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The San Benito Health Care District is worth between $55.3 million and $61.1 million, excluding liabilities, according to an appraisal done by HealthCare Appraisers. The appraisal also estimates that the hospital’s overall assets are estimated to be 31 years of a 50-year-economic-life expectancy.
The new appraisal is lower than one done 10 years ago, in 2014, by American Appraisal which concluded the health care district was worth $74.2 million.
In a presentation to the district’s board of directors, who govern Hazel Hawkins Memorial Hospital and commissioned the appraisal, members of the firm said they came up with the number based on three approaches to the evaluation:
- Income – cash flow generated and applying a risk-adjustment rate of return.
- Market – comparing transactions to a similar business and its assets.
- Assets – cost to replicate the assets. The presentation did not clarify if it analyzed replacing assets with new or a similar, used model.
According to the presentation, the hospital real estate is worth $42.4 million, which includes buildings on Sunset Drive ($40.8 million), the Mabie First Street Health Care Center ($825,000) and the Mabie Fourth Street Health Care Center ($800,000).
According to the presentation, the Mabie Southside Skilled Nursing Facility is worth $7 million and the Mabie Northside Skilled Nursing Facility is worth $6.8 million totaling $13.9 million.
Overall, the stated market value of invested capital, which includes the hospital buildings, skilled nursing facilities, non-cash working capital, capital assets and intangibles (workforce, licenses) is $77.6 million but the appraisers included a 25% discount for lack of marketability/liquidity that would put the value at $58.2 million. This formula, Matt Muller with HealthCare Appraisers said, assumed there was no debt, which would have been subtracted from the value.
In regards to their market approach, which puts the value of the hospital between $50.4 million and $57.6 million, Muller said transactions of acute, distressed, critical care hospitals as well as revenues associated with those transactions were analyzed.
“We ultimately didn’t rely on this approach as you might surmise, when you are looking at or discussing hospitals or hospitals with lower levels of profitability, the underlying assets from one hospital could differ quite a bit in quality from another hospital,” Muller said.
In terms of the condition of the hospital’s buildings, Jeff Piehl with HealthCare Appraisers said the “main hospital physical plant’ is nearing the end of its useful life, estimated at 47 years, and that the main value is within the Ambulatory Surgery Center, the emergency department, the Women’s Center and the support services facility.
“It’ll have to be seismically retrofitted in order to move forward in the short to mid-term or it’ll have to be demolished for redevelopment,” Piehl said.
For the asset approach, Piehl said appraisers looked at the life expectancy of the buildings which they calculated at 31 years, the replacement costs on a per-bed basis calculated for a typical district hospital at about $2.5 million per bed, and the land value before applying the depreciation factor of life expectancy of the Hazel Hawkins’ buildings, which is 67%.
San Benito County resident Robert Bernosky questioned the 25% discount factor in the market value approach because he said the district has a monopoly in the healthcare system in “the island of San Benito County.”
“Where did that come from? That just sounds like someone pulled it out of the air,” he said.
He also said the value of the business should be analyzed and added to the value of the assets. He commented that it was odd how the appraisal was near the estimated value proposed by Insight in its Letter of Intent at $59.5 million to $65 million. The letter of intent outlines the terms of a non-binding agreement.
Nick Janiga with HealthCare Appraisers said he took “exception” to Bernosky’s comments because he said the report includes the market approach and an evaluation of the balance sheet.
Janiga said income was considered but not included.
“This business is not profitable and that’s why we’ve chosen to rely upon the market approach and asset approach,” he said.
Bernosky also questioned why the presentation was not made available ahead or at the meeting for the members of the public to review. The district stated at the beginning of the meeting and after Bernosky’s comments that the presentation would be made available the following morning. The presentation was made available Feb. 13 and can be found here.
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