Mergers and acquisitions activity is heating up in the skilled nursing industry as higher labor costs and other challenges are sending some small to mid-sized operators to the exits.
Staffing costs, the federal staffing mandate, uncertainty over interest rates and low Medicaid reimbursements are creating a buyer’s market for large nursing home operators and real estate investment trusts that own nursing homes or lease properties to skilled nursing facility operators. These buyers, however, are being selective in the facilities they want and the states in which they operate.
Related: Ensign Group buys 7 nursing homes in 6 states
Skilled nursing facility deals increased more than 80% in the first quarter of 2024 compared with the same period in 2023. There were 57 nursing home acquisitions valued at nearly $1.4 billion in the first quarter of this year compared with 31 deals valued at $448 million during the same period last year, according to Levin Associates, which tracks healthcare mergers and acquisitions.
The appetite for acquisitions comes as the skilled nursing industry emerges from a precarious period in which the COVID-19 pandemic sent nursing home occupancy plummeting from 86.2% in the first quarter of 2020 to 73.4% in the first quarter of 2021, said the National Investment Center for Seniors Housing and Care. While occupancy rebounded to 83.5% in the first quarter of this year, bankruptcies for the industry are on the rise as operators face higher labor costs and a federal staffing mandate that will be phased in beginning this summer.
Last year was the worst year for healthcare bankruptcies in five years, according to restructuring and consulting firm Gibbins Advisors. Senior living and pharmaceuticals accounted for half of the 79 Chapter 11 filings in healthcare in 2023, the company said. It predicted continued distress for the senior care industry this year in a January research report.
That could bode well for large skilled nursing home companies on the hunt for properties, such as the Ensign Group. The company is one of the nation’s largest nursing home operators with 310 facilities in 14 states. It closed on the acquisition of five skilled nursing facilities across four states in the first quarter of 2024 and another seven facilities across six states May 1.
Ensign Group CEO Barry Port told analysts during a first quarter earnings call last week that the San Juan Capistrano, California-based company is likely to continue its buying binge as smaller operators put their businesses up for sale to avoid the federal staffing mandate.
“Regulatory uncertainty leads to less capital being invested in our space, so our local acquisition approach has allowed us to continue to add new acquisitions at attractive prices,” Port said.
CareTrust REIT, a San Clemente, California-based real estate investment trust, is also expanding. The company completed $205 million in deals since the beginning of the year and has $260 million in its acquisitions pipeline for the rest of 2024, President and CEO Dave Sedgwick told analysts during an earnings call last week. The company owns nursing homes or leases property to nursing home operators in 25 states.
But buying isn’t strictly limited to large, national operators. Some midsize chains, including Touchstone Communities, are also snatching up properties to grow in a state or region. Last week, the Killeen, Texas-based company expanded its footprint in the Lone Star State to 27 nursing homes after acquiring three facilities.
Scaling up can let regional nursing home operators compete more effectively in a market by helping control costs for food and other services, according to Dan Revie, a managing director for investment bank Ziegler. Revie said some regional operators are also looking to expand because they operate ancillary businesses that provide services to their nursing homes.
“They might have a pharmacy company or a therapy company or a staffing company and all sorts of ancillary businesses that they can plug into skilled nursing,” Revie said. “A smaller mom-and-pop just isn’t going to have that ability."
Many operators are limiting their buying to states with higher Medicaid reimbursements, said Mark Davis, president of mergers and acquisitions advisory firm Healthcare Transitions Group. Davis said states such as Texas, Ohio, Maryland and California have higher reimbursements that are attractive to buyers. But he said reimbursements in states including Pennsylvania and Kansas are insufficient for some operators.
“M&A activity has ground to a halt in some states because the numbers don’t make sense unless someone is willing to sell for a very low price,” Davis added.
