Spotlight on the Seniors Housing & Care Market | Third Edition

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Third Edition | 2021

Spotlight on the

Seniors Housing & Care Market: A Look Back at M&A Trends and Transactions in the

The SeniorCare Investor


Inside the World of Senior Care Mergers, Acquisitions and Finance Since 1948



Spotlight on the

Seniors Housing & Care Market: A Look Back at M&A Trends and Transactions in the 21st Century 2001-2021 | Third Edition

The SeniorCare Investor

Inside the World of Senior Care Mergers, Acquisitions and Finance Since 1948


ISSN: 2688-383X (print) | 2688-3848 (online) ISBN: 978-1-970078-21-3 Published by: Irving Levin Associates LLC P.O. Box 1117 New Canaan, CT 06840 Phone (203) 846-6800 | Fax (203) 846-8300 Editor: Benjamin Swett Editor Emeritus: Stephen M. Monroe Advertising: Cristina Blazek-Hearty Design & Layout: Drew Rider Price: $199 © 2021 Irving Levin Associates LLC All rights reserved. Reproduction or quotation in whole or part without permission is forbidden. First Class Postage is paid at New Canaan, CT. This publication is not a complete analysis of every material fact regarding any company, industry or security. Opinions expressed are subject to change without notice. Statements of fact have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. POSTMASTER: Send address changes to Irving Levin Associates LLC P.O. Box 1117, New Canaan, CT 06840

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Spotlight on the

Seniors Housing & Care Market: A Look Back at M&A Trends and Transactions in the 21st Century 2001-2021 | Third Edition

Contents Introduction ................................................................................................ 6 Long-Term Care ........................................................................................ 8 Skilled Nursing Market ........................................................................... 11 Independent/Assisted Living Market .................................................15 Independent Living Market ..................................................................18 Assisted Living Market ..........................................................................24

Spotlight on the Seniors Housing & Care Market | Third Edition | 2021


The seniors housing and care merger and acquisition market has grown tremendously since the turn of the century in terms of deal and dollar volume but faces its toughest challenge to date.

As we enter the next decade, the seniors housing and care industry is facing its stiffest test yet. The COVID-19 pandemic strained the owners and operators like no crisis has ever done, and it left investors reeling throughout much of 2020 and 2021. Even if they wanted to invest in these properties, some lenders either refused to lend or demanded stringent terms. Meanwhile, moratoriums on new move-ins enacted in the spring of 2020 dropped census at facilities nationwide, and occupancy continued to fall even as communities reopened their doors. The recovery has begun, with some publicly traded companies reporting census gains of 300, 400 or 500 basis points since the lows of March 2020. But the road to pre-pandemic occupancy (or pre-2018 occupancy, when overdevelopment began to bite) is still quite long, perhaps dragging into 2024 or 2025. As a result, revenues declined just as PPE and labor costs rose to adapt to the crisis, leaving many owners with lower or negative debt coverage ratios in a perilous financial position. Some providers were already struggling from the effects of overbuilding before the pandemic. PPP loans and other government relief such as Medicare prepayments helped stave off ruin for many owners, but some of this aid eventually comes due. Plus, as every operator tries to fill their empty units, many will feel the need to offer discounts or other financial incentives, which further eats into the REVPOR and a community’s profitability. With those problems, owners faced few choices: wait it out, scale up or divest. Waves of federal relief did keep a number of owners on the M&A sidelines, happier to lay low during the dynamic and confusing pandemic response, minimize their risk and receive the aid that was inevitably coming, especially as Washington turned blue in November. Some inves6

tors with solid capital relationships, plus the confidence and patience to go through the M&A process in 2020, took advantage of pricing softness to scale their portfolios. On the other end of many of those deals were the smaller owner/operators, mom & pops and, interestingly, the major REITs, for whom the pandemic tipped the scales in favor of divesting entirely, or at least significantly, from the sector. However, interest from investors both inside and outside of the industry remains high, with plenty of dry powder ready to be deployed in a sector that is set to boom in the 2020s.

Ben Swett

Steve Monroe

About the Editors Ben Swett - Ben joined Irving Levin in the summer of 2014 as an Analyst, responsible for the research and reporting on seniors housing M&A and finance news for The SeniorCare Investor, in addition to providing research and analysis for Irving Levin’s healthcare sector reports. Ben graduated from Hamilton College with a B.A. in History (concentrating on the American Civil War). Steve Monroe - Steve has been a healthcare and senior care financial expert for over 30 years. In addition to being an often-quoted healthcare finance expert in mainstream media, he has published over 50 bylined articles dealing with various aspects of investing in health care and seniors housing. He is also called upon to keynote and speak at organizations such as the American Seniors Housing Association, Assisted Living Federation of America, National Investment Center for Seniors Housing and Care and American Health Care Association, among others.




