From 2022 to 2024, a series of interest rate hikes kept the markets volatile and deal activity to a minimum. Owners and operators across the seniors housing industry planned their next financing move cautiously, hoping rates would drop and allow their transaction to underwrite in a favorable manner.
Although we have not returned to the low rates of the pre-Covid and Covid years, we do seem to have reached a point where the cycle of rate hikes has ceased. In fact, modest rate cuts are expected going forward, which could provide a subtle but effective boost to our collective psyche.
With that backdrop in place, investor optimism appears to be accelerating at a rapid pace not seen in years. That optimism is manifesting itself in the form of increased deal activity, which we started to see signs of during the second half of 2024.
Record M&A Activity
The seniors housing and care mergers and acquisitions (M&A) market hit an annual record in 2024 with over 700 publicly announced transactions, as reported by Levin Associates, fueling investor optimism. That is a 26% increase over the previous high of 560 transactions in 2022.
For seniors housing specifically, there were 221 closed transactions in the second half of 2024 alone and 429 for the year. Owner-operators acquired the majority of transactions (57%), with real estate investment firms, real estate investment trusts (REITs), and private equity groups acquiring nearly 40% of all transactions during the period.
Investors prioritized opportunities in Texas (18), Florida (17), and California (16), and Pennsylvania (18). For transactions with reported metrics, the median cap rate reached 7.2% during the second half of 2024. There were three transactions that closed at a cap rate exceeding 10%, one of which reached a price of approximately $214,000 per unit, or an implied 13% cap rate.
For the 66 senior housing transactions that closed with reported metrics, the average price approached nearly $150,000 per unit. Nearly 20% of those consisted of distressed acquisitions and averaged a price approaching $124,000 per unit. Notably, despite the distress, the majority (54%) closed at a price over $100,000 per unit, with two closing at a price over $200,000 per unit.
Upside Opportunities
The REIT Investment Diversification and Empowerment Act (RIDEA) structure seems to be gaining in popularity as of late, as several acquisitive REITS are pursuing creative RIDEA solutions (sometimes referred to as SHOP (seniors housing operating portfolio)) whereby the REIT also invests in operations. We also expect to see an increase in portfolio transactions going forward, particularly for operators benefitting from improved capital conditions.
In addition, new supply is expected to accelerate in the second half of 2025, with a focus on new living models with a diversified service offering. According to NIC, approximately 41% of seniors housing inventory is over 25 years old, demonstrating the need for new communities.
Dynamic capital markets require creative transaction structures and careful, thoughtful planning. Sellers mulling strategic alternatives in 2025 need to hire an experienced partner with investment banking services that can drive competitive tension and maximize purchase price.
The Lument M&A team has the depth of expertise to effectively and seamlessly help clients accomplish goals and objectives despite turbulent capital markets. As you consider your goals, we welcome you to give us a call so we can provide you with a customized and confidential analysis to inform your decision.
