Episode 05: A deal today vs. a deal tomorrow – Presented by Senwell Senior Investment Advisors

On this episode of The Investment Opportunity Podcast, we welcome Ben Swett (Editor) with The SeniorCare Investor. The SeniorCare Investor is a publication where you can find daily updates on senior care transactions, development and housing news.

In this episode, we cover the following topics:

1. M&A activity dropoff
2. The SeniorCare Investor Deal Search Online data review (as of June 1, 2020)

1. Closed deals 2019 vs. 2020
2. 2020 M&A slow down prior to Covid
3. Second half of 2020 projections
4. Process of selling during and post-Covid
5. Debt markets
6. CAP rate impact
7. Uncertainties to keep an eye on going forward — The SeniorCare Investor will try to cover all of these topics in their articles and newsletters

You can learn more about, and contact The SeniorCare Investor by visiting their website:

Twitter: @SeniorCare_Inv: https://twitter.com/SeniorCare_Inv
Linkedin: Irvin Levin Associates, Inc: https://www.linkedin.com/company/irving-levin-associates-inc-/
Website: https://seniorcare.levinassociates.com/
Ben’s Linkedin: https://www.linkedin.com/in/ben-swett-b3142353/

The Investment Opportunity Podcast is presented by Senwell Senior Investment Advisors, a mergers and acquisitions advisory firm specializing in skilled nursing and seniors housing. The show is hosted by Ben Bohland and Brandon Bohland.

Want to watch the show? Visit our website: www.senwelladvisors.com/podcast

If you have suggestions on topics or guests that to invite on the show, questions or comments, please contact us. You can get in touch with us the following ways:

• Website: senwelladvisors.com/podcast
• Email: info@senwelladvisors.com
• Linkedin: Senwell Senior Investment Advisors – https://www.linkedin.com/company/26199139
• Facebook: Senwell Senior Investment Advisors – https://www.facebook.com/Senwell-Senior-Investment-Advisors-105891937461351/
• Twitter: @SenwellAdvisors – https://twitter.com/SenwellAdvisors
• Instagram: @SenwellAdvisors – https://www.instagram.com/senwelladvisors/

Contact Senwell Senior Investment Advisors for mergers, acquisitions and dispositions. Senwell specializes in working with owners and operators of skilled nursing (short-term rehabilitation and long-term care) facilities, assisted living and memory care facilities, independent living facilities, continuing care retirement communities and owners of bed licenses in Certificate of Need (CON) states or states with a moratorium on bed licenses.

Thank you for listening to The Investment Opportunity Podcast!

Ben Swett is the Editor of The SeniorCare Investor and of The Senior Care Acquisition Report at Irving Levin Associates. Since joining the company in 2014, he has also overseen the production of The Dealmakers Forum enewsletter and has reported on the senior care M&A, finance and development markets. He is also responsible for maintaining Irving Levin’s proprietary long-term care M&A database. He attended Hamilton College, where he received a B.A. in History, specializing in the American Civil War.

Episode 05: A Deal Today vs. a Deal Tomorrow – Presented by Senwell Senior Investment Advisor

Ben: [00:00:00] On this episode of the Investment Opportunity podcast, we take a look at how cove it has affected M&A activity.

Intro/Outro: [00:00:08] Welcome to the Investment Opportunity podcast. We’ll educate you on the latest investment trends happening in one of the hottest real estate classes, skilled nursing and seniors housing. We’ll point out the risks so you can reap the rewards of investing in this growing and complex industry. And now your hosts, Ben Bohland and Brandon Bohland.

Brandon: [00:00:32] Welcome to the Investment Opportunity Podcast presented by Senwell, Senior Investment Advisors, Senwell is a skilled nursing and seniors housing mergers and acquisitions advisory firm. And we are your hosts. I’m Brandon Bohland and I’m joined by my co-host, Ben Bohland. Today on the show, we have the infamous I’m sure you’ve all heard the name if you’re in the industry at all. Ben Swett, who is the editor at the Senior Care Investor. And for those of you who don’t know, the senior care investor is a publication where you can find your daily updates on senior care transactions, developments and senior housing related issues. Ben, welcome to the show.

Ben Swett: [00:01:15] Thanks for having me, you guys. And, yeah, you nailed what we do. We’ve been around for over 50 years and track senior care, M&A, the finance world and produce newsletters, enewsletters. We’ve got webinars. We have a public database called Deal Search Online that we also curate. So if you’re at all interested in investing in the senior care world, then we’re probably a pretty good source, if not the first you should come to.

