Four weeks ago, when we wrote that Assisted Living Concepts was just too cheap to ignore when it briefly dropped below $5.50 per share, we wondered whether anyone was listening (or reading).  Well, someone has made some serious money, because since our comments in late March and our lead story in the April issue of The SeniorCare Investor, the stock has soared, hitting $7.56 per share today, or 38% higher than when it dipped down to $5.46 per share on March 26.  Can it go higher?  Probably, but now it will be more dependant on what the company’s first quarter results look like.  If overall occupancy has declined since the end of last year, and if the private pay census has not improved, then we would expect a sell-off.  But then the whole cycle could begin again, with money to be made by all!      

It was bad enough when Haven Healthcare, operator of 25 skilled nursing facilities, of which 15 are in Connecticut, filed for bankruptcy protection late last year, but a second local chain also filed for bankruptcy protection a few weeks ago, Marathon Healthcare.  This company is much smaller, with just six nursing facilities in Connecticut and one in Massachusetts, but it was the Massachusetts facility that was causing most of the problems for Marathon.

According to one report, $4.2 million had been “drained” from the Connecticut facilities to cover the losses at the Springfield, Massachusetts facility, which Marathon stated they planned to sell.  Now we hear that the facility will be closing no later than June 10 because negotiations with a potential buyer fell through.  There has been no word where the 88 or so residents will be going, but if history serves us correctly, the Springfield market has been overbedded and there should be room in other facilities, even though it will be quite disrupting for the residents.  What will happen to the 100-plus employees at the facility is anyone’s guess, other than an unemployment check for the immediate future. 

Marathon paid about $2.5 million for the Springfield facility two years ago, but we don’t know what the debt on the building is and how the lender/lessor will get paid off.  That’s for the bankruptcy court to deal with, but if anyone wants to do a quick deal and has a good relationship with the Massachusetts Department of Health, the time to act is now.  We believe, however, that the Commonwealth will not be too sad to see this one close. 

We remember the days, not too long ago, when various hedge funds would call us asking what we thought about Assisted Living Concepts, and telling us that the stock was too cheap and trading well below replacement cost, and whether we thought the company should be a takeover target. And that was when it was trading between $8.00 and $12.00 per share.  At the time, we disagreed, and did not believe the stock was “cheap” at those levels.  But we had a “bogey” number in mind, a number that, even in this market, would have to get some of those hedge funds to do the math again.  And in our mind, that irresistible value was when the shares dropped below $5.50 per share. 

We have been waiting……and waiting as the shares flirted with this very low value, actually hitting exactly $5.50 on March 18, before increasing slightly.  But today, the price finally dropped under our number, hitting $5.46 per share.  Did our phone ring?  No.  Are the number-crunchers hard at work?  Probably not.  Should they be?  Probably.  Where are the speculative buyers and what should the company be worth?  Stay tuned for the April issue of The SeniorCare Investor.        

At long last, and just before its shares were going to be de-listed, Sunrise Senior Living filed its 2006 10-K, which included revised numbers for 2005 and 2004.  It will still be difficult to value the company until more recent numbers are released, and even then it will not be easy.  One of the things that confused us was that the cash balances in the restated 2005 numbers were significantly lower than in the previously reported financial statements.  We can understand the revenues and expenses changing as the accounting treatment for property sales, development projects and joint venture agreements was changed, but we always thought cash was cash.  I guess we were wrong.

So the good news is that Sunrise’s shares will continue to trade on the NYSE, and they jumped 14% on the news of the 10-K filing, but jumped 43% from the low of $16.27 on March 18 after the company initially failed to meet the NYSE deadline.  Think of that lucky investor who bought at a two and a half year low!  But what are the shares really worth?  They are now trading about where they were before the filing deadline, so investors apparently were not impressed with the 2006 numbers, or else relieved, if they can even understand them.  The net income per share was a relatively low $0.42 for the year, with the four quarters posting earnings of $0.05, $0.98, $0.33 and ($0.94) per share.  Our guess is that no one will be using this for any kind of trend analysis (I know, the GAAP earnings per share is not meaningful for them).  The only valuation attempt we have seen comes from Stifel Nicolaus, which lowered its net asset value (NAV) estimate to about $34 per share from $37 per share, which means the current trading value is at a 35% discount to the NAV.  They have to rely on many assumptions to come to that number, and we may explore those assumptions in the April issue of The SeniorCare Investor, using a little sensitivity analysis. 

