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They may not be a destination of choice for most folks, but for the takeover artists at private-equity shops, it seems they're the place to be.
In the past two months, two of the big publicly traded nursing-home companies have been snapped up by private-equity shops for healthy premiums of 20% and 35%.
What do these savvy see in nursing homes? Real estate.
Both Manor Care (HCR, news, msgs), purchased in early July by Carlyle Group, and Genesis HealthCare (GHCI, news, msgs), bought by Formation Capital and JER Partners in May, own most of the land and buildings at the facilities they run. Those assets were carried on the books at cost, which made the stocks look undervalued. The buyout shops, in addition to finding hidden assets, used those assets as collateral to finance the deals.
So, the obvious question: Who's next?
Of the remaining publicly traded companies in the elder-care group, Assisted Living Concepts (ALC, news, msgs) looks attractive as a real-estate play because it owns 73% of its assets.
Skilled Healthcare Group (SKH, news, msgs) appears to be a potential real-estate play because it owns 75% of its properties. But the company just came public after going through a bankruptcy earlier this decade, so I'd be surprised to see it taken private so soon.
Lehman Bros. (LEH, news, msgs) analyst Kevin Fischbeck estimates a buyer would pay about $1.02 billion for Skilled Healthcare based on recent transactions in the group. Subtract the $409 million in net debt and the buyer would really be paying $611 million for the company, or $16.27 a share -- which is around current levels.
But all that real estate still has value to investors, even if these two companies never get taken out as real-estate plays. Why? Because the value of the real estate will support the stocks, making them relatively safer plays in this group.
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Good news from the moneyman
The second attractive quality that private-equity shops see in nursing-home companies is that fundamentals are solid after years of turmoil in the group. "We think the overall regulatory and reimbursement environment has a level of visibility not seen in almost 10 years," says CIBC World Markets analyst Michael Wiederhorn.To understand why, just follow the money:
- Two-thirds of the people in nursing homes are on Medicaid, a federal program for the indigent that is funded and administered by states. Since Medicaid reimbursement rates are relatively low and residents on Medicaid normally aren't getting high-cost rehabilitation care, they account for only 44% of the industry's revenue. The good news here is that most states are flush with cash again, thanks to years of solid economic growth. So unless there is a recession, big Medicaid cuts aren't on the horizon. "When state revenue collection is strong, there is generally less pressure on Medicaid spending," says Fischbeck.
- The other third of nursing-home residents have their bills paid by Medicare and health insurance, or they pay themselves out of savings and through long-term-care insurance policies. Medicare is the biggest piece here. It represents about 30% of a typical nursing-home company's revenue. It's also the biggest single factor affecting performance because it changes so much depending on government policy, says Fischbeck. For the next several years Medicare policy will help nursing homes. The reason: To cut expenses, Medicare pressures hospitals to move patients into nursing homes as quickly as possible to recover, because costs are lower. "Medicare needs to find a way to save money, and one of the easiest ways is to get patients out of more expensive settings and into nursing homes," says one portfolio manager who owns shares of Sun Healthcare Group (SUNH, news, msgs) in part for this reason.
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Boomers and buyers
Two other trends are set to help elder-care companies. First, the number of Americans who are 65 or older will increase from 37 million in 2005 to 40 million in 2010, and 47 million in 2015, says the U.S. Census Bureau. After 65, they will have more of the health problems that put people in nursing homes for short and long stays. Another favorable factor is that this country's 1.7 million nursing-home beds are offered by 16,000 facilities, according to the American Health Care Association. In such a fragmented industry, the bigger publicly traded players can grow through acquisitions.Rate this Article
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