A Changing View On The Future Of Skilled Nursing
After a relatively quiet acquisition market in seniors housing and care in 2012, at least compared with the near record dollar volume in 2011, as well as the largest number of publicly announced transactions since the 1990s, activity seemed to heat up towards the end of the second quarter. It was nothing huge in terms of dollar volume, and certainly nothing like last year in transaction volume, but a slightly noticeable change seemed to be in the air.  Perhaps it was boredom among the various deal junkies, perhaps cash-heavy investors grew tired of earning 1% (if that) on their cash, or maybe it was just that some good opportunities became available.  Most likely, it was all of the above, and all we hear is that the fourth quarter will be very active, despite the election uncertainty (and maybe because of it).
The exciting news in June, of course, was the announcement that Genesis HealthCare had agreed to purchase Sun Healthcare (NASDAQ: SUNH) in the largest skilled nursing transaction since, well, the owners of Genesis sold their real estate to Health Care REIT (NYSE: HCN) last year in a $2.4 billion transaction.  Genesis agreed to pay $8.50 per share, repre senting an approximately 38% premium to the closing price before the announcement. Since Sun split into two companies in late 2010, with the owned real estate assets transferred to a new REIT, Sabra Health Care REIT (NASDAQ: SBRA), Sun’s shares have ranged from a high of $15.01 per share prior to the CMS preliminary Medicare announcement in April 2011 to a low of $2.06 in the aftermath of Bloody Friday three months later on July 29 when the actual cuts were announced. 
It had been difficult for most skilled nursing stocks to recover from that bad news, but Sun was particularly hard hit, partly because it no longer owned any of its assets and had a significant lease exposure to Sabra, and investors began to question (mistakenly) the ability of Sun to survive.  The company had sufficient cash, and a friendly landlord with intimate knowledge of its operations, so survival was not really the issue; it became more a question of whether the best it could do was tread water as a standalone company in the new reimbursement environment with what will only be increasing reimbursement pressures.  Management obviously decided the company would be better off as part of a larger entity, and instead of worrying about protecting their jobs, they did what amounts to the right thing for their shareholders, employees and customers. 
So what is Genesis buying?  On an annualized basis from the first quarter of 2012, Sun has $1.834 billion of revenues, $209.1 million of EBITDAR and $63.55 million of EBITDA.  The EBITDAR margin was 11.4%, down from 13.8% in the first quarter of 2011, and the EBITDA margin was 3.5%, down 6.2% from the year ago quarter.  Sun’s EBITDAR margin was 200 basis points lower than both Kindred Healthcare (NYSE: KND) and Skilled Healthcare (NYSE: SKH), but 550 basis points lower than National HealthCare (NYSE: NHC).  Currently, Sun operates 158 skilled nursing facilities, 10 assisted living communities, two independent living communities, 13 combined SNF/ALF/IL buildings and seven mental health facilities with a combined total of 21,444 beds in 23 states.  In addition, Sun operates a contract rehab therapy business with a revenue run rate of $256 million, a hospice business with revenues of $60 million and a staffing business with revenues of $92 million…………….Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today