Brandon: [00:01:48] Yeah, I know that a lot of your sources are very well known throughout the industry. So thank you guys. Over at the senior care investor for continuously putting out really good quality content.

Ben Swett: [00:02:01] It’s what we do, thanks.

Brandon: [00:02:03] So were we actually having you on the show because we really want to get down to what’s going on in the industry as it relates to COVID. So if you could just at all touch base at a high level of what you’re seeing in the market and in our eyes in our day to day, we’ve seen a significant drop off in M&A activity, not only through this COVID pandemic, but maybe even a little bit before that. So can you touch base on any data that you have available that you’re able to share with us today?

Ben Swett: [00:02:36] Yes. So, I mean. To cut to it. What we’ve been seeing in the market is not much in the market. And I mean, anecdotally, at the end, the last week of May, we did not have a single publicly announced senior care transaction, which in my memory has never happened. You know, you have to go back a long, long way away, maybe even back to the Great Recession to see that happen previously. So that’s kind of been the main theme is just not much going on. Starting in mid-March, deals, if they were not up to 90 percent completed by then, really had the pause button hit on them. Lenders started to really get a little antsy about lending in this environment. You cannot blame them. Sellers started to kind of also hit the pause button, really focus on the crisis at hand. Buyers generally understood that. They also wanted to take a break, see how things flesh out in the next few months, get a better sense of when we could be returning to some kind of normal. And because of that, M&A has really dried up. And I do have some numbers from our deal search online database.

Brandon: [00:03:58] That would be great if you could share any of, either as it relates to just volume or even dollar volume, if you could share any of that information. And I guess the question would be comparing 20, I’m assuming 2019 versus 2020 where we stand so far.

Ben Swett: [00:04:14] Yeah. So for the first five months of 2019, we had 201 publicly announced senior care deals in that same time period in 2020, including two and a half months of pretty normal M&A activity. We have one 139 deals. And it gets even worse when you look at May transaction totals in 2019. We had 45 publicly announced deals in May and this year that was just 19. And another time period that we’ve been looking at is kind of from March 15th to today, March 15th it varied across the country. But that seemed to be a pretty consensus date of when.

Ben Swett: [00:05:03] Something started to hit the fan, and so since March 15th in 2019, we had 104 publicly announced deals and so far in 2020, that is just half its 52. Yeah. And then when you look at dollar volume, which it’s not the best indicator of M&A health because it’s contingent on prices actually being revealed to the market. But in 2019 and the first five months, we had about five point three billion in total dollar volume. And for that same period in 2020, it was just over three point three billion.

Brandon: [00:05:38] So just since that if we take a look at that snapshot from March until now, you had mentioned 52 transactions in that time period. Do you think I guess what portion of that 52 is originated deals during that timeframe? I would imagine significantly almost net zero. And most of those maybe were originated in the first quarter and maybe started trickling in to where we are now.

Ben Swett: [00:06:11] Sure. Yeah, that’s a good point. You have to look at all the deals that are revealed with the public REITs and public operators, quarterly earnings reports. In May our estimate was that about half the deals that were publicly announced were from those Q1 reports. And so those are deals that closed in Q1, if not earlier. And they’re just coming to the market now. Just coming to the light now. And so that’s it. It is not an indicator at all. With like the M&A activity that actually happened in April, in May based on closings. We don’t have an official number because we have a separate transaction database that covers deals on a closing date basis, and that’s a private database. And I will tell you that the number of deals that have closed since March 15th are far lower than in 2019. Far lower. And that that cannot surprise.

Ben: [00:07:11] Sure. Now, especially because 2019 was such a great year to begin with.

Ben Swett: [00:07:17] Yeah. That’s what’s so stark. I mean, 2019, we had 450 total publicly announced transactions in senior care. And that’s not including a lot of deals that are done off market or confidentially disclosed to us. So the differences just made even starker.

Ben: [00:07:38] Before COVID do you think 2020 was heading toward that direction to surpass 2019?

Ben Swett: [00:07:44] Some of the indicators in the first quarter showed that M&A activity was slowing down a bit and. I don’t think anyone would point to COVID as a reason for that. Even in the first quarter, I mean, the deals that closed in March. I think there were. Well, over 30 of those, most those deals were pretty much all done and dusted by the time they.

