Kindred Healthcare (NYSE: KND) has made no secret that it is getting out of the skilled nursing business. It took until June 30 for the deal announcement to come, and when it did, it was a bit of a surprise that a single buyer was taking over the entire business.
Private equity firm BlueMountain Capital Management, LLC, through a joint venture it is leading called BM Eagle Holdings, agreed to acquire Kindred’s 89 skilled nursing facilities. BlueMountain, you may recall, acquired the financially failing Daughters of Charity hospital system in California in July 2015, following the collapse of Prime Healthcare Services’ $849 million bid in March 2015.
A week after this deal with Kindred was announced, BlueMountain sold its majority interest in the hospital system, renamed Verity Health, to privately held NantWorks and its billionaire owner, Dr. Patrick Soon-Shiong, for an undisclosed amount. As a practicing physician, Dr. Soon-Shiong worked in St. Vincent, the oldest hospital in Los Angeles and part of the Daughters’ health system.
Kindred’s 89 skilled nursing facilities include 11,308 beds and seven assisted living communities (380 licensed beds). The $700 million price represents $59,890 per bed. Today, that may be considered cheap, since it is nearly 40% below the average price paid per bed in 2016, but there is more to it than meets the eye, since there is a group of leased facilities outside of the Ventas-owned (NYSE: VTR) properties that will be purchased from Ventas as part of the larger transaction.
Occupancy stands at 78%, which is below the current national average of 82%. The properties are scattered across 18 states, and we suspect that BlueMountain will hire at least a few different operators to manage them. We also suspect that the buyers view that 78% occupancy rate as an opportunity, as all buyers do when faced with under-performing assets.
But is this portfolio really under-performing? Annualized revenues and EBITDAR are approximately $1.1 billion and $126.9 million, respectively, producing an EBITDAR margin of 11.6%. That means it is producing about $11,000 per bed of EBITDAR which, while not exactly like the cash flow of those $125,000 per bed sales, is still a decent number and just below last year’s bed-weighted average of $12,100 per bed for SNF sales. With the current cash flow, we estimate the cap rate to the buyer is about 18.1%, another reason to like the financial metrics from their perspective.
That cap rate, however, will come down a point or two when working capital and capital expenditure requirements are added in. The level of required working capital will depend on whether they lease the properties to third-party operators or simply hire them as managers. And, that cap rate is really not apples to oranges since even after the purchase from Ventas, Kindred will not “own” the real estate of all those properties it is selling to BlueMountain. It is selling its SNF “business,” which does not mean all real estate.
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