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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

Long-Term Care

The number of mergers and acquisitions grew somewhat consistently throughout the 2010s in the seniors housing and care industry, peaking in 2018 and 2019. The pandemic led to an understandable drop in M&A activity, but signs in 2021 point to a recovery that may soon arrive.

Investor interest in the senior care sectors has boomed since the Great Recession, rising steadily from 89 publicly announced transactions in 2009 to a then-high of 365 deals in 2015, according to statistics from LevinPro LTC. After a couple of years of lower activity, deal making took off again in 2018 reaching 436 deals (a 44% increase over the 302 transactions announced in 2017) and peaking at 450 deals in 2019. Including transactions that were confidentially disclosed or took place off-market, that total would be even higher. The party had to end, but no one could have predicted how it actually did. Despite the first confirmed case of COVID-19 being announced early in the first quarter of 2020 (January 21, officially), dealmaking was not yet impacted. A total of 104 transactions were made public in the quarter, which was equal to or less than every quarterly total of 2019, albeit being a healthy figure.


However, investors halted almost all activity in the second and third quarters, especially as COVID-19 raged through the population (particularly the frail and elderly), economic lockdowns forced providers to shut their doors, unemployment soared, political uncertainty persisted through the summer and fall, and much was still unknown about the virus or the prospect for vaccines. With all of that, dealmaking still reached 61 transactions in the second quarter and 60 in the third quarter, although nearly all of these deals were all-but consummated before the pandemic. Hundreds of deals were put on the backburner, many just abandoned by the parties involved. For many, the math just did not work anymore based on the agreed-upon purchase price and current financials. The gap between bid and asking prices widened so that the few willing buyers and sellers left could not get deals done. Plus, the CARES Act funds and Medicare prepayments kept




many facilities financially afloat and postponed many sellers’ exit plans. Then, after the presidential election in November, Pfizer announced that its vaccine was 90% effective, followed shortly by Moderna’s and AstraZeneca’s positive vaccine news. Then, the FDA agreed to emergency use authorization for the Pfizer vaccine on December 11 and the Moderna shot on December 18, with shots commencing for healthcare workers just days after that. So, the end was in sight, or at least the problem became more manageable, especially with nursing home and assisted living residents starting to receive the vaccine. As a result, investors flooded back into the market, announcing 35 deals in the month of November and a whopping 59 in December, a record for any month, ever. That represented 71% of the entire first quarter of 2020’s total, which was 83 publicly disclosed transactions, a healthy number considering the caution in the market as vaccinations were still being tranched out across the country. In the end, the fourth quarter brought 2020’s deal volume to 353 transactions, a 22% decline from the 453 deals made public in 2019. Dealmaking then cooled in the first quarter, with 26, 27 and 30 transactions made public in the first three months of the year, respectively. We had heard there was a gap in the transaction pipeline, with so few deals entering the pipeline in the spring and summer of 2020, understandably few could come out in early

2021 (especially with so many closing in December). Activity remained modest in April and May, with 33 and 32 transactions, respectively. But the market seemed to have turned a corner in June 2021, when 45 separate transactions were announced. It was not only the number of transactions that was notable, but the kind of deals that investors and lenders were able to get done. To put it in perspective, the market had not seen a billion-dollar deal in two years, partly because few were even available in the market, but also because buyers were more cautious about committing that amount of capital. Then June saw $5.08 billion in total disclosed value, with three billion-dollar-plus deals. That equates to about 65% of the total dollar value of publicly announced LTC deals (with disclosed prices) in all of 2020. REITs were buyers in two of these. Welltower (NYSE: WELL) announced the acquisition of Holiday Retirement’s owned portfolio of 86 independent living communities for $1.58 billion, or just about $152,000 per unit. That is yet another portfolio acquired “below replacement cost,” which was a common theme of 2020. The Holiday-owned portfolio consists of 86 properties, 80 of which are nearly identical independent living communities, and six have a mix of IL and assisted living units. There are around 10,400 units

10 LARGEST LONG-TERM CARE TRANSACTIONS, 2000-Sept 2021 Target Nationwide Health Properties, Inc. Holiday Retirement Corp. Manor Care, Inc. HCR ManorCare real estate assets CNL Retirement Properties, Inc. Griffin-American Healthcare REIT II Quality Care Properties Care Capital Properties, Inc. DigitalBridge Group's healthcare assets Atria Senior Living real estate assets

Acquirer Ventas, Inc. Fortress Investment Group, LLC The Carlyle Group HCP, Inc. Health Care Property Investors, Inc. NorthStar Realty Finance Corp. Welltower Inc. Sabra Health Care REIT, Inc. Investment group Ventas, Inc.

