Higher Deal Volume Hints At End of Log-Jam
During July the Long-Term Care sector posted a total of 10 deals involving 21 facilities. This marks the first time in 2009 that monthly deal volume in this sector has risen above six. We know that brokers, buyers and sellers have been sitting on a backlog of properties, waiting for the financing freeze to thaw, and we may now be witnessing the first signs of renewed acquisition activity.

In the largest of July’s deals, Golden Living, formerly known as Beverly Enterprises, sold a portfolio of 12 skilled nursing facilities in Arkansas for $62.0 million. The buyer was Baltimore-based Capital Senior Care Ventures, an affiliate of Capital Funding Group. The portfolio in question has a combined total of 1,241 skilled nursing beds and, at one facility, 14 independent living units. Built on average in 1979, the portfolio was 85% occupied at the time of sale, 70% of which was Medicaid. The acquisition multiples are 0.85x revenue and 5.9x estimated EBITDA. To help finance the deal, the buyer borrowed $61.0 million through the HUD LEAN program. Capital Senior Care Ventures is leasing the acquired facilities to a newly formed entity, Senior Living Communities, for an initial annual rent of about $7.0 million. It should be noted that Golden Living’s very high liability insurance costs were reduced to $1.25 million in the operating expenses of $62.5 million to arrive at the estimated adjusted EBITDA of $10.5 million which we have used in the acquisition multiples.

All of the remaining Long-Term Care deals in July involve single-property transactions. Chelsea Senior Living of Fanwood, New Jersey is acquiring Brentwood Assisted Living, a 100-unit assisted living facility in Tom’s River, New Jersey, from Fortress Investment Group for $5.4 million. Built in 2006 on 7.4 acres, the facility was 65% occupied at the time of sale; the census was 60% Medicaid and 40% private pay. The deal is valued at approximately 2.0x revenue. Sunwest Management had been the operator, but defaulted on the debt. Subsequently, Fortress foreclosed and Chelsea was hired as the receiver. Though broadly marketed, with a high Medicaid waiver census and low occupancy, pricing for the facility was well below the $16.0 million original cost to build in 2006. The buyer plans to convert 20 beds to Alzheimer’s care, so total occupancy should grow to 110 or 115 residents. Valley National Bank provided the financing.

Sunwest Management made a second divestment during July, selling The Corinthians Assisted Living & Memory Care, a 56-unit assisted living facility in Carrollton, Texas, to Esperanza Senior Living for $3.25 million. Built in 1996, The Corinthians was 63% occupied at the time of sale, due in part to Sunwest’s financial woes. The price to revenue multiple was 2.3x revenue; the price per unit, just over $58,000. This is Esperanza’s fifth acquisition in the last 13 months, as it seeks to build up its facility network. The deal was handled by Marcus & Millichap. As Sunwest continues to labor in the throes of restructuring, we may expect it to be the source of further sales in the coming months.

TJM Properties, an owner and operator of senior care properties based in Clearwater, Florida, is paying $5.3 million to buy Carriage Hill Retirement, a 100-unit assisted living facility with 120 beds in Bedford, Virginia. To finance the acquisition, the buyer assumed a HUD loan. The relevant acquisition multiples are 1.6x revenue and 6.6x EBITDA. This acquisition gives TJM’s its 11th facility in the Southeast. The property has two buildings, built in 1987 and 1988; one will be used for lighter assisted living care, the other for heavier assisted living and for memory-impaired residents. At the time of sale, Carriage Hill was 70% occupied. It is thought that this is the only good facility of its kind in the market and that it will take from six to 12 months to reach stabilization.

A local owner is selling Twin Oak Estates of Metropolis, an independent living facility in Metropolis, Illinois with 47 units, to an Illinois-based operator of seniors housing properties. The purchase price is $4,225,000; the acquisition multiples are 3.9x revenue and 8.5x EBITDA. Built in 2006, Twin Oak Estates was 95% occupied at the time of sale. Occupancy at the facility had been 100%, which prompted the addition of nine units; the addition was in fact built by the current buyer. A local bank provided 80% loan-to-value mortgage financing for the deal. Senior Living Investment Brokerage handled the sale.

