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December 2003 issue
Year-End Rush Is On: Spin-offs,
Mergers, Divestitures
As the end of the year nears, everyone
is trying to get things done for a fresh start in 2004. While there were
no real surprises, some significant industry events have recently taken
place, all beneficial to the senior care market. See page 1
Acquisition Market
The largest transaction of the month
was the sale of 21 nursing facilities by Beverly Enterprises in three
states. The buyer tripled its size with the deal. See page 4
Other SNF Deals
Kindred Healthcare is buying back a
group of facilities only to be able to divest the money-losers. Four other
single facility deals are discussed. See page 4
Assisted Living Market
CNL Retirement Properties is buying the
EdenCare assets, and two more Manorhouse facilities get sold. See page 5
Retirement Housing Sales
Two high quality, mini-rental CCRCs are
sold in Georgia and Ohio. See page 6
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Year-End Rush Is On: Spin-offs,
Mergers, Divestitures It is always amusing what an end of the
quarter, or end of year, can do to (and for) management, as well as their
advisors. Whether it is cleaning up the balance sheet, taking non-cash
charges so the following period can start off clean or closing
acquisitions and divestitures, there is always a big push to get things
done, especially beginning in mid-November. So why should 2003 be any
different?
Three major industry events
occurred in the past two weeks, none of which were surprises, but all were
important to either get done or at least announced by year-end. We have
gone on record previously as stating that there are too many health care
REITs chasing too few deals, and our group of 12 will now be smaller by
one. The REIT that is being taken over, ElderTrust (NYSE: ETT),
however, has not been one of the companies vying for new deals and was
basically set up by Genesis Health Ventures (NASDAQ: GHVI) in 1998,
a few years before GHVI’s bankruptcy filing, to finance some of its
assets.
The November
20 announcement by Ventas (NYSE: VTR) that it is buying ElderTrust,
with an expected closing in the first quarter next year, is welcome news
for several reasons. ElderTrust was in the final stages of preparing for
the spin-off of GHVI’s skilled nursing assets to a separate company (see
below) and had been involved in a shareholder dispute with a group that
believed a sale of the company was in the best interest of shareholders.
As it turns out, they were right, but management nevertheless seemed to
fight them every step of the way. The likelihood of ETT doing additional
financing business, and increasing shareholder value beyond what it was
worth as an acquisition by another REIT, was next to nil.
Although discussions between
the two REITs had been on and off for some time, they apparently heated up
in the past few months, according to VTR management. The timing was
interesting because in late October ETT announced that it was going to
reduce, over the next 15 months, overhead expenses by 50% and increase the
quarterly dividend rate in December by two cents per share, which for
REITs is quite sizable. In addition, Wachovia Securities was
helping "to analyze the future direction of the company." Just three weeks
later the deal was announced, leading us to believe that the October
announcement was either a negotiating ploy in the final stretch of
contract discussions, or a fallback option if the sale to VTR did not work
out.
Ventas is paying $12.50 per
share and assuming approximately $83 million of debt, which has an average
interest rate of 7.5% and is not pre-payable. ETT’s shares had been as low
as $6.22 per share in the past 52 weeks (historic low was $0.56 per
share), and the offer price represented an 18% premium over the prior
day’s price, and the highest price ETT shareholders have seen in five
years (Merry Christmas). Although the total purchase price is $184
million, after deducting the cash on ETT’s balance sheet, the net price
comes down to $152 million, or close to $76,000 per bed/unit after
deducting an implied value for the two medical office buildings and a
third office building that are in the portfolio.
Despite ElderTrust being a
creation of Genesis Health, just 50% of the revenue stream currently comes
from Genesis. Privately owned Benchmark Assisted Living, with four
facilities, represents nearly one-third, while two other operators (one
facility each) and the office buildings make up the rest. In total, the
portfolio includes nine ALFs, five SNFs and one independent living
community. Ventas management broke down the acquisition values as $60,000
per bed for the SNFs, $83,000 per bed for the ALFs and $150,000 per unit
for the IL facility. The 15 facilities with 1,729 beds/units are located
in Pennsylvania (9), Massachusetts (5) and New Jersey (1) with an
occupancy of 91%.
Initially, some analysts
voiced the opinion that VTR may have slightly overpaid for the
acquisition. Although it was certainly not a "bargain" price, we disagree
with their conclusion. On the monetary side, annual net operating cash
flow from the facilities will be about $15 million, which will increase
funds from operations for VTR by five cents per share. In addition, prior
to the agreement, ElderTrust management had expected to cut overhead
expense by up to 50% to the $1.2 million to $1.5 million range, but as an
independent company. Ventas has stated that it expects to cut it from $3.0
million to $1.0 million, with no senior management coming over from ETT.
Now, if Ventas (or any other REIT) had acquired a portfolio of assets
with, say, 15 facilities and 1,700 beds, under a sale/leaseback structure,
it might be necessary to hire at least one full-time finance person to
handle the extra work, but not at an annual cost of $1.0 million. Despite
her at times disarming manner, VTR’s CEO, Debra Cafaro, is one sharp
cookie, and our guess is that the $1.0 million of overhead is a little
extra padding, some of which will find its way into earnings over the next
few years.
On the nonmonetary side, the
transaction provides some diversification away from Kindred Healthcare
(NASDAQ: KIND), VTR’s primary tenant. Currently, 95% of VTR’s revenues
come from KIND, but that will now drop to 88%, and the nine ALFs in the
ETT portfolio provide some facility diversification as well. This has been
a primary goal for Ms. Cafaro, and we assume VTR will try to do more
business with Benchmark and Newton Senior Living, another new
tenant in the ETT portfolio. Both companies are strong regional providers
that are in the growth mode. This is an important transaction for Ventas,
and may be the first of a few large ones. With its share price almost
doubling this year, Ventas is now the third largest health care REIT with
a market cap of just over $1.6 billion and just behind Health Care Reit
(NYSE: HCN). That’s quite a change from the $300 million market cap at the
beginning of 2000. Well done. |
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