Year 2011 2006 2007 2010 2006 2014 2018 2017 2021 2010

Price $7,400,000,000 $6,600,000,000 $6,300,000,000 $6,100,000,000 $5,300,000,000 $4,000,000,000 $4,000,000,000 $3,996,000,000 $3,210,000,000 $3,100,000,000

Acquirer Sector REIT Investment firm Private Equity REIT REIT REIT REIT REIT Investment firm REIT



Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

across the portfolio, and occupancy averaged 76%, not far off of the pandemic low. The initial cash cap rate was reported at 6.2%, putting cash flow at around $98 million for the 86 properties. Simultaneously, Atria Senior Living announced that it was acquiring Holiday’s operating business for an undisclosed price. Welltower also entered into a RIDEA agreement with Atria/Holiday. The contract aligns incentives for both companies, with top- and bottom-line financial metrics. There are also substantial promote opportunities to Atria upon achievement of certain long-term financial metrics. If achieved, that would improve a nominal yield in excess of 9% to Welltower and a net economic yield over 8% after capex and payment of the promote. And this shows some optimism for the future of the industry. Meanwhile, Atria grew into the second-largest operator in North America, from just over 200 properties to 447 communities in 45 states and seven Canadian provinces. The portfolio could be separated into two groups: Atria’s legacy properties of higher-price communities in coastal markets and its collection of more middle-market communities, which is a segment of the market that will be growing wildly in the 2020s (or at least should be). Shortly after, Ventas (NYSE: VTR) bought New Senior Investment Group (NYSE: SNR). New Senior owns 77 Holiday-managed communities, 21 communities that have recently been switched from Holiday management to Atria, 15 other communities managed by three other providers, one large community triplenet leased to Watermark Retirement Communities, and four communities managed by other companies. The total purchase price, including assumed debt of $1.5 billion, came to $2.3 billion, or about $185,400 per unit. But another June deal signified the market had really turned a corner. In that transaction, Harrison Street Real Estate Capital paid $1.2 billion for 24 senior living communities located in California (23) and Nevada (1). The price point was one of the highest ever


for a portfolio of that size, at $546,700 per unit, and certainly the highest in the previous two years. One of the reasons for the high price was that half the portfolio averages four years in age and the other half of the properties were recently built or are under construction. New usually translates into a high price, especially in the California market. The seller of 12 properties was Healthpeak Properties (NYSE: PEAK), which divested several billion dollars of senior living assets in the past two years, and Gallaher Companies for the other 12. Oakmont Management Group managed all 24. But, the fact that Harrison Street would pay that high of a price, and in a $1.2 billion transaction, showed a lot of confidence in the market, and in the future. Plus, at nearly twice the dollar value of the Harrison Street deal, Ventas, which has struggled a lot with its SHOP portfolio, spending $2.3 billion for a portfolio of mostly dated independent living communities in secondary markets that targets a middle-market population – that will be in a RIDEA structure – means they are starting to see the world through a different lens than the past few years. Finally, with the vaccines working and more than 80% of residents in senior living having been fully vaccinated, the confidence that they are once again safe will be huge for the customer, the lender, the investor, the operator, staff and anyone else who walks through their doors. But one major issue that only worsened during and after the pandemic is the industry's labor shortage. Unfilled job openings have already slowed the census recovery for a number of operators, and seniors housing and care owners face increased competition (from a wage standpoint) from other industries. Major changes in the wage structure, culture, retention strategies and career paths, as well as clearly communicating these changes to prospective workers, will be essential to the industry's growth in the next decade. Investors will also likely need to budget for higher staffing costs, which could affect returns.