The other news that came out was the hiring of Mark Ordan as the Chief Investment and Administrative Officer.  He’s got a great resume, dominated by starting companies or serving as CEO of companies, and then selling some of them.  So…..the fact that in an earlier release it was stated that the Board was working to formalize a CEO succession plan, we have to assume that Mr. Ordan may be that successor, whether to run the company or sell it.  As a former CEO of three companies, Mr. Ordan is probably not used to playing second fiddle to anyone for very long.  And our guess is that this accounting restatement has taken its toll on Paul Klaassen, and that he may be ready for something else.  What that something else may be is anyone’s guess.            

Although many investors believed that a dividend cut was already built into Brookdale Senior Living’s share price, we are not sure they expected a 50% cut in the quarterly dividend to just $0.25 per share.  The irony is that it was fairly foolish to have even pushed the quarterly dividend up to $0.50 per share at a time when the company’s cash flow from operations couldn’t cover it, and wasn’t even expected to cover it until the third quarter of this year.  With the company now focusing on organic growth, the $100 million of annual cash savings will certainly help, even though they may use the cash for a new share buyback program.  The extra cash will also help if the current housing downturn continues and puts additional pressure on occupancy rates at Brookdale’s CCRC campuses and independent living communities.  The bottom line is that the Board reversed what we thought was a decent idea - trying to look like a dividend yielding REIT - but at the absolute wrong time when they didn’t have the cash flow to afford it. So, a tough decision yesterday, but the right one.   

My apologies for my absence from this page during the past few weeks.  Admittedly, there hasn’t been much news, or “fun” news, but that shouldn’t be an excuse.  But the hibernation is over, and the Bear is back from it’s slumber.  I’m not referring to Bear as in the opposite of Bull, nor am I referring to that “other” Bear, which has been in the news of late.  Actually, I still remain somewhat bullish on the senior care industry, partly because the fundamentals are strong, and partly because in an environment where everything else seems to be out of order, the senior care sector is a pretty good place to be, and to put one’s money.  The one caveat is that filling new independent living units is going to be tough for the rest of the year in many markets, and some innovation may be necessary.

That being said, all is not well everywhere.  Take the case of Sunrise Senior Living.  After waiting months…..and months, the final deadline for Sunrise to file its Form 10-K for 2006 with the SEC came and went yesterday, with no 10-K.  The stock dropped nearly 6%, which could have been anticipated with no financial statements.  But today, a lengthy news release was issued, which has put a date of “by April 15″ as the next deadline when we may see the 2006 10-K, with 2007 financial statements by July 31, first quarter 2008 by August 20 and second quarter by September 10.  So, we get to see the 2006 10-K and pay our taxes on the same day.  Great.  The market’s reaction?  As of this writing the shares dropped another 10% and hit a new 52-week low of $19.62 per share.

Investors could not have been happy to read that the impairment loss on the acquisition of Trinity Hospice is now expected to be $50 million, or that the company has suspended all but one of its senior living condo developments, taking a pre-tax charge of $22.3 million in the first quarter of 2008.  Under the category of “strengthening corporate governance,” one interesting item was that the Board has decided to develop a CEO succession plan.  We don’t know if there is anything to read between the lines on that one, although we suspect Paul Klaassen has not been a happy camper trudging to work every day in this environment.  Besides, it always makes sense to have a succession plan, but who that successor would be is unclear.

So, the wait continues, and we assume that shares of Sunrise will be de-listed and trade in the Pink Sheets by next week, although we don’t know the details of that procedure.  One thing that continues to bother us in this whole mess is that the supposed accounting “errors” that are constantly being referred to have been blamed on former personnel of the company who have all been “separated” from the company, but they have not been accused of any actual wrongdoing, or fraud, or cooking the books.  Shareholders deserve an explanation from the Board as to what they supposedly did.  And, after all is said and done, where were the auditors all these years?  Were they blind, incompetent, or both as to what was happening in the books?  And were they “errors,” or matters of interpretation for little used rules in complicated structures?  We don’t know, but as we have said before, this is not rocket science and it should not take this long to provide 2006 financial statements, once they discovered what the “error” was.  Period.     

