The results of the 2024 Senior Living Outlook Report, a collaboration between Lument and Senior Housing News, indicate cautious optimism for growth in 2024, as 55% of applicable respondents said their company plans to buy seniors housing assets in the next year. To dig deeper, we discussed the results with Lument’s Head of M&A Laca Wong-Hammond, who helped put survey results in context as we approach mid-year.
In the introduction, we highlight that 55% of respondents indicated they plan to buy seniors housing assets in the next year. Does that figure align with your expectations for deal activity in 2024 based on conversations with clients?
Laca Wong-Hammond: With interest rates near two-decade highs, and the Federal Reserve not indicating an imminent softening of their target rate, activity will likely remain subdued relative to historic levels. That said, M&A activity often runs counter-cyclical to rates, as increased rates tend to push distressed operators into a liquidation situation.
In this regard, the current cycle has been unique in the prevalence of abundant post-COVID government support that has likely lengthened the cycle by allowing struggling operators a longer window of underperformance. Lument’s M&A team has an active pipeline featuring several underperforming portfolios that are looking for an exit to stem delinquent debt service. Additionally, the M&A team is currently pursuing exit strategy solutions for distressed assets in our HUD portfolio.
Lastly, long-term capital managers such as pension and insurance funds are still flushed with equity and can only invest in optimized Class-A assets, keeping those valuations stable. Clients in this realm have a choice in transaction timing and are differentiated among the ocean of distressed deals.
When asked what their top growth strategy was for 2024, 30% said reposition, 27% said M&A/affiliate, and 19% selected build. What is the outlook for that 30% that seeks growth through M&A? Do you expect that figure to climb in 2025?
Wong-Hammond: The passage of time is instilling confidence on the part of would-be buyers that the cash flows they are assuming have stabilized since the massive COVID distortions. Additionally, there is increased likelihood that the end of 2024 into 2025 will see the start of Fed rate cuts. The culmination of these two factors suggests more robust M&A growth going forward.
It should be noted (per survey results) the single largest category of strategic growth is repositioning. Increasingly this means diversifying across business lines. For example, one of the fastest growing areas within healthcare is home health. To remain a top tier provider to our clientele, Lument provides sell-side advisory and strategic consulting to owner-operators across facilities-based businesses, ancillaries, and asset-light businesses such as home health care.
When asked how respondents foresee senior living asset valuations changing in 2024, 41% predict valuations will remain stable, 32% predict they will rise, and 27% predict they will fall—in line with the previous year’s results. What are your thoughts on these results and where do you think valuations are headed for the remainder of the year?
Wong-Hammond: Valuations will likely increase in the coming months and year. This is because cap rates (or the valuation of hard assets) move inverse of interest rates. The reason expectations have not changed that much from the proceeding years is driven by the Fed’s delay in rate cuts and tight credit markets. In the beginning of 2023, rate cuts were being forecasted starting in early 2024; that view continues to be pushed into the future. Once lenders with distressed portfolios work out bad debt, they will re-enter the lending market again, buoying transaction activity.
The predominant factor working against forward value appreciations will likely be a continued tight labor market which negatively impacts profit margins. However, clients with scale will find a way to adapt to the new normal, or the market will adjust to accepting a new standard. As always, those who stay tuned to market developments and collaborate with trusted parties will be well-positioned to find success when the timing is right.
Considering buying or selling seniors housing assets this year? Contact us today.
