Kindred Healthcare announced an agreement to sell 89 skilled nursing facilities with 11,308 beds and seven assisted living communities with 380 licensed beds for $700 million, or $59,890 per bed. In today’s world, that can 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 casual eye, since there is a group of leased facilities outside of the Ventas-owned properties that will be purchased from Ventas as part of the larger transaction. However, occupancy stands at 78%, which is below the historically low current national average of about 82%. The buyer is private equity firm BlueMountain Capital Management, LLC, through a joint venture it is leading called BM Eagle Holdings. The properties are scattered across 18 states, and we suspect that BlueMountain will be hiring at least a few different operators to manage them. We also suspect that they view that 78% occupancy problem as an opportunity, as all buyers do when faced with underperforming assets.

But is this portfolio really underperforming? 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. We will have full details in the July issue of The SeniorCare Investor.