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May 2004 issue
Where’s The Beef? Acquisition Volume
Stalls in 2004
The stage has been set, but acquisition
activity in the senior care market has dropped significantly from the
levels of last year. Perhaps this is a good thing.
Skilled Nursing Market
Two portfolio sales are completed, but
the market remains slow. See page 3
Assisted Living Market
Somerford adds three facilities to its
portfolio, plus three one-off transactions. See page 5
More Venture Capital
Trilogy Health Services completes a $26
million venture investment as it rolls out its successful SNF/ALF model.
See page 6
First Quarter Earnings
Mostly good news on the earnings front,
in both the assisted living and skilled nursing sectors, sending some
share prices up. Operating margins are improving and Beverly Enterprises
beats forecasts by a wide margin. See page 9
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Steve's BLOG on Senior Care |
Where’s The Beef? Acquisition Volume
Stalls in 2004 This was the year we were
supposed to see big chains re-entering the acquisition market,
consolidation among regional chains, the growing fear of acquisition
prices outpacing values (now that’s a concept) and a basic feeding frenzy
in the acquisition market. The table was set, but the feeding frenzy has
yet to take place. The problem is that while everyone waiting at the table
is hungry, there is nothing being served up. So where’s the beef these
days?
Last year we saw a
significant jump in publicly announced senior care acquisitions compared
with the previous three years, fueled by what we believed to be the end
(or close to it) of the asset redeployment phenomenon that resulted from
the record number of industry bankruptcies. Buyers were plentiful, and as
capital crept back into the market, lenders with unwanted real estate and
operators still suffering from low occupancies and skimpy cash flow
finally made the big push to unload assets at significant discounts to
replacement cost. Or so the story goes.
As can be
seen in the chart on page 1, publicly announced long-term care
transactions in the first quarter of this year were down more than 50%
when compared with both the previous quarter and the year-ago quarter.
Unfortunately, the trend has continued into April as well. Acquisition
activity in the overall health care services market was down in the first
quarter as well, but not to the extent it was in long-term care.
In the
long-term care market, one theory is that buyers became burned out after
the rash of deals in 2003 and needed to take a breather. But from a
historical perspective, this really doesn’t hold water because the level
of activity last year was significantly less than each of the years from
1996 through 1998. It just seemed busy during 2003 given the relative
drought that followed the record level of M&A activity in last half of the
1990s.
But things
just don’t add up in the current market environment. From a seller’s
perspective, the market is the best it has been in four to five years, and
there should be a pent up supply of potential sellers waiting for the
turmoil to be over and values to rise. Interest rates are still at
historic lows, cap rates are in decline, capital is available, especially
for higher-end product, buyers are chomping at the bit and the public
companies are mostly turning in good quarterly numbers, have excess
borrowing capacity and can finally use their stock as acquisition
currency.
In a survey
completed by Senior Living Valuation Services, 40% of respondents
believe cap rates will decline this year by up to 100 basis points,
compared with 19% last year and just 5% in 2002. That should be indicative
of an aggressive pricing market this year.
Operators,
investors and lessors should all be testing the market to see if values
have really solidified, at least for the quality facilities. But they are
still in hiding, and it is doubtful that these accommodating conditions
will last beyond next year, especially the low cost of capital these days.
In another
survey recently completed by CLW Health Care Services Group, 45% of
active buyers (yes, we realize this is a contradiction in terms) in the
assisted and independent living market responded that they are seeing less
product in the market compared with a year ago, while 60% said the quality
of what is available for purchase is worse than a year ago. Since the
quality of last year’s product was not exceptionally high, this says that
the pickin’s are really slim. A strong majority of 70% believes that the
supply of product will be the same or worse a year from now, and 60% think
the quality will be the same. The real kicker is that 89% of the
respondents said they think it is either a seller’s market today or that
we are heading towards a seller’s market (there was an even split between
the two). This should be a wake-up call to anyone with any inkling to
sell.
Owners of
high-end facilities can almost command their price (within reason, of
course) simply because there is so little competition in today’s market.
It is unclear whether, given the absence of quality facilities in the
market, buyers will go after and bid up prices for properties that they
normally would avoid just to show some extra growth. Or perhaps operators
have finally heeded the call of lenders, investors, consultants,
accountants, lawyers, consumer groups, regulators, politicians and even
Simon Cowell to tone down their acquisition appetite, not pay ridiculous
prices and concentrate on improving existing operations. Have we mentioned
a certain bridge with great river views for sale?
The point is
that in any market, when demand far exceeds supply, something happens to
prices, and in the case of the senior care market they will only go up, as
required rates of return decline or, and we have already seen this, the
prices paid will be based not on today’s cash flow, but on forecasts that
are up to two years out, with all the risks inherent in that strategy. At
some point, however, the providers of capital will rebel if pricing gets
too out of whack. We have yet to reach that point. |
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