Skilled Nursing Market Focusing on the skilled nursing market, its average price per bed dropped 14% from $93,000 in 2019 to $79,700 in 2020. We have seen larger percentage declines in the past, most recently an 18% decline from the $99,200 per bed average price in 2016 to $81,355 per bed in 2017. Considering the circumstances of 2020, there could have been a steeper fall in average price, with the sale of many ailing facilities by highly motivated owners. But federal and state aid programs prevented many owners from having to sell, leading investment demand for SNFs to outpace supply of facilities available for sale. That helped push up the average purchase price in the first half of 2021 to $88,500 per bed. But this strength in average pricing does not show that the bifurcation of the market grew in the pandemic. Alongside the sales of plenty of struggling facilities in 2020, including eight properties selling

below $10,000 per bed and more than 30 priced under $25,000 per bed, there is another side of the market with newer transitional care facilities that care almost exclusively for Medicare and private pay patients, usually at a higher acuity too. The introduction of the Patient Driven Payment Model (PDPM) reimbursement rule change in October 2019 had previously ushered in a buying boom in the transitional care market, as these facilities were primed to benefit the most from it. That may not have been first on the mind of some SNF buyers since the pandemic began, but they still paid up for the higher and steadier stream of cash flow. In addition, the premium placed on strong existing cash flow likely only rose as the pandemic drove many struggling, older facilities into financial distress and to sell at steep discounts. Throughout the 21st century, skilled nursing cap rates have gradually fallen, but compared to the seniors housing market, the average has remained remarkably steady. However, it should be noted that


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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021 sponsored content

Flexible Capital During Turbulent Times F. Donald Kelly III – Managing Director | Locust Point Capital The pandemic has presented unrivaled challenges for seniors housing and skilled nursing owner-operators, from COVID outbreaks to additional resident and staff safety protocols and procedures, meeting requisite levels of staffing, and increased costs of operation. In addition to the multitude of operational challenges, owneroperators are challenged with meeting underwritten expectations of loans structured and closed prior to the pandemic. As a result of this confluence of events, many owner-operators are experiencing technical defaults and looming maturity dates. According to Dan Contardi, Founding Partner of Locust Point Capital, “we are hearing from our borrowers and seeing in the portfolio that census and profitability are trending positively. Such trends are expected to continue but may take time for a return to normal. I have always believed, and now more than ever believe, that borrowers need patient capital with reasonable expectations and the flexibility to work through challenges when they arise.” Locust Point Capital is an asset management firm specializing in direct lending to the seniors housing and care industry. Locust Point strives to bring a relationship approach to lending and form long lasting partnerships with borrowers, lenders, private equity investors, and sponsors. Locust Point’s team is comprised of members with broad lending and investing experience in the seniors housing and care sector, and their investment philosophy is built on providing the transparency, flexibility, and reliability. Their core senior leadership team of Eric Smith, Dan Contardi, Helen Quick and Don Kelly have over 90 years of combined seniors housing and skilled nursing industry experience. Locust Point Capital partners with banks and other lenders in the market to provide capital solutions in the form of “B” tranche subordinate debt, mezzanine debt and preferred equity which, in combination, provides a “whole loan” solution to owner-operators seeking to advance their business goals and continue to provide these essential services and care. Locust Point Capital has remained active during the pandemic, consistently working to provide needed capital to owner-operators for new construction, acquisition, recapitalization, and refinancing. During 2020, Locust Point Capital closed 20 transactions and has remained active this year closing 14 transactions for the year to date as of June 30, 2021. According to Don Kelly, Managing Director at Locust Point Capital, “we are encouraged by how our owneroperator relationships are navigating the challenges in the current environment. We value our owner-operator relationships, many of which span decades. As a team, we work to support our borrowers in navigating this new landscape, not just with our capital and flexible structures, but with our expertise and thought leadership. Our expertise is constantly expanding and growing from our frequent dialogues with participants serving many aspects of the seniors housing and care industry. Our company is founded on relationship lending and repeat business. Throughout the course of the pandemic, we received an abundance of positive feedback from our owner-operators and have a sincere appreciation for these relationships and their support.”





Balance Sheet Strength, Relationship Focused

Locust Point Capital is a direct lender specializing in providing capital to the lower middle market seniors housing and care industry.

Locust Point Capital provides flexible, creative, and non-dilutive capital solutions to owner-operators of senior housing and care facilities. Transparency, trust, certainty of execution, and creative structuring are the cornerstones of our business goals.

For more information, visit or contact:

Don Kelly 941.961.0277

Dan Contardi 732.945.7466

Eric Smith 732.945.7459



Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

as the pandemic wreaked havoc on most facilities and their bottom lines, in many cases, facilities’ current financials did not reflect historical or “normal” performance. For our statistics, we strive to collect only trailing financials and census figures that best reflect the stream of cash flow and existing census that the buyer was purchasing (and presumably valuing), not what they hope to achieve in the future.


