The Dealmakers Forum: Assisted Living Concepts On The Block-
Taking Advantage Of The Seniors Housing Bull Market
The assisted living acquisition market has been very strong for the past 18 months. The more than 50% increase in the average price per assisted living unit sold in 2011 confirmed what everyone knew last year. But what everyone also knew was that the primary reason for the substantial jump in prices was the much higher quality of the properties sold, on average, than in the previous three years. Yes, cap rates did decline in 2011, but not enough to account for the near-record average price per unit.
There are, of course, some ramifications of a change in the market such as this, some welcome and some not so much. In any bull market, there is always the belief that the rising tide will raise the values of all properties. While true to a point, people sometimes get carried away with how high the tide will raise them. Acquisitions still need to make financial sense for the buyer, and for the deals that may appear to be “above market,” or at a cap rate that is overly aggressive for that trophy property, it is important to understand that over time that high-quality community has a better chance of retaining its value, especially if it is in a hard-to-build-in location where future competition is unlikely, or where the age and income-qualified local population is expected to grow beyond the supply. It is difficult for value to stand the test of time in a secondary or tertiary market where a competitor can build a new community down the street or across town and “steal” your best customers. This is especially true if the physical plant is better and the quality (or level) of care is higher.
Last month we disclosed that Assisted Living Concepts (NYSE: ALC) may have engaged Citi to either sell the company or look into a major recapitalization. The response was deafeningly silent. On the company’s fourth quarter earnings call several days later, not even one question was asked about it, which means that either the analysts were too polite or had no idea (or hadn’t yet read their most recent issue). We now know that a potential sale was more than a “rumor,” but we also know that it has been a tough slog for Citi as ALC is proving to be the enigma we always knew it to be. On paper, there appears to be significant value, especially with the high percentage of properties owned (76.3%) relative to any other public company, the unusually high EBITDAR margin in the fourth quarter (38.3%), which is higher than any other public company, and the seemingly unlimited upside with just 62% occupancy. Apparently, buyers are looking, but like us for the past few years, they just don’t understand how ALC can skirt some of the principles of seniors housing finance and operations.
Because too many things just don’t add up, we believe it will be too difficult for a potential buyer to pay even the current share price, let alone a premium to that price. Therefore, a sale seems unlikely at this point in time, and management would be in a much better position to convince buyers that the census can improve significantly with private pay residents if they can do it themselves. But over the past year, they have added just one-half resident per community, and with only 39 Medicaid-funded residents now in their communities, it would seem to be appropriate to leave them out of any tables in their quarterly reports moving forward. At this point, who cares?
So what is it about Assisted Living Concepts that no one seems to want to like but is trying to figure out? For those who are relatively new to the seniors housing business, the company got its start in the Pacific Northwest in the early 1990s by a founder who was more of an academic at the time than an assisted living operator. The company broke new ground in the IPO market by going public with about five very small assisted living communities and plans to build dozens more, usually between 35 and 40 units in size and in states with assisted living waivers, using the assumption that up to 20% to 25% of their residents would be funded by Medicaid. The company also used the “universal worker” concept. Because ALC’s buildings were so small, employees would have to be responsible for multiple tasks, such as housekeeping, dining room service and maybe activities. In addition, because of the small size, there really were not any department heads. All of this was meant to allow each community to operate as efficiently as possible to enable them to be cash flow positive with the small number of residents, with many of them at the lower Medicaid rate. Overhead had to be low because there were not many residents to cover it.....Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today