Health Care Deal News: Spotlight on Long-Term Care - August 2012

There was a lot of activity in the skilled nursing facility market last month.  In the largest deal, JLM Financial Investments purchased a portfolio of 10 nursing facilities with 1,553 beds, all located in Illinois, from Granite Investment Group.  The good news is the average occupancy for the portfolio is about 90%; the bad news is that 93% of the census is Medicaid and not even half of the portfolio is certified for Medicare.  The reason is that the census at the majority of the facilities is MI/MR residents, funded by Illinois’ Medicaid program with rates below skilled nursing rates. The other problem is that all 10 properties are about 35 years old or older, which means they were mostly built in the 1970s, which is par for the course for the industry.  We understand that the portfolio was reasonably profitable, which is surprising given the state and the make-up of the census.  We have heard through the grapevine that the price was close to $65,000 per bed, helped by the assumption of a significant amount of HUD debt that will most likely get refinanced with today’s low rates.  We have estimated that the cap rate was between 11.5% and 12%, but that doesn’t tell the real story since with up to $90 million of assumed debt, this was more of a financial transaction with little equity. Apparently, Texas-based JLM, a private equity firm, wants to use this acquisition to expand its investments in the senior care space.  We have also heard that Healthcare Transactions Group brokered the deal, but unfortunately they would not confirm any of the financial details.            

AdCare Health Systems (NYSE: ADK) closed on its acquisition of a 160-bed skilled nursing facility in Georgia.  The seller was a local not-for-profit hospital and while they maintained the 40-year old property, occupancy was just 64% and it was losing money as a result of high wages and benefits and over-staffing in general.  Revenues were about $6.3 million, but this was before an expected Medicaid rate increase which, despite the national trends, was expected to be relatively large.  The purchase price was $8.24 million, or $51,500 per bed, so AdCare obviously sees some upside in both the overall census as well as the quality mix.  Private Bank provided a $6.6 million mortgage for the acquisition, which has an interest rate of either 6.0% or LIBOR plus 400 basis points, and is due in two years (HUD, here we come).  Despite the fact that it was losing money and had a 64% occupancy rate, there were five offers at the relatively high asking price ($8.0 million) within seven days.  And we thought that only happened with New Jersey nursing facilities losing money.  Senior Living Investment Brokerage handled the transaction..............Want to read more? Click here for a free trial to The Health Care M&A Information Source and download the current issue today