Skilled Healthcare Group Inc.’s settlement of a state complaint could put it in position to pay down more of its long-term debt.
The Foothill Ranch-based nursing home company is awaiting word on whether it will be allowed to borrow up to $250 million in lower-interest loans from the U.S. Department of Housing and Urban Development.
An approval could save Skilled as much as $10 million a year, according to Roland Rapp, general counsel for the company.
HUD officials are looking at the settlement but haven’t set a date for a decision, according to Rapp.
Skilled had $449 million worth of long-term debt and paid $37.2 million in interest last year.
The company sees HUD financing as a way “to take advantage of the high percentage of real property we own,” Rapp said.
Skilled owns 73 of its 100 total facilities. Using the facilities it owns as collateral on a HUD loan would give the company a much better rate than its current senior secured debt, which Rapp said “encumbers” its properties.
It would be worth it, according to Rob Mains, a nursing home analyst with St. Louis-based investment bank Stifel, Nicolaus & Co.
“Less interest expense means more earnings,” Mains said.
It won’t be easy.
“To get it, you have to jump through a lot of truly onerous processes,” he added.
Skilled, prior to the Feb. 15 settlement announcement, said that it could post a full-year profit of $25.2 million to $27.4 million for this year. That compares with analyst estimates of $25.9 million.
Skilled had to make sure the complaint was resolved prior to restarting any HUD discussions.
The complaint was made by the California attorney general’s office. It centered on staffing levels and quality of care at Skilled’s nursing homes.
The settlement calls for Skilled to make improvements to its 20 California nursing homes. The company will be monitored, and the order for improvements enforced by a court if necessary, Attorney General Kamala Harris said in a statement.
Skilled will pay $700,000 over a two-year period for an independent monitor to make surprise inspections of its nursing homes, the attorney general’s office added.
Skilled had applied for the HUD financing and received conditional credit approval from the federal agency in mid-October, before it learned of the complaint from the attorney general’s office.
“We called [HUD] right after we learned about the existence of the complaint on Oct. 31,” Rapp said.
HUD officials said they wouldn’t process or underwrite any insured loans until the state complaint was resolved to its satisfaction, Skilled said in a Securities and Exchange Commission filing.
Skilled and the attorney general’s office reached the settlement in light of more than 200 deficiency notices and nearly 80 citations the state Department of Public Health issued against it between 2008 and 2012. The notices touched on several issues, including failure to prevent pressure ulcers and medication errors.
Rapp said that the settlement with the state is not directly related to a case Skilled settled in 2010 for about $50 million after a jury delivered a potentially crippling $677 million verdict against the company in a staffing case concerning a Northern California nursing home it no longer owns.
Wall Street reacted well to the recent settlement—Skilled’s shares rose 10% to a market value of $233.2 million in afternoon trading on Feb. 19, a few days after the settlement became public.
The settlement removes an “overhang” on shares, Oppenheimer & Co. analyst Michael Wiederhorn wrote in a client note.
Skilled shares are down 7% since the start of 2013 after rising 17% last year.
News of the settlement came a few days after Skilled released its fourth-quarter and 2012 financial results.
The company posted a profit of $5.7 million for the quarter, down 15% from a year earlier.
Revenue came in at $219.2 million, up 2% from a year earlier.
Skilled earned $21.5 million on revenue of $872.6 million for all of 2012.
