To Be Public Or Not

There are a lot of people who do not believe seniors housing and care companies should be publicly traded. It is not appropriate to try to manage quarterly revenues and profits when you are taking care of older, frail residents. And don’t forget the earnings disruptions that can be caused by new developments and the ongoing depreciation expense if you own your real estate. It is just difficult to please investors and analysts with all the variables, including external ones that you have no control over, or so the argument goes.

And then there is the roller coaster of daily stock prices. Take Genesis Healthcare, as an example. This past Monday, its price plunged by as much as 19% on trading volume four times heavier than the average, but based on what? The New York Times article on understaffing at SNFs? The report that Sabra Health Care REIT had closed on its sale of another portfolio of Genesis-managed facilities, a transaction that was already in the public domain? All this does is lower Genesis Healthcare’s annual rent obligation. A rumor slipped into the market? And then the next day its shares jumped back up by more than 8% in early trading.

Another argument against being public is that with the heavy costs of depreciation, interest expense, rent expense and development expense, the companies in our universe can’t make a GAAP profit. To that we say, Poppycock. All one has to do is look at National HealthCare Corporation and The Ensign Group, with vastly differently capital structures, to put that theory back in the cellar. And historically, the former Healthcare & Retirement Corporation and the former Manor Care (see lead story in the July issue of The SeniorCare Investor), both with heavy depreciation expenses as well as development pipelines in the first half of their corporate lives, never had a problem posting GAAP profits. That is, until they merged, were bought, and then all the owned properties put up for lease and Medicare Advantage did its subsequent damage.

One very persuasive argument against being public, however, is that at times you are forced to deal with hostile shareholders who want you to do something for the short-term benefit of shareholders that may not be in the long-term interests of the company. The problem is that management is accountable to its shareholders, regardless of their long- or short-term viewpoints. This sometimes runs counter to what is good for the company, its employees and its residents.

Despite all the negative attributes, with the right capital structure, a long-term plan for growth and the ability to adapt, there are many advantages to being public, especially if you frequently need capital. And despite the administrative costs of being public, creditors don’t mind it either. But if it is the ability to generate sustainable earnings growth that keeps you away from the public markets, just take a look at the ones that did succeed in the public markets, and why they were able to. It does help to explain a lot of things.



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