Alterra's multipronged strategy.

Alterra Healthcare Corp. has embarked on several initiatives aimed at strengthening its capital structure and cash flow. The Brookfield, Wisconsin-based assisted living chain, whose stock at press time was trading at $7, off its 52-week high of almost $34, has engaged Merrill Lynch & Co. and Cohen & Streets Capital Advisors, LLC to assist it in obtaining capital from a strategic private equity investor.

To strengthen its balance sheet and cash flow the company is reducing its utilization of joint venture development arrangements and is acquiring ownership of 19 residences currently operated as leased assets.

And consistent with Alterra's prior announcements regarding a reduction in development activities, the company will record a one-time, nonrecurring charge in the fourth quarter of 1999.

Alterra has already begun negotiating the terms of a minority private equity-linked investment with a strategic financial investor. While the company declined to disclose the name of the investor, it expects to complete negotiations and announce a transaction in the first quarter 2000.

Industry analysts are not surprised by this announcement. "With so may stocks trading under water," says Raymond James analyst James Kumpel, "the only people looking at assisted living are the vulture investors, i.e., the ones that didn't get burned in the public market (see sidebar)."

Concerning its announced reduction of joint venture development activities and plan to acquire leased residences. Alterra notes that while the joint venture arrangements have provided substantial fee income and reduced the impact on earnings of startup losses associated with a large volume of newly opened residences, future cash flow and liquidity will be improved by capturing 100 percent of the revenue operating cash flow from more of its residences.

Accordingly, Alterra has agreed to acquire ownership of 19 stabilized residences currently leased from a healthcare REIT for a total of $62 million. The residences, all of which it currently operates, have occupancy of 97 percent, generate annual revenues of $25 million, and produce residence level earnings (before interest, taxes, depreciation, amortization, and rent) of $11 million, representing a 44 percent operating margin.

Alterra closed on seven of the residences, representing $31 million of the investment, in December, and was expected to complete the balance of the transaction by the end of January.

"This transaction will allow us to realize an increase in annual cash flow from this portfolio in excess of $1 million," President and CEO William Lasky said in a prepared statement. "Despite tight credit market conditions, we expect to finance 100 percent of the investment with mortgage financing."

Commenting on fourth quarter earnings, Alterra announced that it will be recording a one-time charge of $38 million to $43 million pertaining to a previously announced strategy to reduce its development activities and focus on stabilizing its core business operations. Components of the charge include

* The write-down of carrying costs of development sites.

* Costs associated with the planned reduction in development activities and the discontinuation of operations of its wholly owned construction subsidiary.

* write-off deferred financing costs associated with construction loan credit lines that will not be fully used.

"The steps we are pursuing," Lasky said, "are focused on strengthening the company's balance sheet, improving cash Flow, maximizing the value of our significant asset base, and, in conjunction with the private equity transaction, being in a position to consider selective acquisition opportunities."

Lasky noted that while some of these initiatives would reduce near-term earnings per share, it will be offset by the "growing strength of our in-place operating business in combination with increasing our ownership of our operating residences will generate revenues exceeding $500 million for 2000." Still, notwithstanding the charge, Lasky said the company anticipates incurring a pretax loss in the fourth quarter.

Frank Morgan, an analyst with J.C. Bradford, says Alterra's move reflects a trend among assisted living companies to "shore up balance sheet, focus on existing operations, fill up capacity, and take advantage of acquisition activity."

Adds Kumpel: "Alterra is unwinding the very financing structure that, by artificially goosing earnings, was their undoing. They're buying out their grey boxes and focusing on operations--a theme that started last fail when Sunrise Assisted Living, American Retirement Corp., and Assisted Living Concepts began puffing back a bit."

VULTURE CULTURE

Alterra is not the first long term care company to turn to a strategic private equity investor to help it out of the financial quagmire created by the exodus of Wall Street investors from the industry. While the beleaguered nursing home sector remains unattractive even to "vulture investors," as some analysts cynicalty call the type of capital source Alterra is courting, a number of assisted living firms have booked up with strategic investors in recent months. Following are some notable examples.

* Capital Z Partners made a $100 million investment in Brookdale Living Communities.

* Walton Street Managers accumulated a 9.6 percent stake in American Retirement Corp.

* Balanced Care Corp. shareholders approved a $16.8 million investment by an investor group led by the Reichmann family.

* Emeritus announced a $40 million strategic investment by Saratoga Partners.

* Greenlight Capital filed to report holding an 8.8 percent stake in Assisted Living Concepts.

* FRR Investments, another investment vehicle of the Reichmanns, new holds a 6.6 percent stake in Sunrise Assisted Living.

SOURCE: RAYMOND JAMES & ASSOCIATES, ST. PETERSBURG, FLORIDA

LEADERS AND LAGGARDS

How industry stocks fared from 12/1/99 through 12/31/99

The end of the worst year in memory for the long term care industry is over. December went out with a whimper, with the weakest operators trading at around a dime a share. While strategic investors took another look at the fallen angels in the assisted living sector--bringing a ray of hope to this beaten-down segment. Meanwhile, the winnowing of investment options for nursing home investors is essentially complete, with Beverly and Manor Care the only possible choices.

 Company                                        Gain/ Closing
                                                        Loss  Price
Assisted Living Concepts   +36.0% $2.13
(ASE-ALF)
CareMatrix                 +21.2% $2.50
(NASDAQ-CMDC)
Alterra Healthcare Corp.   +9.9%  $8.31
(ASE-ALI)
Integrated Health Services -69.2% $0.13
(NYSE-IHS)
Mariner Post Acute         -44.0% $0.07
(OTC BB: MPAN)
Vencor                     -41.9% $0.09
(OTC BB-VCRI)
Company                                             Key factors
Assisted Living Concepts   Analyst forecasted enough cash to sustain
(ASE-ALF)                   company through third quarter. Greenlight
                            Capital took on 8.8 percent stake.
CareMatrix                 Stock fluctuated between $2 and $3 due to
(NASDAQ-CMDC)               the absence of material information and
                            many shareholder suits.
Alterra Healthcare Corp.   Similar to 1998, active trading in the last
(ASE-ALI)                   three days of the year sent stock price
                            up 30 percent from its December 28 level.
Integrated Health Services Shares fell as NYSE announced it would
(NYSE-IHS)                  delist stock and IHS said restructuring of
                            debt would render its equity worthless.
Mariner Post Acute         On the brink of bankruptcy, shares slid
(OTC BB: MPAN)              as equity holders rushed for the exits.
Vencor                     From a high of $0.27 in October, shares
(OTC BB-VCRI)               trailed off as speculators in bankrupt
                            operator all but gave up.
SOURCE: RAYMOND JAMES & ASSOCIATES, ST PETERSBURG, FLORIDA.