Impressive Growth Strategy Includes A For-Profit Management Arm
Originally chartered in 1874, United Methodist Homes (UMH) operated two small facilities through 1998 but has demonstrated an impressive growth pattern over the last decade.
The board of directors of United Methodist Homes realized in the late 1990s that a small-scale operation couldn’t compete with larger organizations and needed to grow or merge or diversify its revenue streams. Although formed in 1874, until recently UMH only operated two small facilities on its Shelton, Connecticut, campus: a 120-bed nursing home with significant exposure to Medicare/Medicaid reimbursement and a 180-unit independent living community with HUD control over rents.
So in 1998, UMH took action. It developed a green-grass assisted living site on the Shelton campus, leased a new 74-unit assisted living facility in a nearby town, and formed a for-profit management/consulting subsidiary— The Long Hill Company—to work with troubled properties and lenders. That last effort provided an inside track to other acquisition opportunities, and the organization has demonstrated an impressive growth pattern ever since.
“Over the years, The Long Hill Company has done a number of receiverships and managed distressed properties on behalf of several states and lenders,” explained David Lawlor, CFO of UMH. “Our primary goal is always to stabilize the property and find a buyer—someone other than ourselves—to take out the existing debt.” In situations where there’s no market for a new buyer to come to the table, however, acquisition deals may be introduced to UMH’s not-for-profit asset-holding company. So far, that has happened twice.
The first such acquisition, in 2005, was a 120-unit assisted living facility in Memphis, Tennessee, and the last remaining entity in a pool of properties acquired as part of a defaulted HUD loan. While it had suffered from poor management decisions, the facility’s layout was good, its occupancy was historically high, and the overall market was strong. “We had been the receiver for a couple of months and hadn’t really started an active marketing program,” said Lawlor, “but the lender wanted to close the deal quickly—before the fiscal quarter came to an end. So the bank provided financing, UMH came up with some equity and working capital, and we worked the deal.”
The second, in 2006, was a 40-bed nursing home in rural Cloverdale, Indiana, that Long Hill managed for 18 months and ultimately bought for $400,000 in cash. “The facility hadn’t gotten the attention of any buyer,” Lawlor explained. “We liked the fact that it was small, that it had a good culture, and that the workers were dedicated. We felt the facility would break even—perhaps even provide a small management fee—if we could keep a baseline census level, and that would keep it in business. Helping the lender get a sticky situation off its books also strengthened our relationship with the lender.”
In addition to those two acquisitions, UMH acquired an 88-bed skilled nursing facility in 2001 and a 54-bed assisted living facility in 2003, both of which were purchased on the open market. And in 2007, UMH exercised a purchase option on the 74-unit assisted living facility that it leased in 1998. Meanwhile, the Long Hill operation has operated or managed 20 distressed facilities since 1998 (including the two that UMH acquired) as receiver for the lender or state or for the bond trustee and is currently acting as a consultant for the Connecticut State Receiver regarding five distressed nursing homes.
For-profit subsidiary—not for everyone
While having a for-profit management/consulting subsidiary has worked well for UMH in terms of its growth strategy—and its ability to recruit and retain new people through added opportunities—it’s not necessarily a good strategy for every not-for-profit organization. Board members may want to focus only on a single site, for example, or they may be so intimately involved in the daily operations of the single facility that they don’t recognize the greater risks that the organization faces by not growing.
“We don’t often see a proactive strategy among not-for-profits to grow their businesses,” Lawlor said. “They may buy a plot of land next door or add onto their facility or even develop a green-grass project on another site, but they’re not necessarily used to following the flow of deals.”
“Some not-for-profits have substantial foundations that can carry them through thick and thin with little or no stress on operating margins,” he added. “The size of our foundation is such that we’re still reliant on our operations to generate opportunities for growth—much as a for-profit would. Our board, which includes some very forward-thinking folks who have had long business careers in for-profit companies, has been very supportive of our endeavors on the for-profit side. They know it’s a business strategy that ultimately helps the not-for-profit side grow and become a stronger organization.”
