Description

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

Summary:

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.  

Background:

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 (see althea excellent 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.

Owned Portfolio

Debt

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.

Valuation

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

Upside: ~6-8x

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

Upside: 4.5-6.5x

Catalyst

RMR realizing they stand to benefit from unlocking RE values