Mountain View Retirement of Ooltewah, Tennessee is paying $4.2 million to buy Skyland Oaks, a 106-unit assisted living facility on 14 acres in Tuscaloosa, Alabama, from its three owners. BB&T provided 65% mortgage financing; the sellers provided 35% financing. Skyland Oaks was the first facility of its kind in the Tuscaloosa market. The three owners were all octogenarians and, as we hear it, one prevented the other two from putting any money into the facility. Also, the rates were considered below market, which resulted in annual revenue of $1,950,000 and EBITDA of $220,000 for a price to revenue multiple of 2.2x and a price to EBITDA multiple of 19.1x, respectively. The buyer plans to put $500,000 of improvements into the buildings, which should allow him to increase the rent. It is estimated that with these improvements, the pro forma revenue and EBITDA will rise to $2.3 million and $420,000, respectively. Senturian Senior Housing Brokerage handled this transaction.

Legend Senior Living of Wichita, Kansas paid $4.1 million to acquire Silver Oak of Jefferson’s Garden, a 39-unit assisted living facility located in Edmond, Oklahoma, which lies in the Oklahoma City metropolitan area. Plans exist to add 20 units on an adjacent parcel of land, which was also included in the sale. It is expected that most of these new units will be used for Alzheimer’s care. The price to revenue multiple was 3.7x. Senior Living Investment Brokerage handled this sale.

Santa Clara Specialty Community, LLC, based in Washington state, is buying Sierra Oaks of Santa Clara, a 60-unit assisted living facility located in Eugene, Oregon with 45 assisted living and 15 Alzheimer’s units. The purchase price was $3.5 million. The buyer put down equity of $800,000 and assumed debt of $1.05 million; the sellers financed the remaining $1.65 million. Built in 1994, it was 98% occupied at the time of sale. The property had been owned by the now dissolved Asset Real Estate Investment (AREI); the tenants-in-common investors of the property decided to sell it off. Due to AREI’s bankruptcy, staffing and management costs were high, which resulted in a loss. The price to revenue multiple is 2.2x. JCH Consulting represented the seller in this transaction.

A Colorado-based operator of nursing homes is paying $2.5 million to buy Garden Valley Retirement Village, a 155-bed skilled nursing facility in Garden Valley, Kansas with 115 skilled nursing beds and 40 independent living units. Built in 1980, the Village was 63% occupied at the time of sale. The price per bed is approximately $16,130 and the price to revenue multiple is 0.5x, both of which are low for skilled nursing facilities (SNF). Part of the reason behind this, we learned, is that the facility defaulted on its bond issue in 2007 and the receiver hired the Tutera Group to manage it. Prior to the default, it had been operated by a local board of directors. Another part of the equation is the apparent overbedding of the market, leading to depressed occupancy and revenue levels. The other SNF in a town of 27,000 has just 60 beds and a 90% census. In response to this, the buyer plans to decertify 35 to 40 of the skilled nursing beds at the Village. Senior Living Investment Brokerage handled the sale.

Finally, Cleveland, Tennesee-based Life Care Centers of America acquired Rhea Nursing Home, an 89-bed skilled nursing facility in Dayton, Tennessee, from Rhea Medical Center for $1.5 million, or approximately $16,850 per bed. This acquisition gives the buyer a total of 25 facilities in Tennessee. The Life Care contract includes a lease agreement of up to four years for the current nursing home facility for a minimum monthly rental of $29,000. During this period, Life Care proposes to build a new nursing facility in Rhea County. In addition to rent, the lease agreement requires Life Care to pay all real estate taxes, building insurance, and operating and maintenance costs for the facility during its tenancy. Of the proceeds, $1.0 million goes to the Medical Center and $500,000 goes to the Rhea County general fund.

Half of these deals are clustered around July 1, which suggests to us a concerted push by the parties involved to clear out deals that had been hanging over their heads during the first half of the year. Nonetheless, while one month’s activity is not enough to establish a trend, July’s M&A deals in the Long-Term Care sector are consistent with the increasing volume of dealmaking in the health care M&A market that has taken place since the end of the first quarter. We appear—fingers crossed—to be drawing back from the abyss of the Great Recession.