The finances of the assisted-living industry haven't exactly been laugh-a-minute in recent years, but last week, the story got downright depressing.
Alterra Healthcare, Milwaukee, provided the first bad news. Charges for defaults on debt and lease payments led to a sevenfold increase in losses in the first quarter ended March 31. Alterra lost $37.6 million, or $1.70 per share, compared with a loss of $5.3 million, or 24 cents per share, in the year-ago quarter. Revenue rose 20.4% to $128.3 million.
The company reiterated its plan to sell 67 of its 481 facilities and 33 parcels of undeveloped land at a pretax loss of $150 million, $2.5 million of which was accounted for in a first-quarter charge. Alterra's defaults on $10.8 million in debt and lease payments in March and April resulted in a charge of $9.6 million.
"They've got some serious negotiating to do," said Stephen Monroe, editor of the SeniorCare Investor, a newsletter published by Irving Levin Associates, a New Canaan, Conn.-based consulting firm. "If they don't, they've got a gun to their head."
Next up was Assisted Living Concepts, Portland, Ore. The company said in its report for the quarter ended March 31
that unless it comes up with $4.7 million for a payment to debenture holders or renegotiates terms by May 31, it "will likely seek protection under Chapter 11." The payment was due May 1, but was unilaterally delayed by the company. Assisted Living Concepts is negotiating with its bank lender to obtain the extra financing. The company, which owns and operates 185 assisted-living facilities, also reported that losses widened for the first quarter to $4.2 million, or 25 cents per share, vs. $3.8 million, or 22 cents per share, in the year-ago period. Revenue was up 11.5% to $36.9 million.
Then Balanced Care, Mechanicsburg, Pa., reported that losses for its third quarter ended March 31 were $9.6 million, or 28 cents per share, or more than double its losses in the year-ago quarter, which were $3.8 million, or 11 cents per share. Revenue was up 11.6% to $13.5 million. Charges of $2.2 million for financial restructuring and $1.2 million for asset writedowns were significant hits, and the company also pointed to higher costs for utilities and insurance at the 57 facilities it operates. For the nine months ended March 31, Balanced Care lost $28.4 million, or 83 cents per share, on revenue of $43 million.
Another company experiencing trouble is Emeritus Assisted Living, Seattle. In late April, Emeritus extended the due date on a $73.3 million mortgage debt by 30 days. If no compromise is reached by the rescheduled due date of May 29, the company has no alternative financing lined up, Emeritus said last week in its quarterly report. If the lender were to foreclose on the 10 properties secured by the mortgage, the company added, that default could trigger other lenders to foreclose on loans securing another 35 assisted-living facilities. Emeritus operates 135 properties in the U.S. and Japan.
The climate for assisted living hasn't gotten worse-it's just the time for the chickens of rapid growth, overbuilding in some markets and high debt levels, to come home to roost, Monroe said.
From 1991 to 1999, the number of assisted-living facilities in the U.S. grew almost 50% to 27,277 facilities, according to the National Investment Center for the Seniors Housing and Care Industries.
"This is something that has been building up for a while," Monroe said. "Some of those large, overleveraged firms are having debt maturing that they can't refinance, given the state of things. That leaves them two options: restructuring or Chapter 11."
Balanced Care's dismal quarter comes as the company is asking shareholders to provide $55 million in a recapitalization and approve a reverse stock split of one new share for each 20 current shares. Its majority shareholder, Luxembourg-based trust IPC Advisors, supports the plan and has agreed to provide a $54 million bridge loan until it can be enacted.
Tom Shinkle, a healthcare securities analyst with Imperial Capital, Beverly Hills, Calif., said Balanced Care's approach could become more common. It can work in two ways: either equity investors become willing to buy deeply depressed bonds or provide other financing, or bondholders agree to exchange their notes for shares. Both approaches aim to keep the company out of Chapter 11, Shinkle said.
For instance, ARV Assisted Living, Costa Mesa, Calif., traded equity to retire debt in 1999 and 2000. In total, ARV gave bondholders nearly 1.6 million shares and $10.6 million in cash in exchange for $42.2 million in bonds, according to the company's last two annual reports.
Even the one company reporting good news, Sunrise Assisted Living, McLean, Va., isn't doing as well as its quarterly earnings numbers might suggest, Monroe said. Net income tripled to $13.2 million for the first quarter, compared to the year-ago quarter, but some of those gains came from asset sales in which Sunrise retains a minority stake in the property and signs long-term management contracts to run the facilities, he said.
"There is some guarded view of what they're doing," Monroe said. "Are you selling off your best assets to help you today (but) will hurt you tomorrow? Opinions on it are mixed." He added that Sunrise still is in a much better position than many competitors, because it owns many more of its facilities than most assisted-living companies, and it has focused on higher-income neighborhoods.
Monroe sees one upside to the bad news: New development has halted, so the properties built in the past few years should start to fill up. "I think in two years' time, it will be a very different situation," he said.