PACS Group (NYSE: PACS) plans to acquire the operations of 53 skilled nursing facilities as well as assisted and independent living facilities located across eight states, including five new markets for the company.

The facilities in the pending deal are currently operated by family-owned Prestige and comprise 2,511 skilled nursing beds and 1,334 assisted living and independent living units, PACS said in a press release late Wednesday.

PACS plans to lease 37 of the facilities from a joint venture in which it owns a 25% interest. The remaining 16 facilities will be leased from unaffiliated third-party landlords, the company said.

PACS, which debuted on Wall Street in April, has consistently emphasized the success of its business model based on turning around struggling facilities and empowering local leadership.

“We plan to leverage our decentralized leadership model, as well as our prior experience with larger portfolio acquisitions, to quickly integrate the new facilities after the anticipated closing later this year,” said Josh Jergensen, PACS president and COO.

Also, favorability of regional factors are a strong consideration for acquisitions at PACS.

To that end, Derick Apt, CFO for PACS, said of the latest bid, “The Prestige acquisition illustrates an important element of our growth model in action. We consider acquisitions, both large and small, when we believe the PACS operating model can thrive in the local markets.”

PACS will be leasing the facilities on a traditional triple net basis, he said.

“Our up-front capital outlay to do the transaction will consist primarily of the approximately $15 million that we’ll invest in the real estate joint venture for our 25% interest,” Apt noted.

PACS anticipates that the transaction will close in the third quarter of 2024, subject to regulatory approvals and third-party consents.

Regional footprint ‘surpassing’ expectation

The facilities in the portfolio are located in Oregon (21 facilities), Washington (19 facilities), Idaho (6 facilities), Nevada (3 facilities), and one facility in each of Alaska, Arizona, California and Montana.

PACS will expand its facility portfolio by about 24%, from 218 facilities in the first quarter of 2024, according to health care equity analyst, Scott Fidel, managing director with Stephens Inc. 

“[This is] substantially surpassing our current forecasting of [over] 21 facilities in 2024,” Fidel wrote. “Indeed, we expect this deal should meaningfully supplement PACS’ current $80 million to $100 plus million embedded EBITDA harvesting opportunity from acquired facilities.”

In acquiring the Prestige facilities, PACS will now overlap with The Ensign Group (Nasdaq: ENSG) across the eight states, Fidel said.

Opportunity to improve occupancy

The acquisition presents a “significant opportunity to improve performance and drive synergies,” said Fidel, because the Prestige facilities were operating at much lower-than-average occupancy.

Prestige facilities had an average SNF occupancy of about 73.2% in the first quarter of 2024, representing a 300 bps in year-over-year quarterly growth of around 70% rate, said Fidel, basing his figures on a sample of 32 Prestige SNFs.

Overall, Prestige’s SNFs underperformed PACS’ new facility cohort, which Fidel defined as those SNFs acquired less than 18 months ago, by roughly 1,000 bps in the first quarter of 2024.

“This should provide PACS with a significant opportunity to improve occupancy performance at the Prestige facilities,” Fidel said.

The strength of occupancy levels for the Prestige SNFs varies across states.

The two SNFs in the portfolio that are located in Idaho had an average occupancy of 59.5% compared to an occupancy level of about 75% for facilities operated by Ensign in the area, and 72.4% for industry average in the state, Fidel said.

Meanwhile, in Nevada, where PACS will acquire a single SNF, the average occupancy of that SNF was about 60.3% compared to PACS-operated SNFs in the area, which have an occupancy of 97%. In Nevada, occupancy at Ensign’s facilities is around 86.3% and the state’s industry average stands at 81%, based on research at Stephens.

In Washington, PACS will acquire 19 post-acute operations of which 10 are SNFs, with the remainder being ALFs. Washington also represents a new market for PACS. Here, the SNF operations have an average occupancy of about 73.1% compared to Ensign-operated facilities’ occupancy of 75.9% and average industry occupancy of 74.2% in the state, Fidel said.

The Oregon operations have the largest number of SNF facilities with 18 of the 21 post-acute operations being SNFs. Oregon represents a new market for PACS as well. These SNFs had an average occupancy of about 78%, which is better than the industry average of 69.8% in the state, Stephens research shows.

Prestige currently owns a total of 30 post-acute operations in Oregon, and PACS will acquire all the available SNF assets but not the entire portfolio of ALFs and memory care operations, according to Fidel.

Nevertheless, in announcing the pending deal, Jason Murray, PACS Chairman and CEO, lauded the existing leadership at Prestige.

“The Delamarter family and the Prestige team have created a great legacy of providing compassionate care over the past many decades, and we look forward to honoring that legacy and supporting the facilities in their mission of providing quality care going forward.”