We waited to post this entry, probably for too long, because the news that Capital Senior Living terminated its proposed acquisition of the 32 leased assisted living facilities from Hearthstone Senior Services is no longer real news, especially for a blog.  Our delay was the result of trying to find the story behind the story, and whether Capital Senior Living management succumbed to the pressure mounted by several large institutional shareholders who thought the acquisition was a big mistake and could even threaten the future solvency of the company itself.  Unfortunately, we didn’t find any good scoop, and management’s explanation that based on the results of subsequent due diligence and lease negotiations the deal was not beneficial to shareholders, may just be what it was and nothing more.

We would like to think that management did not walk away because of the threats from some shareholders, although I am sure the shareholders now believe they have more influence, and will try to use it.  But to handcuff management on every major decision seems to be unhealthy, especially since shareholders are not privy to all the confidential information that management is regarding a particular transaction.  Everyone seemed to congratulate management for its resolve in making the “tough decision” to walk away, but management isn’t stupid, and with nothing to lose (a free peek, if you will), it was worth the time to look at the transaction.  And what some people may not realize, they couldn’t even get into the buildings before the contract was signed, so they really didn’t know exactly what they were buying until after the announcement.  Sometimes, you get a much better feel by giving it the old sniff test when you walk through facilities to see if a) you want to run these particular facilities, and b) if these facilities will really mix well with what you have.  Our guess is that the answer was no and they didn’t think so, especially with the stated lease rates.  Perhaps if the base lease rates could have been negotiated downward management might have continued in the process, but it seems there were too many issues that had to work in Capital Senior Living’s favor for the acquisition to make sense in the final analysis. 

The shareholders, however, remain a little bitter and may still pressure the board to put the company up for sale.  I still think that is a big mistake, because under almost any scenario it is difficult to believe the company won’t be worth a lot more in one to two years.  Selling in a weak acquisition market with the capital markets getting shakier by the day just does not make sense, and never did.       

Don’t get me wrong, I love free press for our publications.  But when a dissident shareholder of a company makes reference to certain things we have said, such as in the January 2008 issue of The SeniorCare Investor, in a letter to the outside director of Capital Senior Living and it is filed with the SEC, we take particular note.  Especially so when they take bits and pieces of what we said to help make their case, but leave out important parts.

West Creek Capital has control over more than 1.7 million shares of Capital Senior Living, or about 6.6% of the outstanding common stock.  Three weeks ago Capital Senior Living announced its agreement to buy the leased interest on 32 assisted living facilities operated by Hearthstone Senior Services.  The transaction will be immediately accretive to the buyer and it gives the company some needed bulk, and we had a generally favorable opinion about the deal, which we expressed in the January issue.  But you would never know that from West Creek’s letter.  We did make reference to the fact that when the original Hearthstone completed a sale/leaseback with Nationwide Health Properties 18 months ago, the initial coverage was a skinny 1.0x, which West Creek repeated.  What they failed to say was that the coverageseems to have increased to 1.14x, based on the first nine months of 2007, and that it is probably higher than that today.  They went on and on about an “underwater” senior position (Nationwide Health’s, we presume), but a positive coverage hardly looks to be underwater to us, especially with $5.0 million of EBITDA after lease payments, and growing. 

It seems that West Creek still wants to see a sale of the company, but the last time we looked, the capital markets are not too friendly to that sort of thing, and we doubt they would get a valuation that would make sense for them, with or without Hearthstone.  West Creek complained about Capital Senior Living’s share price slide since the Hearthstone announcement, but it is not hitting 52-week lows like some of its industry competitors.  Capital Senior Living may at some point be a takeover candidate, either if its share price really drops or when the credit markets return to some sort of normalcy.  But for now, accretive acquisitions and organic growth would seem to make the most sense for shareholders, at least for those not looking for a quick buck and exit. 

Regarding the issue of independent directors owning shares of the company’s stock so that their economic interests are aligned with other shareholders, we sincerely doubt that if independent director Jim Moore owned more than the 20,000 or so shares he currently owns his votes would be any different than they have been to date.     

No one is predicting any major M&A deals in the seniors housing and care sector, especially the buyout of a publicly traded company.  But Sun Healthcare Group jumped by 6% yesterday on trading volume that was four times its daily average.  The cause?  Apparently, CNBC made a brief statement that Sun was “in play,” or so we hear.  While it is probably the last in the field of skilled nursing companies that could be a target at some point (if we exclude the two that went public last year), we just don’t see it happening right now and believe the value of the company will increase more after the full integration of the Harborside Healthcare acquisition.  And this is not a sector play, either, as Skilled Healthcare Group and The Ensign Group, the two IPOs in 2007, hit new lows in the past several days, so no one believes anyone may go after them.  Stay tuned.        

