Over the last several quarters, M&A activity in the Rehabilitation sector has experienced a decline in deal volume. Throughout Q1:23, 15 transactions were reported and during Q2:23, only nine acquisitions were announced. This is a drastic comparison to the first half of 2022, when 28 Rehabilitation acquisitions were reported in Q1:22 and in Q2:22 there were 21 transactions. The deal volume of 2023 is even a significant dip from 2021, when there was a quarterly average of 23 transactions.
Yet, the activity in the Rehabilitation sector has risen from 2020, averaging eight transactions across each quarter in 2020. The overall increase in deal activity is because of an aging demographics that need physical therapy services, demand for outpatient care and an emphasis on value-based care.
While transaction volume has fluctuated over the past several quarters, the recent decline in activity can be attributed to rising operational costs and an economic slowdown due to interest rates.
The transaction with the largest purchase price in the first six months of the year was the acquisition of Bardmoor Oaks Healthcare and Rehabilitation Center and Countryside Rehab and Healthcare Center for $23.3 million. The buyer was a private entity owned by Joseph Herskowitz. Both facilities were sold by Eclipse Decathlon Properties, LLC, a Florida-based real estate company. With a total of more than 270 in-patient beds, the two rehabilitation centers are based in Florida.
Private equity has a large presence in the Rehabilitation space, with 12 of the 24 Rehabilitation acquisitions being done by a private equity group. Waud Capital Partners, through its portfolio companies Ivy Rehab and Ivy Rehab for Kids, completed three acquisitions in the first half of 2023, representing the most active buyer in the Rehabilitation industry. In 2022, Ivy Rehab acquired seven physical therapy practices.
Even though 50% of transactions being completed by a PE group in 2023 is an impressive number, it is still a decline from the first half of 2022 when 71% of transactions were by a PE firm.
While M&A experienced a dip in deal volume, that doesn’t necessarily mean that the market is going under. According to several companies, the industry is still strong.
In 2023, U.S. Physical Therapy, Inc. (NYSE: USPH) completed two transactions, adding five physical therapy clinics to its network and spending a combined $9.3 million. In 2022, the company added 30 practices to its portfolio and spent more than $67.9 million to do so.
During its Q1:23 financial report, USPH announced an increase in patient revenue from physical therapy operations, increasing more than 15% to $126.6 million from $109.5 million for the first quarter of 2022. Yet, the company noted that not every aspect of the quarter resulted in great optics due to “higher effective interest rate as well as increased borrowings to fund acquisitions.”
Carey Hendrickson, Chief Financial Officer, had this to say in Q1:23’s quarterly report.
“Our physical therapy operating costs per visit declined in the first quarter from the higher levels we experienced in the third and fourth quarters of 2022 when we began to feel the effects of inflation.”
Although there is still time in 2023 for USPH to make several major acquisitions, the company has slowed down significantly in deal activity and as long as inflation continues to put pressure on companies, that is not likely to change.
Additionally, ATI Physical Therapy (NYSE: ATIP) noted that its strategy is centered on improving and focusing on “high-performing clinics” instead of expanding networks, to combat the market headwinds. In fact, according to ATI’s Q2:23 financial report, the company closed 12 clinics and divested six clinics. It should be noted that the company did open four clinics and intends on continuing to “optimize its geographic footprint and clinic-level economics.”
According to data captured in the LevinPro HC database, the last time ATI made strategic acquisitions was in 2021 when it purchased three practices. The lack of recent acquisitions is definitely in line with ATI’s strategy to improve the assets it already owns and is maybe a tactic other companies should take on.
Sharon Vitti, Chief Executive Officer of ATI said this in Q1:23’s financial report.
“While the labor market continues to be a headwind across our industry, our team delivered notable sequential and year-over-year increases in provider productivity, helping to mitigate labor availability constraints in the market.”
The juxtaposition between strong financial results and the decline in M&A activity is jarring, but indicates that the market is strong. Once interest rates cool, we expect a rebound in M&A volume since demand for rehabilitation and physical therapy services hasn’t softened.
