Bishop Hucles, a 240-bed New York nursing home, recently sold for over $30 million. But the sale of the nonprofit nursing home in Brooklyn had to first overcome a number of challenges — showing profitability, addressing staffing and overall affiliation changes, among others — which ultimately delayed the final sale.
The seller was the arm of Episcopal Health Systems (EHS) of New York and the buyer was a local New York investor with four other nursing homes in the New York City area.
Mark Myers and Josh Jandris of Marcus & Millichap, investment specialists in the National Seniors Housing Group (NSHG), closed the deal.
Myers, seniors housing specialist, senior vice president and director, spoke with SHN about the winding road both seller and buyer traveled during the challenging transaction.
When Hurricane Sandy hit in October 2012, the facility provided care to about 200 displaced nursing home residents from the other EHS facility located in Far Rockaway, one of the areas hit hardest by the storm.
And, New York Supreme Court approval was needed because it was a nonprofit seller, and approval by the Dormitory Authority of New York (DASNY) was needed for the assumption by the buyer — who bought the facility with a nonprofit entity — of about $21 million in bond debt.
“These factors, combined with the lengthy Change of Ownership (CHOW) process, made this a particularly difficult transaction,” he says.
But three steps helped move the deal along, Myers tells SHN.
1. Show Profitability /Potential
Demonstrating profitability and potential, using real market data, is key to a successful closing.
“The facility was losing $4 million a year when we were marketing it,” Myers says. “This further complicated the issue not only from the standpoint of the buyer having to go and make it a profitable facility, but from the standpoint of New York wanting to see a path to profitability.”
The facility continued, uninterrupted as Providence Care Rehabilitation Center.
While the community had a negative earnings before interest, income taxes, depreciation, amortization and management fees (EBITDAM) when Providence Care, Inc. took over management in 2012, the buyer was able to turn a significant profit within 12 months of taking over the facility.
Much time was spent on budgeting, and the buyer had to assume liabilities as well as assets. Numbers were key in showing the future potential, Myers says.
For example, “if the local hospitals all have swing beds and the average Medicare census ranges from three to 10 residents per 100 beds for the area nursing homes, you cannot arbitrarily increase the Medicare census in your pro forma to 25 residents,” he says.
And real estate investment trusts (REITs) are less likely to underwrite off pro forma, as they require an acquisition to be accretive from the start.
“However, such investors typically have a capital stack at much lower costs than a traditional buyer; and, thus, the REITs and institutional investors will typically be able to apply a lower cap rate, but on the trailing earnings before interest, taxes, depreciation, amortization, and rent (or restructuring) costs (EBITDAR),” he says.
Ultimately, when creating a pro forma, note the negatives of the property or transaction, but show how the positives outweigh those unflattering factors to build credibility, he says.
“This is more like a scientific analysis than an entry from Match.com, where nobody looks bad and everybody stretches the truth to win affection,” he says. “This type of flattery to the property only comes back to haunt the process during the buyer’s due diligence, much like occurs the moment the date meets his or her online ‘match.’”
2. Attention to Staffing
During the CHOW process, staffing changes wanted by the buyer had to be approved by the seller, creating additional road bumps.
CHOW must be approved by the state of New York for a nursing home or assisted living facility, prior to the new owner taking over operations.
The consulting management agreement was structured so that the buyer was not in charge, but were advising the client.
“So, if the buyer felt that there were three CNAs that were extraneous, they’d have to go to the seller and say, ‘Do we have permission [to let them go]?,’” he says. “That way it’s legally the seller letting go of those people.”
Getting approval regarding employment changes from the seller in this type of contract isn’t always easy, such as if the seller and/or family members of the seller work at the facility.
“Sometimes, these family members are overpaid and you need to reduce or eliminate some extraneous salaries,” he says.
In addition, “a buyer must be sure to subtract salaries of the owners and others who will not be inherited by the buyer, and add back any positions left open by the termination of [those roles].”
3. Work Through Affiliation Challenges
While both the seller and buyer were nonprofits, the seller was a faith-based organization, which presented additional delays to the final closing.
“The church was in favor of the sale, but it did require the approval of the Episcopal Bishop,” he says, noting that even transactions between nonprofit groups requires approval of the Attorney General and the New York Supreme Court.
Written by Cassandra Dowell