Lowering Estimates and Safety Rating, Withdrawing Performance Rating and Price Target
AlerisLife Inc. (ALR), formerly known as Five Star Senior Living, reported a fourth quarter net loss of $10.7 million or $0.34 per share, slightly worse than the third quarter’s loss of $10.2 million or $0.32 per share. I had estimated a $0.15 loss.
The impact of the transition to other operators of 107 senior living communities owned by its affiliate, Diversified Healthcare Trust (DHC), was more evident in ALR’s performance this quarter. Revenues were 3.5% higher than anticipated, but operating expenses were also higher across nearly all line items. The accelerated pace of decline in average revenue per occupied room (RevPOR) is a concern; but management says that it has recently implemented price increases of 5%-10%. While the costs associated with the transition and resetting ALR’s cost base are temporary, there is no evidence yet that ALR will be able to align operating costs to its new lower operating base anytime soon. The company also faces continuing high costs associated with the pandemic, including higher wage costs, which it anticipates will remain elevated for the foreseeable future. Thus, it seems likely now that ALR’s operating losses will continue through 2022 and probably well into 2023.
That conclusion is supported by ALR’s recent announcement in January that it drew down $63 million of a new $95 million term loan facility. Borrowing from DHC’s playbook, the company appears to be taking steps to ensure its liquidity during what is likely to be an extended period of operating losses. The higher interest expense will add to projected 2022 and 2023 losses. Management has not conveyed its rationale for the new credit facility and its expected use of proceeds. It appears that the funds will be used to cover current period operating losses as well as the start-up and capital costs associated with expanding its business. While ALR’s goal of engaging with potential residents early through its Lifestyle Services business makes good strategic sense, it may be challenging and potentially costly to execute, given the low barriers to entry and existence of well-established competitors.
With losses now projected for 2022 and 2023, ALR’s current share price is probably best viewed as a call option on a return to profitability in 2024 and beyond. Given the multiple variables at play and the recent string of large losses and negative cash flows, I have decided to lower my safety rating on ALR’s stock by a notch and withdraw my performance rating and price target until there is more clarity in the outlook.
This is a summary of my recent update report on AlerisLife, Inc. (ALR). For a copy of the report, give me a call.
April 1, 2022
Stephen P. Percoco
Lark Research
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