UMH has also put together a team in its for-profit subsidiary with clinical, technical and financial expertise. Those assignments need to be managed differently on the for-profit side, and many not-for-profits are simply not set up to do that.
Nevertheless, “buying right” is the key component to growing through acquisitions, according to Lawlor. “If we get the transaction right and the price right, we don’t shy away from it regardless of geographic location or the type of facility,” he said.
A buy-and-hold company
While always keeping an eye open for acquisition opportunities—particularly through its for-profit operation—UMH is not looking to flip real estate. “We’re a buy-and-hold company,” Lawlor emphasized. “We want to know that there’s real promise for the facility to be a functioning, productive organization with a good culture. We don’t calculate an ending sale value of the facility in our criteria. Companies that aggressively grow the top line of their P&L through revenue growth put increased pressure on themselves to show earnings. For us, it’s all about cash flow.”
In the 10 years since it embarked on its growth strategy, UMH has more than doubled the average number of residents served, from 300 in 1998 to 691 in 2008, and greatly mitigated its exposure to losses on government reimbursements. Total revenues have more than quadrupled, from $10.2 million in 1998 to $43.3 million in 2008, while total assets have increased fivefold, from $12.5 million in 1998 to $60.5 million in 2008. Bank debt has also increased, from about $1 million in 1998 to $36.3 million in 2008.
Corporate leverage and the overall value of the organization have increased significantly, as well, improving UMH’s positioning for long-term viability. “In the next 10 years, as the credit markets tighten, we have more options than we did 10 years ago when we were a single-site not-for-profit,” said Lawlor. “Because of our diversity, we’re better able to handle any downturn in the credit markets.”
Credit crunch effect on growth
Still, Lawlor does expect the current credit crisis to change the organization’s approach to transactions. “The availability of credit will be compromised,” he said, “but our growth strategy has always been to look at single-site or small-chain transactions rather than large-scale acquisitions. Going forward, we will be looking at opportunities to restructure existing loans of borrowers who are in trouble rather than bringing new money into the deal. And bringing working capital and management expertise to the table may also enhance the bank credit. We think that working from the inside out (rather than blowing out existing debt with a new loan) will allow us to continue to grow.”
At the moment, in fact, UMH is in the early stages of developing a new CCRC and trying to put together the deal despite the credit markets. “The first step was to secure the land,” said Lawlor, “and we’ve been able to alter our land deal.” The initial plan was to buy the land prior to the bond issue, but UMH restructured that transaction as more of a partnership with the landowner than an immediate outright purchase. “We’re making minimal option payments,” he continued, “and because we’re outlaying capital to make the project work, the landowner is comfortable with the deal. In the end, though, we’ll buy out the land.”
Lawlor doesn’t expect the project to hit the credit markets until 2012, after all pre-development and pre-marketing work has been accomplished. “We hope the housing market will settle down and gain some traction as we lead into our closing on this transaction,” he said. “We think we’ll hit the markets just right. We’re working with Ziegler Securities and New Life Development Co. and feel that equity support and underwriting will be available for the project—which may change somewhat over the course of the next couple of years, as well.”
Overall, Lawlor and his colleagues at UMH see a tremendous opportunity for not-for-profits with significant cash and stability to create opportunities for themselves in the next few years by getting more actively involved in facilities with “less chunky” balance sheets. But to tap into the game, he suggested, “they should be reading industry newsletters and sitting down regularly with their advisers, their accountants, their attorneys, and industry brokers—and really putting some energy into evaluating the deal flow.”
Lawlor also expects that some providers will default as interest rates tick up and that banks will be looking to strengthen their credit. “That’s where not-for-profits can come in and not only improve the credit for the bank,” he said, “but also seize opportunities for themselves.”
November 1, 2008