Navigating Turbulent Waters: Shoring Up Against Financial Distress and M&A

By Raoul Nowitz, Senior Managing Director of Restructuring and Distressed Asset Support Services, SOLIC Capital Advisors

The senior living industry finds itself facing continued financial headwinds in 2024, the roots of which are multifaceted:

Occupancy: While occupancy trends have improved favorably relative to levels last seen pre-pandemic in select markets, the “aging in place” trend started by the pandemic continues to affect resident admissions and lease-up trajectory of newer facilities, hampering revenue generation and resulting in higher concessions packages in many instances. Competing facilities and an oversupply of beds in several markets are also driving the pace of occupancy gains.
Labor Costs: Rising labor costs fueled by a nationwide staffing shortage are squeezing profit margins. While contraction in agency cost usage is being realized, inflationary factors are resulting in many struggling to compete with higher wages being offered in other healthcare sectors, leading to staffing turnover and stickiness of heightened labor costs.
Aging Facilities: The industry faces infrastructure obsolescence and meeting significant deferred capex requirements as two out of every three senior housing facilities was built prior to 2000. Updating these locations requires meaningful capital investment. Many of the identified capital needs are deemed unavoidable, as well as an element of spending viewed as necessary in competing with new “shiny pennies” that have entered many markets.
Maturing Debt: With around $10-$14 billion of debt in the senior housing sector scheduled to mature in the next 24 months, the industry is feeling the crunch. Many credit facilities were entered into with floating rate debt creating added liquidity and debt service coverage challenges for borrowers. In addition, with many traditional lending sources sitting on the sidelines on new originations in the sector while they address other troubled portfolio credits, bridge loan structures are being seen as an attractive alternative for borrowers on select new investments being made.

The cliff is coming.

M&A May Be the Lifeline
We expect these challenges to translate into a rise in mergers and acquisitions (M&A) activity. Stronger operators and those on the sidelines with ample capital reserves may see opportunities to acquire distressed facilities, expand their market share and density, and benefit from economies of scale. Sellers are becoming more realistic about the pricing of sector assets, and financing markets are more accommodating than last year, although rates remain high. We are seeing stabilized assets generating greater lender interest, notwithstanding regional banks being cautious in returning to the lending market with the same level of deal appetite.

If your company is considering purchasing a distressed property there are some important considerations. This includes a comprehensive property assessment – not just physical condition, but also financial health, resident mix, and regulatory compliance. Buyers must ensure the target facility aligns with their long-term strategy and diligence in a credible business plan in justifying a high degree of likelihood that success in turning around value-add and repositioning opportunities is likely to yield a higher level of execution success.

On the flip side, facilities facing financial distress need to be prepared for various restructuring options. While M&A might be a solution, it’s not the only one. Bankruptcy may be necessary in severe cases. Here are some key considerations for facilities undergoing a restructuring process – be it a purchase, merger, or bankruptcy:

Positive Occupancy and Rental Rate Trends: Evaluate factors like projected rental rate growth across care levels, potential occupancy increases, and the possibility of reducing aggressive move-in concessions.
State Legislation Impacts in Addressing Reimbursement Needs: Assess the potential impact of pending state legislation that could affect Medicaid reimbursement rates.
Improving in Operational Fundamentals: Focus on achieving improved operating fundamentals including expense management (especially staffing, insurance, supplies, and property taxes) amidst heightened inflation.
Liquidity and Lender Support in Executing the Turnaround Plan: Ensure sufficient liquidity to execute turnaround plans, and work with lenders to gain necessary support in the face of increased debt costs, elevated leverage levels, and potential debt covenant violations.
Addressing Capital Needs in Providing Runway Through to Execution: Secure the capital necessary to address any near-term deferred capital expenditure (capex) requirements.
Value Creation: Analyze how current and projected cap rate trends could influence the facility’s long-term value.

Looking Forward:

The senior living industry undoubtedly faces a period of financial turbulence. However, this can be a catalyst for positive change. M&A activity could reshape the sector while restructuring efforts can create stronger, more sustainable facilities. For financially strong facilities, M&A activity presents a chance for growth. For those facing distress, clear-headed planning and a focus on resident care can provide a path towards a secure future. The ability to weather the current storm will depend on a combination of financial savvy, operational efficiency, and unwavering commitment to resident well-being.

About the Author

Raoul Nowitz has over 25 years of professional experience and serves as Senior Managing Director of Restructuring and Distressed Asset Support Services. Mr. Nowitz’s expertise includes astute analytics, detailed assessment, and creative resolution planning and implementation support to address complex challenges facing the firm’s clients. Before joining SOLIC, Mr. Nowitz was a Director with Navigant Capital Advisors. He previously served in a variety of senior professional roles at Macquarie Capital, Giuliani Capital Advisors and Ernst & Young Corporate Finance (both predecessor firms of Macquarie Capital), as well as an associate at Grant Thornton International’s Accounting, Audit & Tax Division. Mr. Nowitz received his Masters of Business Administration from the Goizueta Business School of Emory University, where he qualified for Beta Gamma Sigma recognition for Honors achievement in business study, and received his Bachelor of Commerce and Postgraduate Bachelor of Accounting from the University of the Witwatersrand, South Africa.