Long-Term Care Deal Volume Leads an M&A Landscape Stunted by COVID — But Values Drop 43%

In terms of total deals completed, long-term care operators led a health care mergers-and-acquisitions market devastated by COVID-19 — but that volume came with a significant drop in value.

The long-term care space saw 158 completed transactions in the first half of 2020, according to a new report from accounting and consulting firm PwC, the most of any sector. But that figure represented a 32.8% drop in activity from this time last year, while the $4.7 billion in total value was 43.7% lower than the haul during the first six months of 2019.

Perhaps unsurprisingly, the laboratory category saw the greatest growth in PwC’s analysis, with a 622.4% spike in deal value against an increase of just 12% in terms of total transactions completed.

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Source: PwC

Across all sectors, the total deal count of 483 represented the first six-month period without at least 500 transactions completed since 2015, PwC observed.

That said, the global consulting firm indicated that the numbers aren’t quite as bad as some might have expected.

“H1 2020 fell just 3% short of that level, even amid the unprecedented challenges of the COVID-19 crisis,” the firm wrote of the 500-deal benchmark. “And, Q2 2020’s deal count is not far from 200, our long-held barometer of quarterly deals interest, and could be revised higher as companies continue to disclose past deals in the coming months.”

During the first post-COVID round of earnings reports from publicly traded real estate investment trusts (REITs) with long-term care holdings, multiple leaders emphasized a desire to remain in the business — and also potentially growing.

“We’re on the hunt for skilled nursing,” National Health Investors (NYSE: NHI) president and CEO Eric Mendelsohn said in mid-May. “I’m a little worried the rest of the world will be in on the secret.”

Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), echoed that sentiment, though he emphasized that the company would only strike if the opportunity was right.

“The most important thing for us to get back to, when we get through the pandemic, is growing the company, and if the best opportunities are on the skilled side, we’re happy to increase our skilled exposure — because there’ll be other opportunities on the senior housing side to provide balance at some other point in time,” Matros said in early June.

The REITs, along with publicly traded skilled nursing operators, are set to begin reporting their second-quarter 2020 earnings results over the coming weeks.

In PwC’s view, the deals that have closed represented self-preservation on the part of both buyers and sellers.

“In each case, deals can be a resilience strategy: a way to add strategic assets or relationships that preserve growth, profitability, or operational excellence; and/or a way to free up needed capital by shedding non-core assets,” the company observed.

As for the second half of the year, PwC cautioned against expecting a significant change in deal flow.

“In addition to pockets of sub-sector growth in H1 2020, there was a slight uptick in deals volume in June compared with May. However, most likely, deal volumes will be uneven for the remainder of 2020, as potential deal makers try to determine paths forward,” PwC noted. “In pre-deal diligence, buyers may need to disentangle targets’ short-term challenges from their longer-term strategic potential.”

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