Analyst's concerns send assisted living stocks reeling.

February was a stormy month for assisted living stocks. And everyone is hurling thunderbolts at the analyst they say bears responsibility.

"We believe that the stocks are unlikely to be valued on a fundamental basis during this time as news of the impending and likely negative report enters the market," she explained. "It is our obligation to inform investors in a timely fashion."

On February 4, BancBoston Robertson Stephens senior health care analyst Sheryl Skolnick announced she was suspending coverage of four assisted living companies-Alternative Living Services, Balanced Care, CareMatrix, and Sunrise Assisted Living-citing concerns about the potential impact of a Government Accounting Office report on the industry which was due out April 26.

While Skolnick admitted that she did not know exactly what would be in the report, she said there is "an increasingly real risk that regulations could be imposed."

Coming from one of the sector's biggest boosters, the effect was akin to Mrs. Murphy's cow kicking over the lantern. In the first hour of trading following the announcement, the entire sector lost almost a billion dollars in market capitalization. "We dropped $250 million, although we gained most of it back by end of day" recalls Sunrise CEO Paul Klaassen. "Some stocks really got hurt and did not come back."

The Assisted Living Federation of America sought to restore investor confidence by issuing its own statement, calling Skolnick's actions "irresponsible" and an "extreme overreaction and possible misrepresentation of the GAO's and Senate Aging Committee's intention with respect to the upcoming report on our industry."

"There is no news here," said ALFA President Karen Wayne. "The study has been underway for two years and the industry has been working closely and cooperating with the GAO during that time."

ALFA quoted Senator Charles Grassley (R-Iowa), chairman of the Senate Special Committee on Aging, as saying the GAO's objective "is simply to gain a greater understanding of quality and consumer matters. The intent is not to open a door for legislation or regulation."

Committee member Senator Ron Wyden (D-Ore.) phoned Skolnick and told her he wanted to "prevent the kind of overregulation imposed on other areas of health care."

Industry executives also weighed in. Abraham Gosman, chairman of CareMatrix, whose stock fell 22 percent following Skolnick's "no rating," called the report "unwarranted and disturbing." William Lasky, president of AIS, whose stock was down 11 percent by the end of the day, told The Milwaukee Journal Sentinel that the issues raised by Skolnick "have nothing to do with our strong growth and the quality of life for our residents."

Meanwhile, industry analysts were quick to take issue with their colleague. "Volpe Brown Whelan believes investors should maintain their confidence in this sector," wrote health care analyst Andrew MacPherson.

"The prospect of this report is really old news," Prudential Securities analyst Marie Conway said in a conference call.

And Roxanne Cheng, an analyst with Wedbush Morgan Securities, questioned Skolnick's take on the upcoming report.

"After hurting home health and skilled nursing, now the government is going to dump on assisted living? It didn't seem rational, especially corning from a Democratic senator."

Initially, Skolnick stood her ground. In an interview with Martin Bayne, editor of the Mr. Long Term Care Web site, she said: Until a report is out, stock typically weakens ... The gyrations of the health care and pharmaceutical industries from 1992 until the Balanced Budget Act of 1997 are legend."

But on February 22, she did an about-face, reinstating her ratings on the companies she covers-all "buys" or "strong buys." The reasons she gave for resuming coverage seemed more like rationalizations. They ranged from "a renewed effort by the industry to make sure the GAO report is at least neutral, and possibly positive" to "excellent fourth-quarter performance among the larger companies" to concerns that their stock prices are at unreasonably low levels, even giving full discount to the GAO issue."

Klaassen of Sunrise says the moral of the story is that "the analyst who introduces a worry gets more attention than one who is optimistic. About two dozen analysts are positive on the industry, so she stands out."

Leaders and Laggards

How industry stocks fared from 2/1/99 through 2/26/99

February was a disaster for the long term care sector as every assisted living and nursing home stock declined for the month. The Raymond James LTC Index fell 6.5 percent versus declines to the NASDAQ Composite and Russell 2000 of 1.5 percent and 1.6 percent respectively. The biggest shock to the assisted living stocks came in the form of a controversial suspension of coverage by an investment bank's industry analyst based on speculation about the possible contents of a yet-unreleased GAO report on the industry. The termination of the American Retirement-Assisted Living Concepts merger and the implosion of major nursing home operator stocks also served as a negative backdrop for the sector.

Company                      Gain/ Closing
                              Loss   price
American Retirement          -3.0%  $15.94
(NYSE:ARC)



Sun Healthcare Group        -72.8%   $1.38
(NYSE:SHG)


Balanced Care               -67.9%   $2.25
(ASE:BAL)


Assisted Living Concepts    -62.4%   $4.75
(ASE:ALF)



Integrated Health Services  -57.6%   $5.94
(NYSE:IHS)





Mariner Post-Acute Network  -53.9%   $2.19
(NYSE:MPN)






Company                     Key factors

American Retirement         The termination of the Assisted Living Concepts
(NYSE:ARC)                    deal actually helped the stock as investors
                              recognized the company's uniquely visible
                              earnings from CCRCs and senior living
                              networks.
Sun Healthcare Group        Sun announced it expected a significant loss
(NYSE:SHG)                    in the fourth quarter due to PPS and reduced
                              demand for therapy services. Consensus
                              EPS for 1999 dropped from $1.10 to $0.12.
Balanced Care               After a fourth quarter loss of $0.07--$0.19
(ASE:BAL)                     below consensus estimates--the company
                              announced a dramatic slowdown in its
                              growth plan.
Assisted Living Concepts    Restatement of earnings due to a KPMG audit,
(ASE:ALF)                     termination of the company's merger with
                              American Retirement, and the reduction of
                              1999 earnings outlook from $0.88 to $0.40
                              hammered the stocks.
Intergrated Health Services IHS announced it expected fourth quarter
(NYSE:IHS)                    results to come in at $0.30--$0.40 below
                              consensus estimates--due to PPS and
                              reduced demand for contract therapy
                              services. Consensus estimates for 1999 fell
                              by more than $1.00 per share and three
                              analysts downgraded the stock.
Mariner Post-Acute Network  The company reported a first quarter loss
(NYSE:MPN)                    of $0.17, fully $0.17 below consensus
                              estimates, due to a decline in census, PPS,
                              and intense regulatory scrutiny. Mariner
                              also significantly increased its bad debt
                              reserves.


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