Aleris Life- “ALR” (F/K/A Five Star Senior Living – “FVE”)
32.6mm s/o * $1.13 = ~37mm mcap
Debt 67mm - Cash 83.5mm = ~22mm EV
Aleris Life is a simple hidden asset play: untapped real estate value. There is no crystal ball the duration it will take for management and the majority shareholder (DHC/RMR) to unlock this value but investing in a real asset trading for a penny in the public market but worth a nickel+ in the private market seems well worth the wait. IR has been open to the fact they’ve received offers and this has slowly become a non-core part of the RMR/DHC story, and we believe its only a matter of time till the nut cracks.
Full disclosure – ALR is part of the (in)famous RMR/Portnoy family web with a checkered relationship with public shareholders, inter-company relationships and may not move rapidly to sell assets making this investment likely suitable for SMAs or PAs with lots of patience.
ALR’s history is not a pretty read. rookie964’s Jan 2020 write-up highlights why the company never succeeded operationally and needed to consistently pivot. A recent operational review (anticipated removal of 14mm in annual G&A expenses) and a CEO change (2Q22) is more noise and cause for more cash burn as management postpones the inevitable and decides to unlock real estate value.
ALR owns and operates (”O&O” - OpCo and PropCo) 20 independent and assisted living (“AL/IL”) facilities consisting of ~2,100 units in NC, NJ, IN, AL, etc with effectively all private pay residents. The rest of the P&L consists of a senior living management company servicing a RM affiliate REIT that holds a 30% share in ALR (“DHC”) pocketing 5-6% of revenue and outpatient physical therapy centers. All free options but not something we attribute significant value towards.
ALR’s O&O facilities are back at 75% occupancy with RevPar ~$2,550+ and RevPOR ~$3,500+ (in-line with industry). AL/IL facilities are less clinically and operationally intensive and are more like multi-family than senior nursing facilities. In the private markets, well-run AL/IL assets run at 30% NOI margins with value-add levers to pull and a steady customer base (seealtheaexcellent write-up on BKD for industry backdrop) making AL/IL an attractive investment in the senior housing arena.
Although ALR does not break out its residential segment’s expenses between managed facilities and O&O, we can back into near-break-even margins on the O&O residential component with some excess fat driven by excessive Corp expenses associated with legacy ALR, public company costs and RMR (~5mm/yr) as highlighted by the recent Alvarez operational review.
These costs and the operational nature of senior living units offers potential buyers an easy route to profitability. Assets usually change hands on a per bed/unit/pro-forma basis with $150K/Unit as the rule of thumb and are not as tied to trailing NOI numbers as other RE sectors.
In Jan 2022, the company entered a credit agreement of 95mm (63mm funded upfront) with 14 of the 20 O&O facilities serving as security, and 5 properties fully unencumbered (~500 units likely worth >50mm)! We find this agreement extremely excessive and haven’t been able to receive a satisfactory answer from management other than the cursory “We need to maintain our facilities standard.” Although concerning and a drag on potential timing to unlock value, our thesis is not built on management’s ability to execute but on real assets that will eventually have their true value unlocked.
Owned & Operated Units:
~$2,550 * 12 * 2,100 units = 65mm annualized revenue
NOI margin 30% (based on prvt market experience and public peers) = ~20mm NOI
Cap Rate of 8-6% = 250mm-333mm
ALR currently has 67mm debt and 84mm cash, so we’ll assume EV=Mcap
Per Unit: 120K-160K
Per share: $7.60-$10.20/share
For conservatism we’ll remove any credit for cash on the BS. Residential owned and operated communities have run between break-even and cash burn ~$3mm/Q over the past few quarters and there is always the potential management spends significant CapEx across the portfolio (Even if the company puts in $10K/unit to upgrade an arguably dated portfolio, that would only be ~$20mm across the entire owned portfolio)
Equity Value at 8-6% cap: 180-265mm
Per share: $5.50 - $8.10
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
RMR realizing they stand to benefit from unlocking RE values