2011 Long-Term Care M&A Activity Finishes Strong

The long-term care (LTC) merger & acquisition (M&A) market saw its best year in 2011 since peaking in 2006 and 2007 in terms of publicly announced transactions and dollar volume. Results are still filtering in, but with a final year-end projection of 150 transactions, 2011 is slated to be the most active year in LTC M&A since the late 1990s. The first three quarters of the year alone exceeded transaction counts for full years 2008 through 2010 with 118 deals. LTC transactions in 2011 led to more than $16 billion in total transaction value.

As the following graphs illustrate, there have been a near-record 139 transactions reported so far for 2011, topping 2010 by 26.4 percent.

*Preliminary results

Source:  Irving Levin Associates, Inc.

Several factors continue to drive LTC M&A market activity, including regulatory changes and continued reimbursement pressures due to strained federal and state budgets, low capital costs and the “aging of America” as the wave of baby boomers continues to grow. With the Federal Reserve’s pledge to keep interest rates low into 2014, combined with the regulatory and reimbursement changes facing the industry, we should continue to see favorable M&A volume over the next couple of years in LTC as well as the broader health care services landscape.

Public Comparables

Skilled Nursing

 
Assisted/Independent Living

Note:  LTM=Last Twelve Months; EV=Enterprise Value; EBITDAR=Earnings Before Interest, Taxes, Depreciation, Amortization and Rent

Historical Transaction Cap Rates

In the third quarter of 2011, skilled nursing cap rates reversed direction slightly from the previous quarter, increasing 20 basis points to 13.2 percent. The assisted living sector cap rates increased in the third quarter by 20 basis points, while the independent living sector increased by 30 basis points, bringing them to 9.5 percent and 8.4 percent, respectively. As the high level of M&A activity continues, these figures are projected to remain stable in 2012.

Average Historical Transaction Capitalization Rates

Source:  National Investment Center for the Seniors Housing & Care Industry

Recent Select Transactions 

Skilled Nursing

• December 2011 – A large health system purchased a 149-bed skilled nursing facility from an Arizona provider for $7.8 million, or $52,300 per bed. Built in 1969, the facility had an occupancy rate of 86 percent and annual revenues of $16.5 million.
• December 2011 – A private investor purchased a 29-bed Oklahoma skilled nursing facility for approximately $561,000. The facility had a 93 percent occupancy rate.
• November 2011 – A local not-for-profit sold a 142-bed facility in Alabama to a private investor for $10.6 million, or $74,600 per bed. The facility was built in the late 1960s, and the occupancy rate was only about 65 percent. Revenues were about $11.5 million. 
• November 2011 – Adcare Health Systems purchased a portfolio of five skilled nursing facilities in Oklahoma for approximately $16 million, or $44,800 per bed. Each facility has an average of 71 beds, and they generate about $15 million in revenues. 

 Assisted/Independent Living

• December 2011 – Wilkinson Corporation purchased three assisted living communities in Illinois from a national senior housing operator for $30.8 million, or $168,000 per unit. Each property has about 50,000 square feet with 96 percent occupancy. Revenue and EBITDA were approximately $6.3 million and $2.5 million, respectively, yielding a cap rate of about 8.1 percent.
• December 2011 – A local operator sold a 57-unit assisted living facility in California to a private investor for approximately $11.3 million, or just more than $198,200 per unit. This facility was operating at 95 percent occupancy and yielded a cap rate of 8.2 percent, based on revenue and EBITDA of $2.9 million and $925,000, respectively.
• December 2011 – A large assisted living center consisting of 142 units and 225 licensed beds sold in Virginia to a private investor for $3.5 million, or approximately $24,650 per unit. The price was discounted because of 80 percent state-assisted revenues. The facility operated at a 26 percent margin, yielding a 20 percent cap rate.
• November 2011 – The Autumn Group purchased a 30-unit assisted living facility in Maryland. The facility was built in 1999 and maintained an 85 percent occupancy rate. The private seller will receive approximately $3.8 million, or $126,700 per unit, and based on revenue of $1.5 million, the cap rate was 11.9 percent.
• November 2011 – Meridian Senior Living purchased a 90-unit assisted living facility in California from Western America Properties for $5.5 million, or $61,600 per unit. The facility was built in 1970 and had a 50 percent occupancy rate.

Source:  Irving Levin Associates, Inc.

For more information on this market update or related matters, please consult your BKD advisor.

About BKD Corporate Finance, LLC

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.

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