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.