California Attorney General Rob Bonta conditionally approved the $35.6 million sale of three northern California skilled nursing facilities owned by Eskaton.
Eskaton, a Carmichael, California-based not-for-profit senior healthcare provider formed in 1968, had $102.8 million in revenue bonds and notes at the end of fiscal year 2022, according to combined audited financial statements for the years ending Dec. 31, 2021, and Dec. 31, 2022.
The bonds and notes weren’t in default, according to disclosure posted on the Municipal Securities Rulemaking Board’s EMMA website, but the healthcare provider had violated covenants outlined in the master indenture’s debt service requirements for cash-on-hand.
The conditional approval will allow the facilities to come under the ownership of International Equity Partners, a Los Angeles-based company that owns roughly 100 skilled nursing and convalescent facilities throughout California, according to the attorney general’s office.
Bloomberg News
Under California law, any transaction involving the sale or transfer of control of a nonprofit healthcare facility must be approved by the attorney general.
“When reviewing healthcare transactions, the safety of Californians remains our top priority,” Bonta said. “The conditions imposed on the sale will protect the well-being of the residents and ensure that their access to care remains uninterrupted.”
Offloading the SNFs to IEP will enable Eskaton to expand and enhance its offerings in the independent living, assisted living, memory care and home care sectors, Eskaton said in a release when the sale was announced in April.
The facilities that will be changing hands are: the 99-bed Eskaton Care Center Manzanita in Carmichael; 148-bed Eskaton Care Center Greenhaven in Sacramento; and the 149-bed Eskaton Care Center in Fair Oaks.
Former Eskaton CEO Todd Murch said in a statement when the agreement was reached that the three facilities, represent the bulk of the non-profit company’s losses in fiscal year 2022. He said $14 million of Eskaton’s $16.4 million operational loss last year was from the stand-alone SNFs.
Murch, the healthcare provider’s long-time leader, retired a year before he had previously planned.
“The sale of our three standalone skilled nursing facilities puts Eskaton in a much stronger position,” said current CEO Sheri Peifer, who took over as president and CEO effective Sept. 1. “The three facilities represented the majority of our operating losses and with the sale of those communities, Eskaton is positioned to strengthen our residential living, affordable housing and home-based services portfolio.”
Eskaton’s $102.8 million in tax-exempt revenue bonds and notes as of fiscal year-end 2022, include $38.2 million in Series 2013 fixed-rate bonds maturing in 2035, $26.8 million in Series 2012 bonds maturing in 2034; and $23.4 million in variable rate bonds maturing in 2029, sold in a direct placement deal with Truist Commercial Equity, Inc.
The Series 2022, Series 2013 and Series 2012 bonds are subject to restrictive covenants contained in the master indenture. The series 2022 bonds are also subject to additional covenants contained in the direct placement agreement with Truist.
Under the bond indentures on all three series, Eskaton is required to maintain specified debt service coverage ratios and days cash on hand, and they limit further incurrence of long-term debt.
“Management believes Eskaton was in compliance with the various covenants as of and for the year ended Dec. 31, 2022, with the exception of debt service coverage ratio covenants associated with the master indenture and related direct placement agreement, and the debt service coverage ratio covenant associated with the First Republic note payable related to The Ruetlinger Community,” according to the financial documents. “Management believes the debt service coverage ratio covenant noncompliance does not constitute an event of default for obligations issued under the master indenture.”
The healthcare provider did not seek “a waiver from First Republic Bank and has instead agreed to prefund the required debt service payments for the remainder of 2023 into a restricted money market account with First Republic Bank, which provides the lender assurance of repayment while management evaluates options for refinancing the note payable. Because a waiver was not obtained, the $4.9 million outstanding balance on the First Republic Bank note payable has been classified as current maturities of long-term debt in the accompanying consolidated balance sheets as of Dec. 31, 2022.”
Eskaton had $11.8 million in outstanding notes payable to Lument at 3.07% that mature in 2050, payable in monthly installments of $53 that are insured by the U.S. Department of Housing and Urban Development (HUD). It also had $7.1 million in notes at 2.45% payable to Lument with a 2047 maturity, with monthly installments of $32 that are insured by HUD; and $4.8 million in 3.85% notes payable to First Republic Bank that mature 2035, with monthly installments of $40.
Bonta’s conditions will ensure access to high-quality housing and care for the residents of the three SNFs, according to the attorney general’s office.
IEP has engaged Cypress Healthcare Group, LLC (Cypress) to operate the three facilities. Cypress already operates nine other SNFs located in the Sacramento area.
An expert analysis found that Cypress-run SNFs are among the top-performing facilities, according to the attorney general’s statement. Since Cypress is experienced in operating SNFs, has a proven record of success, and is familiar with the Sacramento County area, Bonta said, he expects IEP’s purchase of the Eskaton’s SNFs to be beneficial for the facilities’ residents.
Bonta required IEP to maintain the same level of services being provided to residents, honor all resident admission agreements, leases, and other occupancy agreements, maintain and continue to employ staff who are in good standing, ensure continued participation in Medi-Cal and Medicare for eligible patients and comply with nondiscrimination rules in the provision of services.
The California Department of Justice’s Healthcare Rights and Access section works to increase and protect the affordability, accessibility, and quality of healthcare in California.
HRA’s attorneys monitor and contribute to various areas of the attorney general’s healthcare work, including nonprofit healthcare transactions; consumer rights; anticompetitive consolidation in the healthcare market; anticompetitive drug pricing; privacy issues; civil rights, such as health equity, reproductive rights and LGBTQ healthcare-related rights; and public health work on tobacco, e-cigarettes, and other products.