Long-Term Care M&A Activity Accelerates
With consecutive increases in transaction volume each of the last six quarters, long-term care (LTC) mergers and acquisitions (M&A) volume has been on a torrid pace following the 40-transaction jolt in fourth quarter 2009. This accelerated deal volume can be traced to a number of factors affecting buyers and sellers.
What’s driving sellers:
- Increased regulation and reimbursement pressures
- Uncertainty about future reimbursement
- Aging facilities needing major renovations or replacement
- Improving valuations
- Beginning wave of baby boomer owners nearing retirement age
What’s driving buyers:
- The need to spread overhead costs due to regulatory and reimbursement changes
- Availability of cheap financing
- The impending wave of baby boomers needing future care
As the graphs below illustrate, after 110 transactions in 2010, there have already been 74 reported through the first half of 2011. Deal volume for this period topped deal volume for the same period in 2010 by an eye-popping 57 percent. Even with a relatively conservative second half of 2011, we could still see a greater number of transactions this year than during the last LTC M&A peak in 2007.
Source: Irving Levin Associates, Inc.
With the Centers for Medicare & Medicaid Services (CMS) recently announcing plans to cut skilled nursing facility (SNF) Medicare payments by 11.1 percent and continued uncertainty with federal and state budgets, coupled with the Federal Reserve’s recent pledge to keep interest rates low at least into 2013 and the fact that people and facilities continue to age, the same factors driving today’s market should continue to drive LTC M&A activity for the foreseeable future.
Note: LTM=Last Twelve Months; EV=Enterprise Value; EBITDAR=Earnings Before Interest, Taxes, Depreciation, Amortization and Rent
Historical Transaction Cap Rates
After average valuations for SNFs increased 30 basis points in the second quarter of 2010, they remained relatively flat through the rest of the year. Although the first quarter of 2011 saw a slight decrease in average valuations, with cap rates hitting 13.3 percent, data for the second quarter of 2011 is expected to show a slight correction to lower cap rates in the 13 percent range.
After the assisted living and independent living sectors gained 70 basis points and 100 basis points, respectively, from the second quarter of 2010 to the fourth quarter of 2010, they have leveled off a bit. These sectors should at least hold these gains over the next few quarters, with continued improvement more likely coming from the independent living sector.
Source: NIC – Seniors Housing & Care Industry
Recent Select Transactions
- July 2011 – A private investor purchased a 107-bed SNF from a Catholic not-for-profit provider in Illinois for $6.1 million, or $57,000 per bed. Built in 1972, the facility had a 75 percent occupancy rate and annual revenues of $5.9 million.
- May 2011 – An undisclosed buyer purchased a 140-bed Illinois SNF for approximately $6.1 million. The facility was built in 1975 and had an 80 percent occupancy rate. The pro forma cap rate for the transaction was between 12 percent and 13 percent.
- May 2011 – A regional operator acquired a 74-bed Kansas nursing facility for approximately $1.3 million, or $17,500 per bed. The facility comprises 55 skilled beds and 19 residential care beds and was originally built in 1963, with a number of renovations and additions through the years. The facility had revenues and EBITDA of approximately $2.7 million and $180,000, respectively, representing a cap rate of 13.9 percent.
- April 2011 – A St. Louis, Missouri-based regional operator purchased a 96-bed Missouri SNF for approximately $5.5 million, or $57,000 per bed. The facility was nearly 25 years old and had a 90 percent occupancy rate. With $683,000 in EBITDA on $4.5 million in revenue, the cap rate was 12.5 percent.
- July 2011 – Bickford Senior Living teamed up with Harrison Street Real Estate Capital to purchase a portfolio of six assisted living facilities in Illinois, Iowa, Nebraska and Missouri. The portfolio included 342 total units and was purchased for approximately $62.5 million, or $183,000 per unit.
- June 2011 – A local operator sold a 42-unit assisted living facility in Ohio to an undisclosed regional operator for approximately $4.4 million, or just more than $104,000 per unit. This facility was operating at 100 percent occupancy and, based on EBITDA of $377,000, yielded a cap rate of 8.6 percent.
- May 2011 – Four assisted/independent living facilities (419 total units) were purchased in Utah by MBK Senior Living for approximately $76.2 million, or approximately $182,000 per unit. Occupancy rates averaged 85 percent, and the cap rate was estimated at slightly less than 8 percent.
- May 2011 – Five Star Quality Care announced the acquisition of six senior living communities in Indiana. The facilities were approximately eight to 12 years old and included 525 assisted living units, 191 independent living units and 22 Alzheimer’s units. The private seller will receive approximately $123 million, or $166,667 per unit, with the cap rate believed to be around 8 percent.
- May 2011 – Senior Living Management sold an 89-unit assisted living facility in Georgia to Wakefield Capital and Bluerock Real Estate for $15.5 million. Based on estimated revenues and EBITDA of $3.73 million and $1.47 million, respectively, the cap rate for this transaction came in at 9.5 percent. The facility was built in 1997 and had a 94 percent occupancy rate.
Source: Irving Levin Associates, Inc.
For more information on this market update or related matters, please consult your BKD advisor.
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BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including health care, financial institutions, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.