ARV Assisted Living has been getting its house in order
Vita Reed
Not too long ago, companies such as Costa Mesa-based ARV Assisted Living Inc. were among the investment community’s love objects. But then something happened on the way to the retirement home.
Overbuilding and debt combined to sour interest in the sector. Once lofty stock prices fell, and some players, including Genesis Health Ventures Inc. of suburban Philadelphia and Albuquerque, N.M.-based Sun Healthcare Group Inc., sought relief in bankruptcy court.
ARV has sought to quietly rebuild itself. The company counts 57 assisted living homes in 10 states, including nine in Orange County. In the past few years, ARV has paid down debt and sold off facilities outside its core market of California, Arizona and Nevada.
The company also ended a long-running business strategy spat that had it at odds with its major shareholder, an affiliate of New York investment bank Lazard Freres & Co. The two settled their differences in 1999.
For the nine months ended Sept. 30, the company posted a loss before one-time items of $2.7 million, vs. a $6.7 million loss in the year-ago period. Revenue for the nine months was up 4% to $108 million.
The company’s stock has been on an upswing this month but still trades in the 2 range, well below the 20 level of 1996. ARV counted a market value of about $30 million as of last week.
Emeritus Corp. of Seattle, which once launched a failed takeover bid for ARV, also is trading around 2 these days and counted a market value of about $20 million last week. Rival Alterra Healthcare Corp. of Milwaukee trades for less than a buck.
Douglas Pasquale, ARV’s chief executive, said assisted living companies aren’t out of the woods yet.
“The industry has to demonstrate the ability to generate sustained profits and positive cash flow,” he said. “It has to clean up its (capital) structure and not over-leverage.”
To that end, Pasquale said ARV has retired around $49.2 million of $57.5 million in debt.
“If you run a business fundamentally well, eventually you will find value,” he said. “We are primarily in California and the western U.S. We want to be the best-run company out here, with the ability to produce positive cash flow.”
“In the case of ARV, they’re ahead of the curve in fixing themselves,” said Brad Razook, managing director of Cohen & Steers Capital Advisors LLC in New York. “Its issues are well behind it.”
Assisted living’s 1990s heyday “was in retrospect, very irrational,” Razook said. “A torrent of building was unleashed. Companies were racing to get products up.”
That changed when the market became saturated, funding evaporated and a “broad industry-wide financial crisis” set in, according to Razook.
Also, many assisted living companies “were not equipped for the complexity” of dealing with residents, Razook said.
The average assisted living resident is a widowed female in her 80s who needs some degree of help but doesn’t require the intensity of care found in skilled nursing facilities. Because of that, assisted living facilities generally charge around $2,000 a month for rent, compared to around $4,000 or so a month for nursing homes.
The assisted-living sector took a fall because investors didn’t realize that real estate-based businesses aren’t growth stocks, according to Robert Kramer, executive director of the Annapolis, Md.-based National Investment Center for the Seniors Housing and Care Industries.
“A real estate-based business is a capital eater,” said Kramer, whose group tracks the senior housing sector. “The more you grow, the worse you’re going to do income-wise. If Wall Street had come to this realization earlier, it would have saved a bit of strife.”
Pasquale is philosophical.
“In spite of everything, we’re quite optimistic,” he said. “We have cycles. We have to anticipate for them, prepare for them and weather them. All the demographic factors point to a bright future ahead.”
ARV employs around 3,000 people, including 500 in OC.
Its local communities include: Acacia Villa, Fullerton; Lynnbrooke, Irvine; Villa del Sol, Mission Viejo and Chateau San Juan, San Juan Capistrano.
But Pasquale said assisted living facilities have had their share of public confusion with nursing homes, which rely on government money.
Matters weren’t helped, he said, when several large nursing-home companies sought bankruptcy protection in the late 1990s, battered by cuts in government funding.
ARV was started in 1980 and went public some 15 years later.
At that time, industry watchers believed the company was poised to dominate because it was among the first companies to tap the public markets.
Analysts also liked ARV’s experience in building and operating senior housing in California, the largest assisted-living market.
But ARV began to stumble in the late 1990s.
Prometheus Assisted Living LLC, the Lazard Freres affiliate, bought about half of the company for $135 million four years ago. Prometheus pushed for more acquisitions,a strategy that led ARV’s then-managers to question whether the deals were more beneficial to Lazard than to ARV.
While all that was raging, rival Emeritus launched a takeover bid that ARV rejected. Lawsuits were traded and investors rushed for the exits.
In spring 1999, Chief Executive Howard Phanstiel left ARV and was replaced by Pasquale, then ARV’s chief operating officer. Phanstiel now is chief executive of PacifiCare Health Systems Inc. of Santa Ana.
