The SeniorCare Investor: After 2000, Is It Time To Start All Over Again?

It was said that nothing could be as bad as 1999, when the best performing senior care stock (Beverly Enterprises, NYSE: BEV) had a –35% return. With the exception of a handful of companies, 2000 was nearly as bad, as least from the perspective of publicly traded stocks. Although technically the number one performer in 2000 was Advocat (NASDAQ: AVCA) with a 524% return, because its stock price closed 1999 at only $0.17 per share as the company teetered on the edge of bankruptcy, the scope of the return is meaningless.

The real number one performer last year was Beverly (second year in a row) with an 87% return, followed closely by Sunrise Assisted Living (NASDAQ: SNRZ) with an 82% return. Although not to the extent of Advocat, the scope of these returns was impacted by the miserable showing of these two companies in 1999, when both ended the year near their two-year lows, and in the case of SNRZ, near its all-time low. So the extraordinary returns posted by these two companies, especially compared to the market as a whole, is not the result of great financial performance or tremendous prospects.

Without sounding contradictory, there were several reasons for some renewed investor enthusiasm. Beverly settled the company’s Medicare fraud litigation, and although it was the largest settlement in the history of the nursing home industry, the financial terms were reasonable and the uncertainty was gone. On top of this, Medicare reimbursement during 2000 started to improve, with more improvements expected this year. And Beverly’s decision to exit Florida, where patient liability costs became too onerous to make financial sense for a national chain to remain, will improve the company’s financial results moving forward.

It can be said that all of these factors also contributed to National Healthcare Corp. (AMEX: NHC) posting a 46% return for 2000, but NHC also was coming off a very disappointing 1999. Finally - and Manor Care (NYSE: HCR) can also be thrown in with this argument - these three nursing home companies are basically the last three large chains left standing after the bankruptcy ball of the past 18 months. That is enough of a reason for investors to have some hope.

In the assisted living sector, Sunrise was clearly the top performer in 2000, but there was little competition. In a sector that some industry observers (and participants, as well) believe still has not hit bottom, Sunrise, notwithstanding the debate over asset sales, is one of the few companies not experiencing a liquidity crunch as it continues to develop properties at a relatively steady rate. Although SNRZ posted a $6.5 million GAAP net income in the most recent third quarter, the company actually had a slight pre-tax loss (removing interest and asset sale income). Investors appear to be ignoring this little detail and instead are focusing on the company’s ability to continue to sell assets at extraordinary prices (see page 5).

From an investment perspective, SNRZ is really the only act in town in the assisted living sector for many institutional investors. Most of the other companies have share prices too low or are just too risky (which is usually why the price is low). Even Alterra Healthcare (AMEX: ALI), which once traded as high as $35.25 per share, hit drill-bit territory this past December. If this company, the largest assisted living company in the country and once a star of Wall Street, can fall so far, can this be interpreted as an indictment of the industry, at least in the realm of publicly traded stocks? This will be a much talked about issue in the coming years.

At the bottom of the heap for 2000 were most of the companies that filed for Chapter 11 bankruptcy protection during the year, plus little known Lexington Health (NASDAQ: LEXIW), which operates nursing homes and a therapy company primarily in Connecticut and Massachusetts. This is a company that never should have been public in the first place. Alterra posted an 88% decline after a similar drop in 1999, and Assisted Living Concepts (AMEX: ALF), a true drill-bit company after its many problems, fell 85% in 2000.

The industry enigma continues to be Emeritus Corp. (AMEX: ESC), which lost 78% in value in 2000 while its chairman was  dabbling in the Alterra financing package. Given the company’s capital structure, it is questionable if Emeritus will ever make a GAAP profit, which has monotonously led us to state that the company should either go private or merge with another entity.