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— Analysis —
 We refer to it as "the" recession, but really, every sector gets its own. And it looks like the $27.2 billion for-profit senior housing industry is in for a doozy. With homes tough to sell and retirement accounts beaten down, retirees have less money to move into senior housing. Meanwhile, the operators are highly leveraged, with lots of debt that needs to be refinanced and the credit markets still mostly closed to them. The two biggest, Sunrise Senior Living Inc. and Brookdale Senior Living Inc., are under strain, especially Sunrise. Share prices have fallen dramatically. All of which leaves Granger Cobb, president and co-CEO of No. 3 operator Emeritus Corp., in surprisingly good spirits. "We're very optimistic about the opportunities this year," he says. "We feel we're in a great position." He adds with a laugh: "We hope the investment community gets as comfortable as we are at some point."
Cobb's sunny outlook is a reminder of how a downturn can create winners and losers in a sector, with the sorting out often accomplished through deals. It's a phenomenon worth exploring, especially in an industry as close to the eye of the financial storm as this one. It isn't that Emeritus is immune to the trends. Occupancy in the 302 communities it operates in 36 states was flat in the fourth quarter of 2008 compared with the third. Although that passes for good news these days, shares in Emeritus ended January at $8.27 after having neared $40 in June of 2007. But in an industry with a roller-coaster history, a variety of business models and a range of often-opaque financial arrangements, Emeritus seems to be doing something right. In December it was able to close on the $62.5 million acquisition of five communities it had been leasing from Ventas Inc., a healthcare REIT. Cobb looks forward to more such deals and to taking advantage of the turmoil in this highly fragmented business. Emeritus has several things going for it. One is its concentration on assisted-living and dementia-care facilities, the middle tier of senior housing. Independent living, the first tier, is more recession-sensitive, since customers usually have to make a big up-front payment to get in. Skilled nursing, the most care-intensive tier, is more dependent on insurance payments, mainly Medicaid but also Medicare and HMOs. Then there's the operational strength Emeritus has achieved thanks to the acquisition in 2007 of Summerville Senior Living Inc. for $257 million. Cobb was Summerville's CEO, a job he got in 2000 after the founders overexpanded and Apollo Real Estate Advisors, their biggest investor, replaced them. He led a turnaround, developing a strong operating model. In a few years Summerville's high occupancy rates and strengths in lead management and patient assessment caught the eye of Dan Baty, CEO of publicly traded Emeritus. He struck the deal with Apollo, which became the largest shareholder in Emeritus; Cobb came in as co-CEO and spent the next year converting the Emeritus properties to the Summerville systems. Thus Emeritus, while not profitable, entered the recession with healthy cash flows. Thanks to the extension of a $21.4 million note in October and the refinancing of $36.3 million in mortgage debt in December, it has no material debt maturities for the next three years, enabling Cobb to think about growth tactics. Many competitors can't say as much. In December Emeritus began leasing and managing 11 communities from HCP Inc., which moved them over from Sunrise. Emeritus has an option to buy after five years. Emeritus is also managing properties that have been foreclosed -- but not just for the fees. "We view it as an opportunity to get a free due diligence look at properties," says Cobb. Of course, the recession poses risks for Emeritus. For one thing, it's pushing some independent living operators further into assisted living, according to Michael Hargrave, a vice president at the National Investment Center for the Seniors Housing & Care Industry. And Emeritus' low share price could signal that investor discomfort with the industry won't be short-lived. Being known as an arena for financial cleverness (Brookdale, for example, is majority-owned by Fortress Investment Group LLC) is not a great selling point these days. Still, some big trends favor the industry: demographics, key markets still underpenetrated, little new supply being built at present. Growth seems certain. The question, NIC's Hargrave says, is: "Can the industry manage it properly?" Granger Cobb's answer is yes. |
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