Austin Propst

RUG-IV Interim Payment System to Be Implemented in October

After the health care reform law pushed back the start of RUG-IV until October 1, 2011, the Centers for Medicare & Medicaid Services now says that it will implement “interim” payments reflecting the MDS 3.0 and RUG-IV system beginning October 1, 2010, unless Congress is able to pass legislation repealing the delay.

Sheila Lambowitz, director of the Division of Institutional Post Acute Care said, “The interim payment system is only an interim measure until an integrated payment system can be developed.  Once that payment system is in place, any claims paid at the interim RUG-IV rates will be reprocessed using the RUG-III system as modified by the Patient Protection and Affordable Care Act [through September 30, 2011].”

The full RUG-IV will be implemented permanently October 1, 2011.

Source:  McKnight’s LTC News & Assisted Living

Sun Healthcare Group, Inc. (NASDAQ: SUNH), one of the largest skilled nursing operators in the country, announced on May 24 its plans to separate its operating subsidiaries and property assets into two publicly traded companies. The operating company will continue to provide nursing and rehabilitative care and will keep the Sun Healthcare Group name. The new entity will own substantially all of Sun’s currently owned properties and will operate as a real estate investment trust under the name Sabra Health Care REIT. William A. Mathies, chief operating officer of Sun, will become chief executive officer of the operating company, while current Sun CEO, Richard K. Matros, will become chairman and CEO of the REIT.

The separation will be effected through a distribution of common stock to Sun stockholders and is expected to be completed in the fourth quarter of 2010.

New Report Finds More Than 10 Percent of GDP Will Be Spent on Medicare by 2083

According to a new report from the boards of trustees for Medicare and Social Security, 11.4 percent of gross domestic product will be spent on Medicare by 2083, nearly twice the amount spent on Social Security.

Medicaid Expansion to Cost States Less Than Expected

According to a study conducted by the Kaiser Family Foundation, the Medicaid enrollment expansion required under the health care reform law will cost states less than originally expected. From 2014 through 2019, $443.5 billion, or 95.4 percent of the cost of the Medicaid expansion, will be paid by the federal government. After 2020, the federal government’s portion will decrease to 90 percent.

Public Comparables

Skilled Nursing

Assisted/Independent Living

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

• Both the skilled nursing and assisted/independent living markets continue to improve.
• Over the last 12 months, the public companies shown in the skilled nursing and assisted/independent living indices have shown overall gains in share price.
• During 1Q 2010, public capitalization rates continued downward for both skilled nursing and assisted/independent living, indicating continued improvements in senior care valuations.
• Public capitalization rates for assisted/independent living are at their lowest since 3Q 2008.

Historic Public Cap Rates

Recent Transactions

Skilled Nursing

• March 2010 - AdCare Health Systems has agreed to purchase two skilled nursing facilities in Alabama for $18.5 million, or $59,300/bed.
• April 2010 - Mission Healthcare purchased a 146-bed skilled nursing facility outside of Sioux Falls, South Dakota, for $11.15 million ($76,370/bed.) By the closing of the transaction, the facility had been recertified for 154 beds, and state regulations allow for another increase of up to 168 beds.
• April 2010 - Petersen Healthcare acquired a skilled nursing facility from one of the largest operators in Illinois. The 99-bed facility was built in 1971 and had an occupancy rate of 66 percent. As part of the $4.3 million purchase price ($43,400/bed), Petersen assumed a $4 million HUD loan.
• April 2010 - Kindred Healthcare announced the acquisition of Stratford Commons in Glenwillow, Ohio, a combined skilled nursing and assisted living facility. Property records show a purchase price of $13.6 million for the 105 skilled nursing beds and 68 assisted living units. The facility is licensed to add another 68 assisted living units.

Assisted/Independent Living

• February 2010 - Sunwest Management sold a 40-unit assisted living facility, with 27 assisted living units and 13 memory care units, in Utah to a local operator for $2 million. The facility was built in 1999 and has an occupancy rate of approximately 60 percent.
• February 2010 - Sunrise Senior Living sold a 30-unit assisted living facility located in Dunwoody, Georgia, for $1.9 million, or $63,300/unit. Pro forma revenue and EBITDA estimates were approximately $1.2 million and $180,000, respectively, representing a pro forma cap rate of 9.5 percent.
• March 2010 - TJM Properties purchased a property on the east coast of Florida for $7.85 million. This price equates to $100,600/unit. The 78-unit assisted living facility, built in 1999, is licensed for 100 beds.
• April 2010 - Senior Lifestyle Corporation, with its equity partner Walton Street Capital, purchased a former Sunwest Management assisted living property in Maryland for $3.6 million, or $56,250/unit. The 64-unit property consists of all studios that average approximately $3,400/month. Senior Lifestyle Corporation plans to spend a significant amount of money on facility improvements, which were factored into the purchase price.

Source:  The SeniorCare Investor

Recent Transaction Cap Rates (12/31/09)

Source: NIC-Seniors Housing & Care Industry

Quarterly Transaction Volume

Source:  Irving Levin

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

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