The Health Care M&A Monthly: Long-Term Care Deal Making--
Activity Strong For Single Properties, Small Portfolios
Earlier this year we reported on intense acquisition activity by health care real estate investment trusts, or REITs, in the Long-Term Care sector. In February alone, six deals were announced worth $11.95 billion, as several of these REITs scooped up large seniors housing portfolios and even other REITS. These companies subsequently eased up on making new deals so they could digest these acquisitions, but the pace of deal making did not drop as others segments of the Long-Term Care sector stepped in to take up the slack. M&A activity during June reveals how active and crucial smaller operators have been in the acquisition market, targeting single properties and small portfolios. Thus, financial and strategic buyers, large and small alike, are creating a diverse and broad-based market for seniors housing and care properties.
By historical comparisons, the single largest deal of June is a relatively small one, but illustrates well what strategic buyers hope to accomplish in this market. In its largest acquisition to date, AdCare Health Systems (AMEX: ADK) is acquiring a portfolio of 15 skilled nursing homes in the Carolinas, Tennessee and Virginia with a combined total of 1,995 beds and $93.0 million in revenue. ADK is paying $38.5 million, which yields a price to revenue multiple of 0.43x and a price per bed of $19,300. These multiples are a bit misleading, however, because ADK is acquiring only two of the SNFs outright, while leasing nine and managing four. The deal is to be funded with a combination of cash, shares of ADK stock and seller notes. Since the company began its acquisition campaign in late 2009, under the sage guidance of Chief Acquisitions Officer Chris Brogdan, the company has brought a total of 46 facilities under contract. With this most recent deal, ADK anticipates an annualized run rate of $268.0 million, which is a whopping 400% more than in fiscal year 2010.
In New York City, Saint Vincent Catholic Medical Center is preparing to sell the Sisters of Charity Health Care System Nursing Home, dba St. Elizabeth Ann’s Health Center & Rehabilitation Center, a 300-bed skilled nursing and rehab care facility located in the Bayley Seton campus on Staten Island. This deal was ultimately prompted by Saint Vincent’s bankruptcy reorganization, a process that began in 2005 and has since resulted in the sale of acute care hospitals, behavioral health centers and home health agencies throughout the NYC metropolitan area. Under terms of the current deal, the buyer is offering a stalking horse bid of $34.0 million. This works out to $113,333 per bed, which is fairly rich for an SNF, particularly one in bankruptcy, but the facility provides higher-acuity skilled nursing and rehab services, long-term care, specialized subacute care, neuro-behavioral and AIDS-related services. SV Operating Three is buying the nursing home operations for $19.0 million and SV Land Three is buying the real estate for $15.0 million. Both are entities controlled by Kenneth Rozenberg, who owns and operates a network of 10 senior care facilities in the New York area. There is a break-up fee of $680,000, just in case someone comes in with a higher bid.
The next deal is actually a set of related deals. University General Health System (OTCBB: UGHS), a recently formed company that characterizes itself as delivering concierge services in health care, made a series of deals with TrinityCare Senior Living. In three separate purchase agreements, it acquired Trinity Oaks, an 80-unit assisted living facility (ALF) in Texas, for $10.8 million; Trinity Hills, an 87-unit ALF in Tennessee, for $10.1 million; and Trinity Shores, a 63-unit ALF back in Texas, for $8.2 million. Additionally, UGHS paid $3.5 million for a 51% interest in TrinityCare Senior Living, LLC, a company that managed the three ALFs as well as three other properties in Columbus, Georgia. UGHS’s plan is to create a local delivery system, anchored by a hospital, but with affiliated laboratories, outpatient centers and seniors housing facilities. The concept is not a novel one, but we have some questions about executablity. First, while the Texas ALFs are anchored by an owned hospital, those in Tennessee and Georgia are not, so UGHS has a way to go to realize its model in those markets. Second, consideration for the three ALFs consists of cash, shares of UGHS stock, notes and assumed debt. The debt ranges between 50% and 66% of the total purchase price in each case, so these purchases really leverage the company. The facilities are—presumably—cash-flow positive, but much of that cash will flow directly into creditors’ pockets. The question then becomes whether the company can access the resources it needs to execute on its strategy, grow its business and generate cash flow before it burns through cash and capital...Want to read more? Click here for a free trial to The Health Care M&A Monthly and download the current issue today