However, these more recent metrics were not always available, nor best reflected how the buyers valued the property. There were also some very low or negative cap rates not included in the average (only “market” cap rates are included) and could understate the market’s weakness. But, thanks to the diligence and generosity of countless brokers, lenders, buyers, sellers and operators who contributed information on either a confidential or disclosed basis, we are confident that these statistics are the most accurate and




representative of the post-pandemic M&A market. Nevertheless, the sector has maintained that consistency amid more volatile interest rate changes, global economic trends and, evidently, even during a pandemic that targets the elderly, frail and medically complex. During the Great Recession, the sector saw a moderate increase in cap rate, rising from 12.1% in 2007 to 12.9% in 2008 and peaking at 13.1% in 2010. Other real estate classes were not so lucky. In the years afterward, the consistently high yields that skilled nursing offered drew investors to the sector, helping compress the average cap rate to around 12.0%. Incredibly low interest rates and abundant capital also contributed to the cap rate compression, but not nearly as much as on the seniors housing side. Then, the risk of owning and operating a skilled nursing facility shot up as COVID-19 cases and deaths rose across the country, unfortunately all too often in the facilities themselves. And the average cap rate followed, increasing 50 basis points from 12.2%

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in 2019 to 12.7% in 2020 and then to 13.1% based on the trailing-12 months ended June 2021. The average cap rate reflects the SNFs sold during the year, but because non-market cap rates are not included in the average, 2020 deserves a little more explanation. There were many struggling SNFs that sold in 2020 with negative trailing EBITDA, and thus negative cap rates not included in the average. Facilities with little positive cash flow that yield very small cap rates would also not be included in our calculations, since they were not “cap rate” deals but rather “per-bed” deals. This happens every year but has only exaggerated since the pandemic.

Independent/Assisted Living Market After the average price per unit for seniors housing communities (including independent living, assisted living and memory care) rose 20% from 2018 to an all-time peak of $244,200 per unit in 2019, the market readjusted, dropping the average price per













Real Estate Investment Sales | Financing | Research | Advisory Services |


Source: *YTD June 2021, Internal Reports



Spotlight on the Seniors Housing & Care Market | Third Edition | 2021 sponsored content

M&A and Bridge-to-HUD Lending Continues to Grow Despite COVID-19 Erik Howard – Executive Managing Director of Healthcare Finance | Capital Funding Group As the industry continues to navigate the effects of COVID-19, it is important to understand current lending trends and options available to owners and operators of healthcare facilities. COVID-19 had a major impact on the long-term care and senior housing sectors while also presenting significant opportunities, as many traditional lenders pulled back credit both generally, and specifically to the healthcare sector. In keeping with its philosophy of supporting its healthcare clients through thick and thin, and recognizing an opportunity to increase market share in the healthcare real estate lending space, the Capital Funding Group family of companies (“CFG”) forged ahead with its healthcare lending programs. Capital Funding Group continues to lead the industry with its one-stop shop approach – providing a full suite of lending offerings, all under one roof. CFG takes an entrepreneurial approach to everything it does, creating new opportunities for growth and delivering creative lending solutions. Executive Managing Director Erik Howard speaks to industry trends, innovations and how CFG helps its clients grow and makes a positive impact on the healthcare industry. What are the latest trends you are seeing with senior housing and long-term care industry M&A transactions? We continued to see significant M&A activity during 2020 and 2021, and we are expecting activity to ramp up further through next year. In particular, we will likely see a further increase in relatively smaller/independent operators selling as a result of the increased costs and uncertainty related to COVID, which has been a particular challenge to those companies. Many long-term care facilities in particular, seemed as though they were not properly equipped to deal with the COVID-19 pandemic. What changes are you seeing within these facilities and what do you expect to be implemented? We expect an increase in renovation/CapEx activity to improve marketability of facilities and reduce the risk of COVID, such as converting semi-private rooms to private rooms. Additionally, we expect operators to use enhanced technology to help to continue to improve efficiencies, while also making equipment upgrades, such as HVAC systems and state-of-art air filtration systems. The HUD Section 232 new construction/substantial renovation and Section 241 supplemental loan programs are a great way to accomplish these with no recourse and low rates. As the number of lenders who support the healthcare industry declined due to COVID-19, how has CFG supported its clients through these unprecedented times? CFG has supported its clients and community through a variety of means, including: • Offering payment deferments during the early months of COVID • Working with HUD in developing the HUD 223D COVID-relief loan, which allows up to 12 months of





