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In
the June
2003 issue:
Nursing Home Stocks Soar, M&A Volume Jumps
Nursing home stocks jumped in price during May, ranging from a 7% increase
to a 90% increase for those companies trading above $1.00 per share.
Loosening Medicaid and Medicare purse strings caused investors to take
another look at the beleaguered sector. See page 1
***
Sunrise Q1
Earnings
Fresh
from closing its acquisition of Marriott Senior Living Services, Sunrise
annoyed investors with the presentation of its first quarter earnings
results. See page 2
***
Acquisition
Market
May was the
biggest M&A month in several years, and Sunrise announces its largest deal
ever. See page 4
***
Other ALF
Deals
Assisted
living sales continue to dominate the market, with more than 10 reported
this month. See page 5
***
***
Skilled
Nursing Market
There is
increasing SNF activity, but for all the wrong reasons. See page 9
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The SeniorCare
Investor |
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Nursing Home Stocks Soar,
M&A Volume Jumps
Over the past 12 months, the
question remained: Has the
industry hit bottom yet? A market "bottom" became a moving target, with
some investors looking at stock prices, others acquisition multiples, and
still others the availability of capital. At several points, it looked as
if we were finally emerging from the depths of despair, only to be tricked
once again. A year or so from now, last month may be described as the time
that the nursing home industry started its climb back up to
respectability, at least in terms of investors’ perceptions. Or will it
become just another illusion for an industry that desperately wants to
turn the corner?
In May, every publicly traded nursing home stock posted
a gain, something that has not occurred for many years. Unfortunately, the
price surge had little to do with first quarter earnings results, which
were reasonable given the operating environment, but not particularly
noteworthy. The only explanation is that investors are focusing on some of
the news emanating from the nation’s capital, but given the fickleness of
our legislators, this may be a dangerous path to take, at least for
investors.
Investors are counting on some help in both the
Medicaid and Medicare programs to boost cash flow of the nursing home
industry. The Centers for Medicaid and Medicare (CMS) recently announced a
nearly 3% increase in Medicare rates by the end of the year, and investors
are hopeful that there may be more coming. With the signing of the recent
tax cut, however, and the resulting higher budget deficits, increased
Medicare spending, if any, will most likely go towards hospitals,
physicians or (gasp) a prescription drug benefit.
The $10 billion of additional funds going to state
Medicaid programs, although not specifically targeted for nursing
facilities, is also viewed as a positive sign for an industry that is more
than 65% occupied by Medicaid-funded residents. The budget deficit crisis
at the state level has been more worrisome to providers than Medicare,
because higher losses on Medicaid residents could threaten the viability
of many operators who may decide it is not worth staying in the business.
We have already been hearing that without some relief, this may start
happening later in the year on more than just a random basis.
Nevertheless, investors have obviously made their
sentiments known, and perhaps they have more faith in CMS than providers
do. After trading in a range of 10% on either side of $2.00 per share
since mid-January of this year, Beverly Enterprises (NYSE: BEV)
jumped by 90% in value in May, hitting its highest levels since last
summer. We spoke to many industry professionals since last September who
were snatching up BEV shares at levels between $1.60 and $2.25 per share,
and now their faith has been rewarded. Some profit-taking, however, may
put a halt to any further price increases in the short term.
Just behind BEV was Mariner Health Group (OTCBB:
MHCA), which rose by 60% to $4.40 per share, and Kindred Healthcare
(NASDAQ: KIND), which jumped by 32%, reaching its highest levels since
last October, when the company announced lower earnings because of higher
liability insurance reserves. And investors may be thinking Sun
Healthcare (OTCBB: SUHG) has eluded a second bankruptcy filing,
bidding up its share price by 245% in May, hitting a recent high of $1.23
on May 30 after being as low as $0.11 per share in mid-April.
The changed sentiment has also helped health care REIT
stocks, with all but one of them posting double-digit price increases in
the past two months. The one exception, Universal Health Realty
(NYSE: UHT), has most of its investments in the hospital and behavioral
health care markets. Perhaps investors have finally realized that assisted
living and skilled nursing cannot be thrown into the same boat, as the SNF
rally had no impact on ALF company stock prices. The one solid performer
was Assisted Living Concepts (OTCBB: ASLC), which jumped by 23% in
May and is now up 62% for the year. This is the kind of performance
Sunrise Senior Living (NYSE: SRZ) management wanted this year, but
through the first five months, it was not to be.
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