Hindsight is usually 20-20, and in the case of Five Star Senior Living, looking back two years, the company should have accepted the offer from Gemini Properties and the Thomas brothers of Senior Star, who offered to pay $325 million for 33 owned Five Star communities. They had already accumulated more than 6% of the company’s stock, an investment they most likely regret. But management, and really the then-controlling shareholder, the late Barry Portnoy, wanted nothing of it. In fact, Mr. Portnoy announced a tender offer to buy 10 million shares of Five Star at $3.00 per share to enhance his controlling position. That’s an investment where his estate would like a re-do. The Gemini/Senior Star group had offered $3.45 in a separate tender offer that did not get the time of day from the Board.

If they had sold the properties to the Gemini/Senior Star group, Five Star would have been left with leases that would soon be underwater, but with a pile of cash on the balance sheet. Even without the sale, the company’s value has continued to deteriorate ever since the offer for the properties. They have since sold a few properties, and now the company owns 20 communities with everything else leased or managed.

In the third quarter earnings announcement, they issued the statement that because of challenges negatively impacting revenues, expenses, cash flow and operations (is there anything else?), it raised “substantial doubt about Five Star’s ability to continue as a going concern.” That is as close to the kiss of death as you get. The stock had already been below $1.00 per share for months, prompting a future de-listing notice, and this latest news sent shares plunging nearly 50% on the morning of the announcement. They recovered a bit to close down “just” 34% at $0.4148 per share.

The “going concern” statement is a bit ludicrous, and perhaps more of a technicality, because they still own 20 communities with 2,108 units which could net them between $200 million and $300 million. And that is net since the company has minimal debt on the books. This could fund operating deficits for several years, not that it would be a good business plan.

The market cap of the company is now just $20 million. This should be an activist shareholder’s dream, except it is too small and there is no liquidity in the stock. And the Portnoy family still controls all decisions, so what’s the point? The Thomas twins learned that the hard way. In addition to the 20 owned properties, Five Star leases another 188 properties (mostly from Senior Housing Properties Trust) and manages another 75 communities. The managed properties can’t lose money for Five Star, and with the owned ones having no debt, it has to be the leased portfolio that is putting them into a cash flow and operating squeeze.

Selling off properties is a short-term solution to generate cash to continue to operate and maintain their buildings, but it is not a strategy and will have longer lasting negative results. Perhaps letting the share price go so low is a longer-term ploy by the Portnoys to take the company private at a much lower price than what their basis is. Or perhaps to merge it into SNH and turn the seniors housing leases into a RIDEA joint venture. Who knows?

Apparently, there has already been talk of selling or transferring the leased SNFs to another operator, which could lead the way to a few possible solutions. But they are solutions for the controlling shareholder, not for the rest of the shareholders, is our guess. Either way, it can’t be fun times for CEO Bruce Mackey. One telltale sign of problems, or disinterest, was that the earnings call lasted all of 15 minutes with no questions. Hmmm.

Five Star’s operating performance was similar to the rest of the industry: occupancy gains sequentially but not year over year. One difference was the skilled nursing portfolio (29 leased facilities). There was a sequential gain of 220 basis points in occupancy to 76.9%, but the year-over-year decline was 320 basis points from 80.1%. Let’s just say they had a terrible first half of the year with a 310-basis point drop through June 30. This company needs to get rid of its SNFs and convert some of those leases to RIDEA JVs, or negotiate lower lease rates, and then see what happens. Otherwise, it is time for Plan B.