The SeniorCare Investor: Senior Care Equity And Debt--

Capital Sources On The Rise For Seniors Housing

When is the best time to raise new capital, whether debt or equity?  When it is cheap, when it is plentiful, which can mean it is cheap?  Or when you need it the most, either because you have profitable uses for it, or you just really need the money?  The seniors housing and care sector has been so starved for capital for most of the past three years, it is difficult for companies to determine if now really is a good time to access the capital markets.  The exception, of course, has been the health care REITs, which have wisely capitalized on current market conditions to access very cheap debt as well as relatively cheap equity.  This has not been the case for their provider customers.

Take the case of Five Star Quality Care (AMEX: FVE).  The company has been growing by acquisition, and has been trying to expand its private paying seniors housing business and at the same time decrease the percentage of its revenues dependent on Medicaid and Medicare reimbursement.  The company has been fortunate to have a capital partner, Senior Housing Properties Trust (NYSE: SNH), which can finance the acquisitions for them, or not.  The disadvantage, at least from FVE’s management’s perspective, is that at times what may be good for the goose may not be as good for the gander.  That said, when pursuing a growth strategy, it can be comforting to know that financing availability, or lack thereof, is not going to be an impediment to getting transactions completed.

Five Star has done many of its acquisitions through sale/leaseback transactions with SNH, but from an FVE shareholder perspective, it does make sense to own some of the properties it buys and put them on its balance sheet.  REITs don’t like to hear that, but how often have you read an equity analyst’s report citing the merits of a company owning a large percentage of its properties?  The problem arises when the cost of putting them on your balance sheet gets too high.  Measuring that cost, however, can be difficult.

On June 8, Five Star announced it would sell 10 million new shares of stock in a public offering, and with only 36 million shares outstanding at the time, it represented significant dilution to existing shareholders.  The share price dropped from $7.20 to $6.27, and to get the full 10 million shares sold the following week, the offering had to be priced at just $5.00 per share, or a 30% discount to the week-ago price.  And when the price recovered a bit a few days later, of course the underwriters exercised their over-allotment option and sold an additional 1.5 million shares at the same $5.00 price.  There is a direct relationship between the 30% share price drop and the 30% dilution to existing shareholders, and that was a cost of raising the equity...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today