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In this “Expert Opinion” interview, Patrick Hurst, National Director of Houlihan Lokey’s Healthcare Group, discusses the current merger and acquisition market, private equity companies coming into the market and what effects they’re having for acquisitions in the senior care market.
Mr. Hurst is the national director of Houlihan Lokey’s Healthcare Group and a Managing Director in the firm’s Chicago office. He has managed a wide variety of corporate finance and financial restructuring engagements in the healthcare industry. He has been involved in numerous transactions involving nursing homes, hospitals, managed care companies, home care agencies and other healthcare providers as well as medical product manufacturers.
Mr. Hurst is also involved in the firm’s investment banking activities including private placements of debt and equity capital and structuring shareholder liquidity and other recapitalization transactions. Before joining Houlihan Lokey, Mr. Hurst worked in the Consulting Group of Ernst & Young as well as a national consulting firm. He is a frequent speaker on subjects of mergers and acquisitions, financing and restructurings in the healthcare industry. Mr. Hurst earned a B.A. in business administration from Marquette University and an M.B.A. in finance from the University of Wisconsin-Madison. He is registered with FINRA as a General Securities Principal (Series 7, 24 and 63) and a Limited Representative – Investment Banking (Series 79).
Patrick Hurst, Managing Director
123 N. Wacker Dr., 4th Floor
Chicago, IL 60606
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Acquisitions can’t get done in the seniors housing market without debt and equity, and to talk a little bit about what’s going on and some of the private equity coming into the market I have Patrick Hurst with me today. He’s a managing director at Houlihan Lokey and has been involved in some of the large transactions of late, even though there have not been that many. But it’s been picking up, and he’s been kind of at the center of at least one big one.
Patrick, we’ve seen two large private equity firms, Blackstone and KKR, make bids in the seniors housing business in the second half of last year. What’s changed in the market to bring private equity companies back to the sector after a two-year absence?
I think there’s a couple of things, not the least of which is when the private equity companies look at their other portfolios in other industry sectors, I think what they found out in looking at that is that health care in general, although it’s not recession-proof, it’s definitely recession-resistant. And when they look at the different spaces and see how it compares to maybe the retail or the industrial or whatever, health care has really held up well, and I think if you break it apart, on the assisted living side, I think there was an expectation and fear, frankly, that that was more discretionary and very little demand-based. And I think two years ago you saw a quarter where it actually started to dip, and people thought it was going to be a trend that continued. Then a lot of the operators held onto occupancy, steadied it out and actually started to increase slightly.
So, when you see it from some of the private equities, they look at that and say, “That’s a market segment that held up nicely, that they really didn’t have the occupancy declines as was anticipated.’ Then when you get further behind it, you can see that a lot of the operators aren’t doing deep discounting, so some of it is true occupancy steadiness and increases. Then when you look at that compared to other sectors, it’s a good space.
And how much in these two situations with KKR and Blackstone, how much do you think was a perceived value opportunity to come into a distressed situation?
I think the two you’re referring to, Blackstone’s obviously looking at Sunwest, and KKR looked at Erickson. They’re both different in terms of their attributes. Erickson had a name recognition and had some quality attributes that people were driven to. Sunwest, size and ownership; they had their own facilities, and I think that was attractive.
So, when you look at that, I think both of those had the different attributes. With an equity shop, the size of those two firms could get behind and actually expand upon and, frankly, do some things. So, I think it wasn’t as much as they were stressed that brought them to it but that there were opportunities. But there’s also opportunities for improvement in their operations.
And are there other large- or medium-sized private equity firms sniffing around the industry, and if so, what are they looking at or what are they really looking for?
There are, and we keep track of all the private equities that have any health care, that have real estate with health care, and we’re constantly talking to them. I think what’s interesting, if you look at the two we just talked about, they both came in with a partner, whether Emeritus with Blackstone and KKR teamed up with CoastWood and Beecken Petty. So they did come with some operational experience, which I think is important on portfolios of that size, and I think they thought it was important.
In talking around the country, the interest from private equity is on the large scale, like in a KKR and the ones that we’ve mentioned because they can put a lot of dollars to work, and some of the issues in health care, frankly, for some of the bigger funds, they just can’t find opportunities to put the level of equity they need to in a deal.
And you recently worked on the Erickson restructuring and ultimate sale, which still hasn’t closed. Was there one main thing that attracted the bidders to that particular property?
That was such a unique asset in terms of its complexity, in terms of a CCRC portfolio. That’s something most people weren’t aware of.
An unusual CCRC too – unique.
Unique in terms of its structure, in terms of looking at it. I think the attraction there was the name recognition of the platform to basically do some of the improvements and what can be done off of that, and for some of them, frankly, it was a bit of a mission-based. They thought that was a need and it would serve the segment of the market they felt good about and thought there was sustainability there.
And now that we hopefully will have these two major restructuring sales behind us, do you see anything on the horizon in seniors housing M&A market, is there anything like that looming, any big asset sales coming up? Or is it going to be pretty small stuff?
I have to think there’s going to be some big plays coming up, and if you break seniors housing both in terms of the assisted side and on the skilled side, and I think there’s a lot of movement. There’s a lot of contemplation. There’s people who’ve been in things for a long time and may see an exit opportunity, and I also think because of the amount of debt, frankly, that’s going to come due, both by just natural when it was originally done, it’s coming through its cycle in 2011, 2012, that it’s going to have to be refinanced. Frankly, what we were doing for the last year or so was amendments and waivers that had a one- to two-year time horizon.
So, what you’re going to see is there’s going to be a natural coming to market as a focus of some of the refinancing. Historically what happened is there wasn’t any equity in the market, and there wasn’t a lot of debt. So, there wasn’t an alternative to just hanging with it. What you’re going to see now is since there is some equity in the market and people are looking at it, the natural weight of the market is going to bring some things out. I also think because of the things we talked about, on the attributes of the market that are attractive, and I think one of the things that we hear when we’re out talking to private equity, as well as even mezzanine players in seniors housing, is that there’s a recognition in the market that there’s not been a lot of new construction. So, there’s been two years where there really hasn’t been development, and if there’s not development now, you’re two years away from it. So, you don’t need a lot of demographic changes. It could even stay flat, but there’s going to be a demand there because of that, and I think that’s a differentiating point from the last time when assisted living went through a bit of a restructuring, back when there was overcapacity.
I hope things heat up a bit for both you and me. So, good luck in this year, and hopefully we’ll have an active 2010.