The SeniorCare Investor: Senior Care M&A Market--
Quiet November, But Expect Deal Surge At End Of Year
By any measure, 2011 will go down as a banner year for the seniors housing and care M&A market. The number of “announced” transactions during the year will be significantly higher than in 2010, most likely by at least 40% higher and possibly 50% higher depending on the ability of various parties to get their deals done by year end. And this is despite a small dip in activity in the third quarter. The dollar volume will also be up by more than 40% from the $11.9 billion of announced acquisitions in 2010. Although our cap rate and unit and bed price statistics are based only on arm’s-length transactions “closed” in every calendar year, because we track the entire health care M&A market based on the announcement date of acquisitions, there can be variances with other reported numbers. That said, the 2010 to 2011 period will not reach the peak years of the 2006 to 2007 period when a combined total of $39.2 billion of seniors housing and care deals were announced.
Barring a huge transaction that we are unaware of that could get us close to an all-time, single-year record, with a strong December the recent two-year period should top $30 billion in dollar volume. For this to have occurred with the economy still unraveled by the Great Recession speaks volumes about the resiliency of the sector. To put it into perspective, in the five-year period from 2001 to 2005 following the dot.com bust and resulting recession (not to mention the events of 9/11), the total dollar volume was just $15.9 billion, or an average of just $3.2 billion per year. The sector has not just survived, but it thrived, at least as measured by investor interest pretty much across the spectrum, and this is despite reimbursement risk (specifically, recent and pending cuts), census challenges, a debt market that has still not recovered and a failed leadership in our nation’s capital (and from both sides of the aisle). The low cost of debt, when it is available, hasn’t hurt the situation.
It was not all gravy during 2011, however. In the skilled nursing sector, after the momentum and excitement following the sale of the real estate assets of Genesis HealthCare and HCR ManorCare to REITs for effective prices above $130,000 per bed, combined with the giddiness of anyone with skilled nursing Medicare beds after RUGs-IV went into effect, the euphoric atmosphere began to change. First came the rather weird April 28th announcement of a wide range of potential changes to Medicare rates, which effectively ended one public company’s attempt to sell the entire entity or, at a minimum, complete a recapitalization, and basically brought most, but not everyone, down to reality that the “stroke of the pen” risk does still exist and will continue to do so. What no one was expecting, however, was a change in the pen.
In an unfortunate twist of fate, and timing, RUGs-IV got caught up in the debt ceiling negotiations in July (did we mention a lack of leadership in Washington?), and after thinking they had negotiated a workable reduction in rates over time, the skilled nursing providers were hit not with the worst case scenario, but something far worse, at least for those working in the high-end therapy side of the business. This did slow things a bit in the acquisition market, and the average price per bed in 2011 will decline from the record in 2010 (sale/leasebacks with REITs without a third party involved are excluded from our per-bed analysis), but the resiliency factor came into play and after a six-week daze, the market began to pick up, high-acuity providers sucked it up and tried to figure out how to deal with it, and low-acuity providers had little to worry about, other than the solvency of their respective states. So, with the worst reimbursement cut since the late 1990s, which at that time contributed to one out of five skilled nursing beds in the country being operated by a company in bankruptcy, the industry, while obviously not happy and shareholders even less so, is basically able to “deal” with it? What does that say about resiliency?...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today