Irvine-based Sun Healthcare Group Inc., the county’s largest nursing home company, is looking to buy more facilities and add related businesses after wrapping up a corporate split last week.
Sun’s real estate holdings broke off from the nursing home operator to become Irvine’s Sabra Health Care REIT Inc.
Sun now leases buildings for its nursing homes and other operations from Sabra.
Spun off shares of Sabra had a big debut last week, surging as much as 12% after their official debut and ending the week with a market value of $1.5 billion.
Sun, which had a market value of $250 million last week, operates more than 200 nursing homes and assisted living centers and provides hospice care, rehabilitation therapy and medical staffing services.
Core Competencies
After the split, Sun plans to “continue to build on our core competencies” of running nursing homes and “complementary ancillary businesses,” said William Mathies, the company’s new chief executive.
Mathies previously was chief operating officer and president of subsidiary SunBridge Healthcare Corp.
“I think you’ll see us getting back into the acquisition mode,” Mathies said.
Sun’s last acquisition came a year ago when it bought Allegiance Hospice Group Inc., a privately held company in Lowell, Mass., with some 300 hospice patients in New England.
The company’s last big buy came in 2007 when it bought Boston-based nursing home operator Harborside Healthcare Corp. for $375 million.
Sun stands to benefit from a change in federal rules for funding nursing home stays, according to Mathies.
In October, the Center for Medicare and Medicaid Services came out with a new way the federal insurance programs would pay for nursing home care, which should lead to longer length of stays and more revenue, according to Mathies.
“There’s some predictability now moving forward,” he said.
Sun gets about two-thirds of its $1.9 billion in yearly revenue from Medicare and Medicaid.
Positive Outlook
The company is “looking forward to trends in the industry being more favorable,” said Brian Williams, an analyst with Nashville-based Avondale Partners LLC.
The split with Sabra, according to Williams, gives Sun “a little bit of ‘dry powder’ to go after acquisitions, and in a market where the fundamentals are improving, that’s certainly a better position,” Williams said.
Sun primarily wants to buy facilities in or near the states it now operates in, according to Mathies.
“I don’t think we’re looking at being in all 50 states, but we would look at growing in contiguous states,” he said.
The split with Sabra also cut Sun’s debt as mortgages went with the real estate holding company. Before the split, Sun did a stock and debt sale with some of the money going toward paying down debt.
Sun now has debt of about $150 million, down from $500 million, according to Chief Financial Officer L. Bryan Shaul.
The company has $75 million in cash and a $60 million revolving credit line.
The nursing home operator’s previous managers, including Mathies and Shaul, remained with Sun after the split. Richard Matros, Sun’s former chief executive, left to head up Sabra.
Mathies joined Sun in 2002. Shaul’s been with the nursing home company since 2005.
Explaining Split
Leading up to the split, Mathies said he met with investors and analysts to help them understand the rationale for it.
The meetings were something of a coming out party for Mathies, “to get people comfortable with my background and my experience and so forth,” he said.
He and others did a “significant amount of legal, accounting and financial work to kind of pull apart what was once one and make it into two,” Mathies said.
“I would say that once we agreed on concept, really the heavy lifting was the technical work around separating the company,” he said. “That’s really what’s taken the last seven to eight months, other than the refinancing, raising equity and so forth.”
A “handful of people” were directly involved in the split, according to Shaul.
“The (facility) operators out there were still focused on growing their business and providing service to patients,” he said.
Hospice Potential
Sun is looking to build up its SolAmor hospice arm.
“In 2005, we picked up a very small (hospice) business that did about $6 million in revenue. We have built that to probably about $50 million this year,” Mathies said.
Hospice care “has a terrific complementary service to people in our nursing homes that require end-of-life services,” he said.
Besides deals, Sun also is working on improving its facilities.
Sun has started “modernizing assets,” or going into nursing homes and performing “front to back” renovations.
