finish has a “wide range” of threads to tug on to realize that aim.
Different, smaller REITs additionally closed on investments within the second quarter of the 12 months, together with Nationwide Well being Traders (NYSE: NHI), which has closed on $56.6 million in investments and has letters of intent for offers valued at $155.4 million; and Omega Healthcare Traders (NYSE: OHI), which accomplished $115 million in actual property acquisitions in 2Q24, practically all in expert nursing.
LTC Properties’ extra restricted transaction quantity within the second quarter was a relative outlier when weighed in opposition to the opposite REITs. Although the corporate’s executives had been beforehand excited concerning the prospect of capitalizing on an advantageous market in 2024, Malin mentioned “we haven’t seen the alternatives come to fruition as we thought.”
He added that the corporate continues to be “actively monitoring and watching” for brand new offers, and that “hopefully these alternatives come to fruition.”
In fact, even probably the most energetic REIT consumers are exercising prudence. One of many massive themes amongst the entire latest earnings calls is that REITs are staying selective with new alternatives and trying to find a low value foundation on which to transact. That features Welltower, which Govt Vice President and Chief Funding Officer Nikhil Chaudhri famous “couldn’t discover alignment on the present valuation” of a portfolio of properties it wished to purchase.
The corporate did agree on a $456 million mortgage mortgage for the practically 1,000-unit property portfolio, which included “a number of newly constructed, marquee senior housing properties,” Chaudhri mentioned.
However I feel the instance from Welltower, together with LTC’s difficulties with the bid-ask unfold to this point in 2024, exemplifies the varieties of adverse discussions senior residing REITs and different consumers are having as they attempt to execute on progress methods. Nonetheless, because the 12 months unfolds, funding exercise may ramp as much as grow to be extra uniformly intense.
Early phases of a scorching cycle
For now, the senior residing funding markets appear caught in a type of establishment, with growth remaining robust and federal rates of interest nonetheless on the 5.25% to five.5% vary. The trade has waited patiently for charge cuts over the previous 12 months, and certainly a minimize of fifty foundation factors would possible add a “wholesome quantity” of M&A gas, in keeping with Grant Blosser, managing director at Columbus, Ohio-based Vium Capital.
Previously, the Fed has tied any future charge cuts to enchancment in inflation, which hit an necessary three-year low in July, probably establishing the trade for charge cuts in September.
Moreover, “the bid-ask unfold has normalized now, and clever consumers are leaping in and snapping up properties for all-cash offers,” Walker & Dunlop Managing Director Mark Myers lately advised SHN. He cautioned that the trade was nonetheless “not out of the woods,” and that it had “a variety of wooden left to cut.”
I’ve heard for months now how rates of interest would give new life to a comparatively stagnant M&A market, and assume it’s possible this might be a really energetic M&A 12 months if sellers and consumers can lastly come collectively over pricing.
However that leaves a problem within the near-term. As LTC’s Malin famous, sellers are probably holding out for charge cuts to take maintain earlier than they transact. If that development continues, I feel that consumers might have hassle accelerating much-needed progress plans within the speedy future.
That mentioned, each REIT government I do know incessantly talks about taking part in the lengthy recreation. And I took notice of NHI CEO Eric Mendelsohn’s phrases on the corporate’s most up-to-date earnings name, when he mentioned that “we’re within the early days of remarkable progress for a number of years to come back.”