Ben Swett: [00:08:11] You know, we’re actually completed. So. By going back to your point, M&A did seem to be slowing down a little bit in the first couple of months of 2020. We’re not exactly sure why. I mean, coming off of such a red hot year, it’s possible that a lot of people were just taking a breath, trying to consolidate their portfolios and focus on operations a bit before going back to the market. Perhaps this pricing was also rising a little too high. Maybe wanted to wait for that to come down a little bit. But we don’t think anyone could have anticipated this kind of slowdown.

Brandon: [00:08:51] And so when you start to actually break down those numbers, you start to see that very little deals were originated during this COVID timeframe, which assumes that the second half of the year looks awfully gloom and doom, I guess have you guys taken a look at maybe readjusting some of your assumptions and where you stood from the beginning of the year? And what do you think third quarter looks like, fourth quarter looks like or or are we just considering this year to just kind of be written off and start to look at 2021?

Ben Swett: [00:09:28] I’d say writing off the year’s feasible.

Ben Swett: [00:09:32] I mean, keep. Q Q3 seems like it would be the period that would be hardest hit. Just as far as deal totals by Q4, you can imagine that some people will hit the mark, will start to normalize. People will start to kind of feel a little more confident in the assumptions that they’re going to make about how Cobh, it’s actually going to affect census in the long run expenses in the long run. Lenders will start to come back to the market a little bit. We’re already hearing rumblings about that starting to happen starting in mid-May, which is, you know, it’s good news. But if lenders are just starting to poke their heads up right now, we’re still months away from any transaction taking announced. So are ideas that Q3 is going to be. Significantly less active than Q2, Q4. We may start to see a turnaround, possibly returning to some kind of normal in Q1, especially if there’s a huge influx of deals that are just waiting to close and kind of waiting just for some sense of certainty. So but. Well, I mean. Who knows anything these days?

[00:10:44]Ben: Yeah. So. going back to last year, I think. With the number of transactions that we saw, I think, in my.

[00:10:55]Ben: Conversations that I’ve had, as well as I’m sure what you’ve had, I think PDPM was a big driver for a lot of those transactions. A lot of mom and pops getting out of the industry. Are you hearing any inclination for PDPM rolling over to any residual sales for 2020?

[00:11:17]Ben Swett: We’re not sure that PDPM. will be as much of a factor in people’s decisions to sell or acquire post COVID-19. I think those facilities. It’s probably further down on their minds right now. And, Medicare coming out with early reimbursement. Medicaid also having some emergency rate increases in a number of states. I think that.

[00:11:49]Ben Swett: Whatever potential adverse effects or positive effects from PDPM., it’ll be really tough to kind of gauge what those are because elective surgeries, since are way down right now, though, you know, the cutbacks in census has dropped significantly across skilled nursing facilities. And so that’ll be tough to tell in 2020. But another point regarding PDM is that. That was a big reason, we think, why M&A was so active in twenty eighteen and twenty nineteen was that there were just so many smaller mom and pop smaller regional operators that PDPM was just one extra thing that potentially was going to shut them out of a lot of the higher paying Medicare patients. It’s another more complex reimbursement system and coding system to figure out. And so that was probably a pretty big push for a lot of them to go to the market. And we can imagine that COVID-19, is keeping any of any other of those smaller operators in the market for much longer.

[00:13:03]Ben Yeah, exactly. Well, it’s so hard to predict, right.

[00:13:07]Ben: Because you have zero consistency on what’s going on right now.

[00:13:11]Ben: You have somebody that’s barely scratching by paying all the expenses towards higher labor costs and PPE and then. They’re struggling and then all of a sudden the Kahrizak comes out and they help him out a little bit. And then the relief fund comes out with 4.9billion dollars.

[00:13:29]Ben: But still, even with that, the census is a dramatic impact to a lot of these people that we’re barely getting by to begin with.

[00:13:38]Ben Swett So, yeah, and there’s a lot of uncertainty around how much longer government relief will continue. That’s right. You know, to what scale?

[00:13:46] Brandon: So, Ben, what’s your sense of you? You’ve been having conversations with lenders, brokers, operators, propcos. What’s your sense of kind of the sell at the sellers standpoint going forward? I know Ben and I in our day to day discussions where if we’re talking to operators or propcos or owner operators that have a strong balance sheet, we’re certainly making a very strong recommendation to hold on.