HUD debt service to be financed and spread over the life of the loan to free up near-term cash flow • Working with borrowers who experienced challenges achieving financial covenant requirements as a result of COVID • Supporting the development of a first-of-its-kind program – the Jack and Nancy Dwyer Workforce Development Program, whose mission is to help resolve the effects of systemic poverty and inequality and help resolve the turnover crisis and burnout due to staffing shortages in the healthcare industry by creating a pathway to advance career opportunities in the nursing profession. What sets CFG apart from other healthcare lenders? We are experts in healthcare lending and are an unparalleled one-stop shop for a variety of products for the healthcare/seniors housing industry, including but not limited to: HUD financing, short term conventional loans, working capital financing, non-bank finance & equity, and group purchasing discounts for facilities. We have a strong appetite for transactions involving value-add or ‘turn-around’ opportunities and provide creative financing structures for transactions with unique circumstances – finalizing them faster than other lenders. We are strong supporters of industry organizations such as AHCA/NCAL, NIC, and the individual state healthcare associations. Our CEO Jack Dwyer is actively involved with our clients and in the communities we serve. His entrepreneurial spirit creates new opportunities for growth and creative lending solutions, and we are excited to continue growing and providing lending solutions that help our clients reach their goals – all while helping to improve the lives of others.

25+ Years of Healthcare Financing With over $2 billion financed in the first half of 2021, Capital Funding Group is the one-stop shop for creative, customized financing solutions.

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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

unit by 20% to $196,000 per unit, and by another 1% to $194,000 per unit in the trailing-12 months ended June 2021. The average has fallen below the $200,000 per unit mark just once since the development boom commenced in 2014, which brought many luxury communities onto the market and sent average values soaring. That in turn attracted many owners of high-quality communities to the M&A market, thereby pushing prices even higher. As in most years, the assisted living market strongly influenced the average, accounting for about 63% of the units sold and 56% of the dollars spent in the sector in 2020. The sector was clearly affected by the pandemic and ensuing lockdowns, with average census dropping precipitously in the spring and steadily throughout the rest of the year. Prior to the pandemic, the AL sector also faced serious labor problems, both the scarcity and cost of it, which only worsened in 2020, and more so in 2021. As in the skilled nursing market, the newer, high-quality communities with their higher monthly rents had more financial flexibility to weather the storm, leaving the older, traditional assisted living communities to watch their occupancy and cash flow drop, all while trying to retain an overworked staff.


Independent Living Market Proponents of independent living touted its durability during the pandemic, especially relative to the assisted living market, and by measure of the average price paid per IL unit in 2020 and into 2021, the claims may be true. The average price dropped less than 1.0% from $233,600 per unit in 2019 to $232,500 per unit in 2020, and then by 2.5% in the twelve months ended June 30, 2021. Considering the shock to the system the pandemic posed to a real estate sector that caters to the elderly, this is remarkable pricing stability. Independent living’s longer lengths of stay, lower labor costs and younger, healthier residents allowed this sector to better weather COVID-19. That relative strength may have inspired a few of the largest transactions seen in years. First was the largest deal of 2020, which featured 11 majority-IL communities in California, Nevada and Washington owned by Welltower. The portfolio sold to a joint venture between AEW Capital Management and Merrill Gardens for $702 million, or $465,800 per unit, at a 5.1% cap rate on trailing-12-month figures ended March 2020. Then June 2021 saw Atria Senior Living’s acquisition




of independent living operator Holiday Retirement, Welltower’s $1.58 billion acquisition of Holiday’s owned portfolio of 86 communities, and Ventas’ $2.3 billion acquisition of the majority-IL REIT, New Senior Investment Group. These three deals announced in quick succession almost certainly would not have taken place without the continued strength and stability of the IL sector, despite the deals coming in with below-average per-unit prices.

age occupancy hovered around the healthy level of 90.0% just before the pandemic, so it had a larger census cushion to absorb the impacts of COVID-19. That strong occupancy also gave these communities more flexibility to charge higher rents, resulting in surer financial footing going into the pandemic as well. Independent living is also a lot closer to attracting the oncoming baby boomers, since the average move-in age is theoretically lower than assisted living.

