Last Friday, AlerisLife management announced that the company is being sold to another firm led by Managing Director and Board Chair Adam Portnoy.
The company’s board has agreed to sell the company to Portnoy’s firm, ABP Acquisition, for $1.31 per share in cash, or approximately $43.8 million. With the sale, AlerisLife will be taken private — a move that “will allow us to enhance our focus on operational excellence, and put us in the best position to successfully deliver on our business and mission,” according to CEO Jeff Leer.
For AlerisLife and Portnoy, the move has some advantages, with the most obvious one being that the company will no longer have to report its financial details to public investors as it focuses on operational turnaround.
But I also think the move is a cautionary tale for other public senior living companies or those exploring going public in the future, while also underscoring current market dynamics in a time of rising interest rates and high inflation, with operating costs going up.
In this members-only SHN+ Update, I analyze the recent news and offer key takeaways, including:
– Why the sale calls into question senior living’s role on the public market
– What the transaction indicates about senior living finances and operations today
– How Portnoy and the RMR Group have influenced the company’s arc over the years
Analyzing senior living’s role in the public market
One need only look at the downward trajectory of AlerisLife’s stock price over the last nine years for evidence that the company has not been on the right path. But in my mind, the requirements of managing a publicly traded company are not always compatible with senior living operations, and that is partly why the AlerisLife saga played out as it did. Senior living operations are often measured in inches, not yards. But for investors, it is a quarter-to-quarter game. That can lead to a mismatch in expectations.
At the same time, senior living is a nuanced business with many moving parts, and executives of public companies have voiced frustration to me over the years that operational success can be hard to convey to investors.
When I first learned of the AlerisLife news, I was not surprised — in our 2023 trends outlook, I predicted that an operator would go private this year. Given rumors of a potential sale of Brookdale Senior Living (NYSE: BKD), I would not be shocked if two or more companies went private this year.
This outlook reinvigorates debate over whether senior living operators are fundamentally a bad fit for public markets. I’m certainly not the only one pondering this question.
The recent AlerisLife news “begs the question whether the senior housing business is suitable for the public market today,” Stifel Analyst Tao Qiu told me.
But Qiu still sees a need for publicly traded senior living companies, and he thinks the industry deserves a spot on the market given it is capital- and growth-intensive.
The problem in his eyes is in the way many of today’s publicly traded companies debuted on the market. Many companies came in with high leverage, and further used debt over the years to acquire competitors.
“This worked great for equity owners when fundamentals are moving in the right direction and the cost of that leverage is low — indeed, in the earlier part of the last decade, stockholders were happy,” Qiu told me.
Then came the Great Recession in 2008, when landlords and debt holders accrued much of the value in those communities, leaving little for equity holders. While the challenges of the downturn eased in the years that followed, Qiu said equity holders have not forgotten about that period.
“Now that interest rates are rising, and labor is rightfully taking out a larger share of the revenue, I think equity holders are grappling with the reality that more speed bumps are ahead for them to get a return on their investment,” he said.
There also aren’t too many senior living operators with the capital needed to weather the industry’s sizable near-term challenges, and many are unable to raise capital in the public market at attractive levels to fund their next growth push or evolution.
“In this context, it makes sense for some to exit the public market, recapitalize the business and rebuild the business when private capital is abundant and still relatively cheap,” Qiu said.
Meanwhile, other capital providers such as the industry’s big REITs, Welltower and Ventas, are flexing their balance sheets and cost of capital to stay active on the public market. Qiu said REITs have expanded the RIDEA footprint “dramatically” through the pandemic, and that they stand to become de facto operator proxies in the public market given new flexibility to self-manage certain owned communities.
“Having said all that, I’m hopeful we will have more public operators to cover in a few years’ time when the tsunami everyone’s been waiting for is finally here,” Qiu added.
Though I am somewhat biased in my profession as a journalist, I share Qiu’s hope that there will be more public senior living companies in the future given the transparency they bring.
But as hopeful as I am, I also see the disadvantages of such a move and believe the industry will look at AlerisLife and other examples as reasons to stay out of the public market.
Too close for comfort with RMR
Some of AlerisLife’s woes have been shared by other public operators, but there are also particular circumstances that have created additional and sometimes self-inflicted challenges for the company, notably its close ties to RMR Group.
AlerisLife’s history as an operator dates back to 2000, when it was founded as an operator subsidiary of Senior Housing Properties Trust, the REIT now known as Diversified Healthcare Trust, also an arm of RMR.
A year later, AlerisLife — then called Five Star Quality Care — spun off into its own company and began trading on the former American Stock Exchange, which was ultimately acquired by NYSE Euronext.
The company’s first CEO was Evrett Benton, who helped devise and lead a pivot from skilled nursing to private-pay senior living. During his tenure, the company became one of the largest operators in the nation. In 2011, he left the company to found Stellar Senior Living, which he now leads with his son, Adam Benton.
Current Sona Senior Living CEO Bruce Mackey, who started with the company in 2001 as CFO, picked up the torch after Benton as president and CEO. The company during this time clashed with some of its investors over its external management.
Mackey stepped down in 2018 after leading the operator for seven years. The company’s next CEO was Katie Potter, who first joined the company in 2012 and was EVP and general counsel before she took the reins at the start of 2019.
Potter helped navigate the company through troubled waters. When she took over, the company issued a “going concern” warning amid financial challenges. Not long after, the Covid-19 pandemic struck.
In 2021, the company’s portfolio shrunk by 108 communities thanks to a major lease restructuring with Diversified. At the time, the goal was for the company to focus on larger communities and growing its ancillary services, like its Ageility rehab clinics.
In 2022, the operator rebranded from Five Star to AlerisLife, and a few months later Potter stepped down. She was succeeded by current CEO Jeff Leer.
Under the direction of Barry and now Adam Portnoy, RMR has tightened its grip on AlerisLife. And I would not be the first to wonder whether management could have made other decisions over the years to have forestalled the pivot from public to private.
In 2015, Senior Star offered to buy the company’s portfolio in a $325 million offer. At the time, Senior Star co-founders and then-activist-shareholders William and Robert Thomas argued such a sale would unlock considerable value for the company’s shareholders.
The brothers, who held a combined 7% of the company’s stock at the time, believed RMR was not acting in good faith when it rejected an offer to buy a larger stake in the company in 2016 in favor of a different tender offer from then-Managing Director Barry Portnoy.
The Thomas brothers are not the only ones who have argued over the years that RMR could have done more to unlock its share value through sales and investments.
In recent conversations on the topic, I have heard that while the $43.8 million tender offer from ABP represents an 85% premium over the company’s 30-day average share price of 71 cents, it still potentially undervalues the company’s communities and operations quite a bit.
If being a publicly traded senior living company has led to some predictable challenges, external management structures like those RMR has in place with AlerisLife and Diversified are even more predictably troublesome. Within the senior living sector, another example can be seen in New Senior, the REIT that was externally managed by Fortress; that arrangement led to shareholder discontent over perceived conflicts of interest, and New Senior eventually internalized management before being acquired by Ventas.
While I see the AlerisLife saga is a cautionary tale, perhaps the most telling perspective is that of the company’s co-founder and former CEO Evrett Benton. In a 2015 interview with SHN, he described several challenges to being public — not only shareholder pressure, but various ways in which CEOs are hampered from being effective leaders.
And when asked if he would ever consider taking Stellar public, he was unequivocal, saying, “I would never do that again.”
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