Strategies For Success In A “Consolidation” Environment
 In his 12 years as president and CEO of Masonic Health System of Massachusetts, David C. Turner is getting more inquiries than ever from organizations seeking an acquisition, affiliation, or a partnership. That’s not surprising, given that, industry-wide, 74 long-term-care transactions were announced in the first six months of 2011, compared to 47 in the first six months of 2010. That’s up 57%. This year is also on target to be the most active in terms of the dollar amount of closed long-term care deals, already topping $21 billion through July 31. Industry observers expect more big deals on the horizon, the likely candidates being large (more than 2,500 units) for-profit providers that haven’t already been bought.  

 Current acquisition activity is mainly in the post-acute arena, where providers generally understand the need to be part of something bigger, more diversified, and with a greater breadth of services. The economic reality is that stand-alone nursing homes—even CCRCs—probably will not survive without becoming part of something bigger and diversifying their revenue and their products.
 Credit restrictions and requirements have become tighter, and credit availability always depends on operational performance on both sides of the transaction; but access to financing is improving every day, according to Ryan Saul, Managing Director at Senior Living Investment Brokerage in Glen Ellyn, Illinois. Also, not-for-profit organizations are reviewing their portfolios and divesting assets that are outside their core expertise. Saul expects acquisition activity to continue in the senior living sector, which has taken bumps in the economy much more in stride than other industries have.
 Typically, not-for-profit sellers, particularly those hoping to remain in the business but just needing some financial help or management expertise, will first consider affiliating with a larger not-for-profit organization, which gives not-for-profits a competitive advantage over for-profit bidders. A not-for-profit’s primary motivation to sell is to provide the best possible future for residents and/or patients.
 A not-for-profit that has deep financial problems or is looking to get out of the business altogether—or the asset isn’t part of the core business—will often sell to a for-profit that has better access to capital and, therefore, can usually outbid a not-for-profit bidder. For-profit buyers are primarily looking for opportunities with the most care and specialty alignment but also that allow them to develop or incorporate ancillary services. They’re obviously interested in the return on investment, as well.
  “When a not-for-profit can sell to another not-for-profit, the change in ownership is much easier,” added Saul. “But especially now, the typical buyer will be a for-profit. Few not-for-profit buyers are in the market at this point other than for small-scale transactions.”
  A relatively small not-for-profit certainly can’t compete with the large institutional buyers in this current environment, even if the operation fits within the core business. Institutional buyers have cash on hand and can move very quickly, while the smaller not-for-profits generally need to go to the bond market for financing—often a very long, cumbersome approval process.
 “Even large not-for-profits and some of the for-profits can’t compete with the institutional buyers right now,” said Saul. “The opportunity, then, is to affiliate with smaller organizations that are not at the top of the institutional buyer’s list and are priced lower, as well.”
Continued consolidation likely
Affiliating with a stable organization makes sense in good times or in bad, as the benefits of consolidating are more easily attained when an organization is free from financial challenges. In the not-for-profit world, those benefits can be shared with the seniors already living at the community (controlled fee increases) or with prospective residents (reduced prices); but even stable organizations are finding it more challenging to maintain historical sales levels, as seniors continue to be plagued by a depressed real estate market…Want to read more? Click here for a free trial to Senior Living Business and download the current issue today