Another IL advantage was that the sector’s aver-

The growth of the active adult community space



Spotlight on the Seniors Housing & Care Market | Third Edition | 2021 sponsored content

Where Oversupply and Pandemic Meet Colleen Blumenthal, MAI - COO | HealthTrust, LLC Florida has witnessed tremendous additions to the seniors housing supply over the last five years. In South Fort Myers, inventory more than doubled from 2015 to 2020, with another three projects representing nearly 300 beds currently proposed: Here are some cautionary tales from this market that developers should hear and digest before moving dirt in a market hammered by new supply and COVID:

Fort Myers AL/MC Market 2,500









60% 50%








Absorption Velocity: While a market study may suggest AL/MC Units AL/MC Occupancy there will be demand in five years for a project, in any given year, only so many prospective residents will make the move Source: HealthCompsTM to seniors housing. Presumably, the development proformas assumed 18- to 24-month fill but with so many properties opening simultaneously, after the pent-up demand was satisfied, monthly absorption dropped from 32-36 beds in 2016 and 2017 to only 13 beds monthly in 2018 and down to 10 beds per month in 2019 when no beds were added. Enter a pandemic and net fill dropped even further to only three beds a month across the market. The current median occupancy of the pre-2015 built communities is 89% compared with 76% for those that opened in 2016 and later. When entering a market flush with new product, fill time may be double typical expectations. Rate Growth: Most proformas we see often suggest initially low rates growing in line with inflationary pressure followed by 5-6% escalations once census stabilizes. The new additions in this market report little to no rate increases (0-2% compounded annually) for asking rates, and in one case, rate reductions. This, on top, of increasing concessions including free rent and other discounts to promote move-ins. Muted revenue growth assumptions are pragmatic when developing in an actively growing market. Labor: These same proformas typically assume inflationary pressure for wages. In this market, median care aide wages have grown at 4% compounded annually to $11.50 per hour because new communities compete for staff as much as residents. While Florida may be unique in that the minimum wage increase to $15.00 will begin to be implemented in September, all markets are struggling to find staff as the pandemic unwinds and many potential employees reassess priorities. Bottom line: even without the pandemic, labor costs in a rapidly growing market will accelerate well above inflationary pressure. Patient Capital: Yes, yes. In time, the silver tsunami will arrive, and all ships will be lifted with the rising tide. Nonetheless, in this market, some communities that opened in 2016 and 2017 are still not stabilized or able to execute on agency debt. Equity will need to be prepared to write more initial checks and wait longer for the promised returns and accept that equity IRRs may be lower than forecasted.

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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

has emerged as a new threat to independent living, potentially capturing those younger seniors and keeping them for longer, especially if those residents can obtain any needed home health care services. Because active adult communities come with fewer services, they typically charge lower rents than independent living. But they usually still offer activities and a better social life than if the seniors just stayed at home, which is a big selling point for independent living. Sometime down the road as their resident population ages, active adult communities could begin to add IL-like features, such as communal dining and laundry services and even certain care options. That could have ramifications across the whole seniors housing spectrum. Assisted living beating independent living in terms of average price per unit in 2019 was an interesting phenomenon, but it was certainly an outlier. Independent living communities regained the top position in 2020, by the widest margin since 2014, and maintained it into 2021. Six years ago, independent living communities hit a valuation peak, brought on by many owners of very-high-quality communities who were attracted by high values to the M&A market. The sector’s strength has been relatively steady, even through the pandemic. A few high-quality, high-


priced deals in this small sector also helped maintain a high average price per unit. However, many more struggling assisted living communities sold during the year, leading to the dramatic drop in average assisted living prices. The independent living market saw a slight drop in its average price per unit from 2019 to 2020, but its average cap rate rose significantly from 6.7% (a record low) to 7.6% year over year. Unfortunately, the small size of the market (especially compared with the assisted living and memory care market) can yield wild swings in the average cap rate, including swings that sometimes may seem antithetical to how the market was actually valued during the year. However, it is true that the average level of cash flow brought in by IL properties that sold in 2020 was significantly lower than in 2019. Breaking out the independent living market by the “A,” “B” and “C” properties yielded some unsurprising results. “A” communities, which are determined by a combination of their age, size and location, sold on average for $329,200 per unit, down 11% from the $369,150 per unit average in 2019. This was the first time since 2016 (when we started breaking out properties by this type), that the average price per