EXPERT OPINION: A Conversation with Larry Minnix

Jane Zarem, editor of Senior Living Business, caught up with AAHSA’s  president, Larry Minnix , at their annual fall conference. Here’s what he had to say about AAHSA’s proposal to dramatically alter the way America approaches and finances long-term health care for the elderly.

You can listen to the interview (click here, 6 minutes) or read the transcript below.

Jane Zarem
We’re talking with Larry Minnix, President and CEO of AAHSA, the American Association of Homes and Services for the Aging.

Larry, you’ve said that long-term care needs to be financed entirely differently than it is, or in most cases isn’t, financed today.  What’s the problem with long-term care financing?

Larry Minnix
The problem is that models, largely funded through Medicaid, are not sustainable.  And policy leaders, far and wide, and virtually every study I’ve seen says that [with] Medicaid, which is viewed as the number one payer for long-term care, we can’t afford to do what we’re doing.

Now, if you add to that the hidden burden that families are already sharing around paying out-of-pocket for long-term care, you’ve got a huge need.  The late Senator Claude Pepper and some of his work, his commission, concluded that long-term care is an insurable event.  And we’ve spent the last 30 years not insuring for it.

Jane Zarem
Why is addressing it so important now?

Larry Minnix
It’s so important now because, personally, in families, 80% of the nursing home care goes on in families’ homes.  And if you look at the staggering numbers of billions of dollars of lost cost associated with work, where families take off from work, if you look at the billions of dollars that families are paying out-of-pocket, it is time to address this issue.  We can’t keep letting this problem build.

Jane Zarem
Can you explain the solution that you have in mind, specifically, the National Insurance Trust, and tell us how that would work.

Larry Minnix
Well, the idea, and we’re far from the mechanics of it, is there would be an independent organization that would make sure that we have an actuarially sound approach that cannot be subject to political decisions or ideological decisions or I guess provider-centric decisions.  So the money ought to be put in trust and overseen by a group of people who do not have conflicts of interest about it.  And they need to be able to certify to the nation that there’s enough money coming in to cover the needs of people as they need to tap those benefits.

Jane Zarem
And individuals would contribute to this.

Larry Minnix
That’s right, every able-bodied person that’s working would contribute a little bit every day.  We say, for the cost of a cup of coffee, we can have a financially viable, actuarially sound program that’s fair—people are not excluded because of pre-existing conditions—and is fair in terms of the basic benefits that they receive.

Jane Zarem
How would the trust be administered?  Is it by the government, the federal government, the state government or private insurers?

Larry Minnix
Well, we think it should be an independent trust chartered by Congress, but set aside in a mechanism where the money cannot be politicized or used for other purposes.

Jane Zarem
And what kind of cultural transformation will be required for this idea to be accepted by consumers, by healthcare providers, insurers and the politicians?

Larry Minnix
Well, it’s a great question and that’s what we’re going to try to find out in the next couple of years. What we’re trying to do right now is define the problem, lay out a solution that we know we can back up. And then begin the consciousness-raising by the public. And there are studies and polls and so forth now that show that many, many families in this country understand this problem. They shoulder their responsibility. They don’t have the help that they need, but they don’t complain much. So what we want to do is tap into that experience to say, “Wait a minute, there’s a way to deal with this.”

It plays positively into the spirit in America of responsibility for self and family. So that’s very positive. It plays into our values about doing things in a fair and just way. It plays into our values about how communities want to take care of their own. And it plays into our self-determinism that we all have of “I want to live at home. I want things done my way.”

So we think the plan plays into everything that’s positive about the American spirit. Then you have to separate out anyone who’d say, “Oh, well, this is … ” and put some kind of characterization on it that it’s not.

So in the next couple of years, we want to get these issues on the table, in the national consciousness.

Jane Zarem
Okay, thank you, we’ll keep our eyes open for some positive activity on this in the near future.

Larry Minnix
I hope you will keep covering this issue. One of the ways we’re going to get it to the national consciousness is if people like you will stay tuned to it.

Jane Zarem
Okay, thank you very much.