[00:14:12]Brandon: If you can and kind of ride this out and and get analy back to some level of stabilization before thinking about proceeding with any kind of a disposition. So what’s your take out there? Are you seeing some people still out there in the market saying that there’s going to be a flood of those operators or owner operators who maybe don’t have a strong balance sheet, who can’t withstand that storm, if you will? Do you see any of that happening in the future, at least through the rest of the year?

[00:14:48]Ben Swett: Quite possibly, especially if government sources, pair sources don’t continue to help out their balance sheets in the near term. You know, if any of them do want to sell right now, most of them, I would say probably can’t just because the mechanics of going through the sales process right now are just it’s nearly impossible right now. You try to get due diligence done. That’s very difficult. And the skill in the skill nursing environment right now, just trying to get into these facilities, getting a buyer with a bank behind them has got to be a lot tougher right now, too. And just there’s. A lot of them are also just kind of stopping and focusing on the crisis at hand right now and trying to stabilize things back, and I can certainly see in the future this may not being a business for a lot of them that they want to continue in.

[00:15:43]Ben: Yeah, speaking of banks in debt, you just put out an article on some. A really heavy price tag on some debt that was just raised by a REIT, what’s going on in the debt markets right now that you’re seeing?

[00:16:00]Ben Swett: I mean, mostly a standstill in the debt markets right now. There’s so much less debt capital available to borrowers right now. Lenders, if they’re even in the market right now, we’re requiring a lot more equity upfront on deals. They’re requiring debt service reserves for a longer period of time going forward. And there’s still so much uncertainty about, how and why we’ll be affected in the next year, two years, because of everything that’s going on. You know, from census to increase expenses to labor costs going forward, you know, lenders are really starting to scrutinize. In long term, what kind of increased expenses will stem from this? Whether staffing ratios will stay the same as they are a year from now? Just no one knows. And then credit spreads are also widening right now.

[00:16:57]Ben Swett: But I’d say, you know, the main thing from the debt markets right now is that not much going on. A lot tougher to do to get debt capital right now.

[00:17:08]Brandon: We are certainly we’ve had several conversations. It does take a lot of creativity right now to to structure that deal. And I think we are seeing it. We’re seeing some really creative ways to go through and go through due diligence. And I think most of that is strongly related to a previous relationship that the propco and the debt service providers they’ve historically had. I don’t think there’s any new relationships forming in this industry. So you would have had to have had a performing operator and a performing relationship. I think, in order to succeed in this environment.

[00:17:48]Ben Swett: Yeah. I certainly have not seen any lenders new to the assisted living or skilled nursing market right now. I don’t think this is their time to jump in.

[00:17:57]Ben: The question is, with higher, higher cost of debt, that’s going to trickle down to. The ultimately that it could trickle down to the cap rates. So where do you see those rates going? And have you talked to anybody with your conversations out there in the market on that?

[00:18:20]Ben Swett: Yeah, we’ve had a bunch of conversations with the brokers, the lenders, owners in the market, and it’s tough to get a straight answer out of anyone, you know. Two main factors will probably result in higher cap rates within the next year, possibly two, and that is that the higher borrowing costs and then the increased risk of operating in this environment. And it’s tough to say what exactly the impact on cap rates will be. As recently as the 12 months ending March 31 cap rates were pretty much across the board at an all time low. Across the three major senior care sectors assisted living, they were around 7.7 percent. Independent living was lower at 6.9 percent. And sniffs were, as they always are. Right around12 percent. It was, I think, twelve point one percent. And so you can you can see those possibly. Increasing by 100 basis points. 150 basis points. It may vary by sector, too. You know, there’s just no there are no transactions to look at right now as to how exactly they will change.

[00:19:37]Brandon: It seems as almost the skilled nursing environment might get scaled a little bit different than the seniors housing and independent living side of things. Just given the uncertainties and the risk around, you know, Medicare, Medicaid and these One-Time stipends that might become permanent, that might not become permanent. That might become a one time thing.

[00:19:59]Ben Swett: So, you know, at the same time, there are potentially different problems for long term demand in each sector, skilled nursing. There’s always gonna be a place for that because it’s lower cost setting for a lot of post acute care patients. And so hospitals and health systems and the payers will continue to send patients just to snice no, keep sending medically complex patients, which will in turn boost the revenues for those. Sniffs after PDPM assisted living and independent living, you know, assisted living is more need based. And so there will certainly always be a market for that. You know that frailer seniors who can’t live in their homes anymore. Well. Assisted living in memory care communities will continue to be probably the safest places for those sorts of residents, independent living. Which is a luxury to most and yet totally elective to seniors to move into. We’ll see what happens in the long run if the main selling point to independent living is the socialization aspect and social living, communal living among seniors may change for the long run. Who knows what it will look like a year, two years, five years from now. But it’s certainly a question to ask in the independent living market.

