Elderly Housing Deals Make Capital Senior Next: Real M&A

Capital Senior Living Corp., an operator of communities for the elderly, may be an attractive consolation prize for buyers that missed out on the industry’s latest takeover.

Brookdale Senior Living Inc.’s $1.4 billion purchase of Emeritus Corp. announced last week followed acquisitions of Sunrise Senior Living Inc. and Assisted Living Concepts Inc. in 2013. While other suitors may emerge for Emeritus, the deal will likely close, Stephens Inc. said. That leaves Capital Senior, which jumped 7.4 percent after the Emeritus deal, as a takeover candidate, said Jeffrey Langbaum of Bloomberg Industries.

Private-equity firms and health-care real estate investment trusts have been buying senior communities as a growing elderly population and improving economy lift demand. Capital Senior is forecast to boost revenue almost twice as fast as Emeritus in the next two years, according to data compiled by Bloomberg. The $713 million company could fetch at least a 21 percent premium from possible suitors Health Care REIT Inc. or Ventas Inc., eyeing the real estate Capital Senior owns, JMP Group Inc. said.

“The senior housing sector is pretty hot these days,” Rob Mains, a Saratoga Springs, New York-based analyst at Stifel Financial Corp., said in a phone interview. “Capital Senior is a well-run company that anyone wanting to get scale in senior housing would be interested in.”

Ralph Beattie, chief financial officer of Dallas-based Capital Senior, didn’t respond to requests for comment on whether his company would be open to a sale.

Brookdale Deal

Brookdale agreed to buy Emeritus to add to its senior-living locations in California, New York, New Jersey and Massachusetts. Shares of the two companies fell yesterday after ProPublica reported the federal government is investigating Medicaid billing practices at Seattle-based Emeritus.

While it’s possible a REIT or a private-equity firm could emerge with a higher offer, Brookdale is offering a reasonable price and will probably take control of Emeritus without having to increase its bid, according to Dana Hambly, a Little Rock, Arkansas-based analyst at Stephens. Brookdale’s offer represents a 33 percent premium over Emeritus’ Feb. 20 closing price, data compiled by Bloomberg show.

After the deal is completed, Capital Senior will be one of the last remaining publicly traded acquisition candidates, according to Langbaum, a REIT analyst at Bloomberg Industries. Health Care REIT acquired Sunrise last January, and private-equity firm TPG Capital bought Assisted Living Concepts in July.

Last Available

“If you look down the list, that’s all that’s left,” Langbaum said of Capital Senior in a phone interview. “Is it a takeout candidate? Yeah, I’m sure it is.”

Capital Senior, which closed yesterday at $24.74, could lure interest from Health Care REIT or Ventas, in part because of the real estate it owns, according to Peter Martin, a San Francisco-based analyst at JMP. He estimated Capital Senior could get more than $30 a share in a sale.

The stock climbed 2.8 percent to $25.42 today, reaching the highest price since July.

“To be honest with you, I thought it would have been the first target,” he said in a phone interview. “It has a very clean capital structure and it has a very concentrated portfolio from Texas to Michigan, right up the middle of the country. It’s a great target.”

Representatives for Toledo, Ohio-based Health Care REIT and Chicago-based Ventas didn’t respond to requests for comment on whether they would be interested in buying Capital Senior.

Baby Boomers

REITs have taken an increasing interest in senior residence communities as the Baby Boomer population, those born in the U.S. from 1946 to 1964, ages and the pickup in the U.S. economy gives the elderly and their families more income to pay for housing, said Mains of Stifel. Gross domestic product has expanded every quarter since March 2011, data compiled by Bloomberg show.

“It’s a health-care sector that’s drawn a lot of interest,” he said.

By 2050, the number of people over 60 years old globally will exceed the number of people under 15 for the first time, according to a PricewaterhouseCoopers LLP report released this month. The average occupancy rate for senior housing properties last quarter was 89.7 percent, up from 89 percent a year earlier, according to the National Investment Center for the Seniors Housing & Care Industry.

That should help Capital Senior increase its revenue to $432 million in 2015, up from $350 million in 2013 that the company reported yesterday, according to analysts’ estimates compiled by Bloomberg. Emeritus is forecast to boost sales by about 13 percent over the same period.

Emeritus Probe

Investigators have been exploring allegations of improper Medicaid billing at Emeritus, ProPublica said, citing a person with direct knowledge of the matter that it didn’t identify. Karen Lucas a spokeswoman for Emeritus told the website that the company was cooperating fully with authorities and described the investigation as a routine civil probe.

A representative for Emeritus didn’t immediately have further comment on the investigation or the status of the deal with Brookdale. A representative for Brentwood, Tennessee-based Brookdale didn’t respond to a request for further comment.

“My takeaway is that this was probably uncovered in their due diligence process,” Hambly of Stephens said in a phone interview. “I’m still of the opinion that this deal will close as announced.”

Capital Senior reduced its exposure to Medicare and Medicaid by repurposing its skilled nursing facilities, removing a potential turnoff for buyers that don’t want to deal with the risk of regulatory changes or cutbacks to the entitlement programs, said Martin of JMP.

REIT Demands

Because some of Capital Senior’s real estate is leased, rather than owned, a REIT buyer may have to sell off the pieces that are owned by other REITs, said Mains of Stifel.

“A REIT acquirer wouldn’t get the full benefit of the entire company,” he said.

That may not be enough to deter REITs that are hungry for acquisitions to help fuel earnings expansion, said Langbaum of Bloomberg Industries. The senior living industry is an attractive place to look, he said.

“You’ve got a big push to own those types of facilities and that type of real estate,” Langbaum said. Capital Senior is “certainly a candidate.”

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