The SeniorCare Investor: Seniors Housing Performance--

Profits Are Up, But Occupancy Rates Should Be Higher

With the last of the public companies reporting their fourth quarter earnings in March, we now have a better sense of how 2010 ended.  While the results were okay, they did not seem to belie the optimism in the industry right now.  Occupancy rates were either slightly up or flat compared with a year ago, and in some cases slightly down, and pricing increases indicated a 2% to 3% average gain in unit rental rates.  But every company is stronger financially than a year ago, and in the case of Sunrise Senior Living (NYSE: SRZ), much stronger and now more than viable. 

Fourth quarter occupancy rates at companies such as Brookdale Senior Living (NYSE: BKD) and Emeritus Corporation (NYSE: ESC), at 87.5% and 87.6%, respectively, are adequate, but we still get the feeling that they are waiting to “pop,” but without knowing what will force the cork off the pent-up demand that should exist in many markets.  From recent reports, it does not look like the housing market is going to be of any help, at least not in the near term.  But with these “big boys” of seniors housing, a 1% increase in census results in up to $20 million of additional annual revenues and perhaps $15 million in EBITDA.  By hitting the holy grail of 90%-plus occupancy, the result can mean an additional value of almost $500 million, and that is something shareholders would certainly pay attention to. At the recent NIC Conference in California, you could just feel the enthusiasm, but also the concern that it may be a tough slog, and a few years, to get to that 90% level.  The giddiness was helped, of course, by the recent acquisition activity of the health care REITs and the valuations of their transactions. 

Or take the case of Capital Senior Living (NYSE: CSU), whose dissident shareholders from a few years ago are no longer complaining about performance or value.  Same-facility occupancy dipped a bit to 85.3%, but it turned in a solid financial quarter with net income doubling from a year ago with an adjusted EBITDAR margin jumping by 500 basis points from the fourth quarter of 2009 (some acquisitions obviously helped those stats).  CSU’s share price jumped by 27% in March, and is up nearly 60% so far this year, and they can still add portfolios without adding much expense despite having the lowest G&A expense of the sector as a percent of revenues (4.2%).  The other companies are showing similar returns for the past three months (see stock chart on page 3), and the sector is poised for growth and profits.

The one enigma we still can’t get our hands around is Assisted Living Concepts (NYSE: ALC).  Try as we may, we just can’t understand how the company keeps on reporting better quarters with higher margins as occupancy wallows at the lowest level of the entire industry (and the lowest level in the company’s history).  In the fourth quarter of 2010, the Wisconsin-based company reported a 1.2% increase in revenues from the year-ago quarter, but a 6.1% increase in EBITDAR, a 25.6% increase in net income and a 27% increase in earnings per share.  And management accomplished this with a 2.5% drop in occupancy year over year, and a company-wide occupancy rate of just 62.1% at the end of the fourth quarter 2010, with just 100 or so Medicaid residents remaining in its buildings.  But, it is now a 98% private pay company, which has been management’s end game for a few years now.  And its share price was up 9% in March and 20% for the year (on top of a 23% gain in 2010).  The problem is that the private pay needle just does not want to move, with a 0.4% increase in the private pay census from the fourth quarter of 2009 to the fourth quarter of 2010, and a slight decrease from the third to the fourth quarter last year on a same-facility basis.  But what’s next?...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today