[00:21:23]Brandon: So I think as we look forward, you’ve kind of alluded a lot to this in the conversation today. But as we look forward, the most certain thing that we know is that the future is uncertain. So I guess what are you thinking about as you start to put content out at the senior care investor? What are some of the topics that you are excited about writing about?

[00:21:48]Ben Swett: It’s tougher to get excited about writing about a lot of these topics these days, it’s been kind of gloomy recently, but the main things that we really just want to touch on are the potential problems that the senior industry will likely face. And. We write about those topics from the point of view of. We love this industry. We think it’s a very important industry for the care of our seniors. And we think in the long run, it will be just fine. But there are just a lot of uncertainties that if people aren’t thinking about or ignoring right now, that we’re just trying to bring to light.

[00:22:27]Ben Swett: I mean, there’s so much uncertainty about the long term impact on census, on new development, on if there’s a lot of unemployment right now. Are workers going to come to the senior senior care industry when there may be other choices that potentially easier or potentially will pay more? You also have to look at what loan terms and liquidity will be in the near term? Potentially the long term, all the PR surrounding the media spotlight on skilled nursing and what kind of impact that has on the assisted living market just because of how many people commingle assisted living with Skilled Nursing. It’s all the old folks home. The nursing home. What kind of effect that had on just the brand of seniors housing in the future. And so it’s we try to shed a light on all these uncertainties. We go into a lot more detail in the newsletter, in our webinars and in our enewsletters as well. But just something that we think is important to point out to investors and operators and owners in a space that we love.

[00:23:35]Brandon: We certainly appreciate you putting out that content. I know Ben and I get a lot out of it, and I’m sure there is the industry does as well. So thank you for that. And I would assume that people can go and follow you to learn more about a lot of these stories that I would anticipate you’re going to be writing about here in the very near future. So what’s a good way that people can either get in touch with you or follow you or or read some of your articles?

[00:24:03]Ben Swett: So we post a lot of our content on Twitter and LinkedIn. We try to foster discussions on those platforms as well. We have our online content at SeniorCare.LevinAssociates.com. That has all of our online articles. But then also, you know, if you just want to have a chat, if you have a deal to report or a loan that you closed, very rare these days. But if you do and you definitely want to let people know that you’re open for business, that you’re closing deals, just send me an email that we can go from there.

[00:24:40]Ben/Brandon: Well, Ben, thank you so much for joining us. That’s valuable content, and we’re looking forward to the content that you’ll be weeding out here in the near future. What we will have all of that information in the show notes. So if anyone didn’t get that, if they’re driving in their car, well, we’ll put all of that info in the show notes for you. Ben.

[00:24:56]Ben Swett: Great. Thanks so much, guys. I appreciate you having me on.

[00:25:00]Brandon Yeah, thanks. And it’s good to see you on video instead of in an article and in written form. This is nice. It’s a little more social. Yeah. Definitely a better, better platform. Next time, hopefully at a conference over some few of a few cocktails at a happy hour.

[00:25:15]Ben Swett Oh, hopefully. Hopefully sooner rather than later.

[00:25:18]Everyone All right. Thanks for joining us, Ben. Thanks, Ben. Thanks. Thanks, you guys.

[00:25:22]Brandon: Hey, guys, hope you enjoyed the show, this is what you got segment. A couple episodes ago, we talked about an opportunity that was unique to most people, although not unique to us at Sandwell. We talked about Certificate of Need Law or CON, and most of the time skilled nursing beds fall under that CON. However, this opportunity is unique in that it’s in a state where both skilled nursing and assisted living and memory care beds all fall under the seal when that state is North Carolina. We have an opportunity where, if you’re interested in developing either a combo sniff A-L memory care facility or a standalone A-L or standalone sniff, there is an opportunity to acquire bed licences on both the skilled and assisted living side. If you have any interest in developing a new project or adding to an existing project, you can contact me directly at Brandon@senwelladvisors.com. That’s Brandon@senwelladvisors.com.

[00:26:29]Intro/Outro: Thank you for listening to the Investment Opportunity podcast. If you want to hear more about investing in the skilled nursing and seniors housing industry, head to our Web site at www.senwelladvisors.com/podcast.