By the standards of the turbulent nursing home business, the sector is hot these days.
Last week, Foothill Ranch-based Skilled Healthcare Group Inc. went public, raising $258 million. Skilled’s shares priced at the high end of their range and rose about 2.5% during initial trading before flattening out with a recent market value of about $530 million.
The debut, modest compared to technology and even other healthcare offerings, highlights a turnaround for nursing home operators left for dead a decade ago.
Skilled isn’t alone.
Shares of Irvine-based Sun Healthcare Group Inc., which emerged from bankruptcy in 2002, have doubled in the past year with a recent market value of about $620 million. So far this year, Sun is up 45%.
Another nursing home offering is in the works. Ensign Group Inc. of Mission Viejo has filed plans with regulators to go public, seeking to raise about $95 million.
Behind it all: a comeback for a sector that’s come through turmoil since 1997.
At one time, five of the top seven nursing home operators sought refuge in bankruptcy court. The Balanced Budget Act of 1997, which dealt nursing home operators’ heavy cuts in federal reimbursements, brought on much of the pain.
There also were management issues and lawsuits.
Today’s nursing home operators still carry a lot of debt and sport discounted market values relative to their size. But the sector is nothing like it was in the late 1990s, thanks to more stable government funding.
“First and foremost, the sector’s more fundamentally sound from a reimbursement perspective than it’s ever been,” said Richard Matros, chief executive of Sun Healthcare, the county’s largest nursing home operator.
The Centers for Medicare and Medicaid Services, a primary source of reimbursement for nursing home operators, is “really trying to have patients taken care of in the most effective setting from a cost perspective,” Matros said.
Sun has been expanding. In April, the company paid $350 million for Harborside Healthcare Corp., a Boston-based nursing home chain. Sun now has 216 facilities and nearly 25,000 licensed beds.
“Yes, we are happy with our performance,” Matros said. “Our initial goal was to just try and save the company. But once we got past that point, we really saw the opportunity to reconstruct this company.”
The sector’s comeback created an opening for Skilled Healthcare and its majority owner, Toronto’s Onex Corp.
“What happened with Skilled was that a private equity firm acquired it and saw an opportunity to take the company public because of how fundamentally sound the industry’s become,” said Matros, who’s known Skilled Chief Executive Boyd Hendrickson for 20 years.
At Ensign, Chief Executive Christopher Christensen and other executives own the majority of the company.
As with other companies, nursing home operators have to pick between going public or being acquired, according to Matros.
Buyouts still are more common. Prior to Skilled Healthcare’s debut, only one nursing home operator, AdCare Health Systems Inc. of Ohio, went public in the past year.
“The stabilization of the sector has created more transactions generally but not necessarily indicated that the trend’s going to be toward IPOs,” Matros said. “The trend’s actually that there have been (leveraged buyouts) in our sector.”
Kennett Square, Pa.-based Genesis HealthCare Corp., which owns about 200 nursing and assisted living centers, has seen a bidding war to take the company private between San Francisco’s Fillmore Capital Partners LLC and Formation Capital LLC of Georgia and JER Partners of McLean, Va.
Manor Care Inc. of Toledo, Ohio, the sector’s largest player with 500 facilities, just hired investment bankers to explore strategic options.
Nursing home operators also have boosted quality and “stepped up” with regulators to share quality data, Matros said.
“We want to demonstrate that we have good quality as an industry, that we can continue to improve that quality,” he said. “Whereas prior to that, there was this sort of theoretical argument that if you cut reimbursement, you’re going to hurt quality.”
Improving quality helped nursing home operators gain more support from Capitol Hill than they historically have, according to Matros.