$2+ Billion of Seniors Housing Sales, Financings and Equity Transactions Closed during 1H 2021 We are thankful for the opportunity to continue serving as a trusted advisor to our clients & the Seniors Housing Industry


CHAD LAVENDER Vice Chairman 214.235.2178

DAVID FASANO Senior Managing Director 312.576.9370

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LELAND MANNING Senior Financial Analyst

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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

unit actually fell. However, the “B” properties helped prop up the sector, with a 13% increase in its average price, from $163,600 per unit in 2019 to $184,700 per unit in 2020. But “C” properties fell slightly in average price, from $49,600 per unit to $46,300 per unit, year over year. Those least-desirable communities were by far the oldest, with an average age of 30 years, versus 24 years for “B” properties and just 10 years for “A.” They also sold for the highest average cap rate, reaching 9.9% compared with 6.7% for “B” and 5.7% for “A.” Interestingly, “B” properties had the highest average operating margin of 30.5%, just edging out “A” properties’ 29.0% average and far outpacing the 9.0% average operating margin for “C” properties. Perhaps most importantly, the highest quality communities also pulled in the most cash, averaging $19,200 of NOI per unit in 2020. “B” properties naturally came in second with $11,200 in average NOI per unit, followed by “C” properties with just $5,900 per unit. That can help justify the huge difference in per-unit price paid for the best communities. For the lesser-quality communities, their future may not be in independent living. They may be converted to other uses, like active adult, or assisted living and memory


care. It all depends on the local market and what the need is.

Assisted Living Market Assisted living certainly had its ups and downs in the late 2010s, with demographic-fueled enthusiasm for the sector leading to overbuilding and depressed occupancy. All of this new competition only exacerbated the problems caused by an already-tight labor market, with poaching of key staff an all-too-common and expensive trend. These issues hit lower-end and middle market assisted living communities more, as they could not raise rents as easily to counteract higher wages and rampant discounting. Even as the pandemic took a heavier toll on assisted living communities than independent living, investor interest still targeted the higher acuity sector. Prior to 2020, assisted living was consistently referred to as “recession-resistant,” since seniors are still in need of those services even in tough economic times. However, it has yet to be seen how COVID-19 will affect future demand for community-based senior care, especially with the growth and improvement of home health care as a service. Demographics will come to the sector’s aid at some point, but likely not starting






Spotlight on the Seniors Housing & Care Market | Third Edition | 2021

until the late 2020s. However, as the year went on, we saw more owners of struggling communities agree to price discounts on their properties, and some opportunistic buyers found some great deals. We have never heard the term “below replacement cost” used so often. At the same time, many owners of newer, more stabilized communities chose to wait it out, accepting government aid while biding their time for a better M&A environment. This combination led to a precipitous decline in the average price per unit to $174,700 for assisted living communities sold in 2020. That decline, however, hides an important trend that continued through the pandemic: the bifurcation of the market between “A” quality properties and “B” and “C” properties. From 2019 to 2020, the “A” assisted living communities, which we categorize based on a combination of their age, size and location, actually increased in average price from $392,500 per unit to $405,100 per unit. Clearly, the appeal of these properties, which were in a much better financial position going into the pandemic and operated at higher margins that could better absorb higher COVID-related costs, did not decline despite COVID-19’s indiscriminate ruthlessness against seniors of all income brackets. Meanwhile, the lower quality communities sold, on 26

average, for less in 2020, dropping from $130,000 per unit to $119,100 per unit year over year for “B” properties, and from $64,000 per unit to $52,400 per unit for “C” communities. Assisted living has come a long way from the throes of the Great Recession, when average cap rates exceeded 9%, and when 6% cap rates were nearly unheard of. Even in the pandemic, we still recorded plenty of 6% or lower cap rate deals, particular for the large portfolio sales. But in 2020, assisted living’s average cap rate rose from an all-time low of 7.6% in 2019 (also observed in 2017) to 7.9% in 2020. In the 12 months ended June 2021, the average cap rate fell 15 basis points to 7.75%. Separated out by “A,” “B” and “C” properties in 2020, the sector was clearly valued differently by investors, averaging cap rates of 6.4%, 6.9% and 9.1%, respectively. And the sector’s average depends on what is sold during the year, and which transactions have disclosed cap rates too. Which EBITDA period was used also affects each transaction’s cap rate, and 2020 was a volatile year for most operators and their bottom lines. So, the average may not be totally representative of how investors valued these communities in a post-pandemic world.




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Spotlight on the Seniors Housing & Care Market | Third Edition | 2021


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