Alterra Healthcare Corporation

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Alterra Healthcare Corporation

1000 Innovation Drive
Milwaukee, Wisconsin 53221
U.S.A.
Telephone: (414) 918-5000
Toll Free: (888) 780-1200
Fax: (414) 918-5050
Web site: http://www.assisted.com

Public Company
Incorporated: 1981 as Alternative Living Services
Employees: 14,400
Sales: $466.5 million (2000)
Stock Exchanges: American
Ticker Symbol: ALI
NAIC: 623312 Homes for the Elderly

Alterra Healthcare Corporation is the largest operator of assisted living residences for frail elderly and memory-impaired elderly in the United States. It is also one of the oldest companies in this specialized field. The company operates over 450 assisted living residences, spread across 28 states, with the capacity to serve up to 22,000 residents. Alterra’s residences operate under a variety of names, including Clare Bridge, Wynwood, Sterling House, Wovenhearts, and Crossings. The company’s residences are home-like structures, designed to provide an alternative to the more hospital-like model of traditional nursing homes. Alterra’s residences are not in fact nursing homes, and are not regulated as such. Some of Alterra’s residences are dedicated to the care of people with Alzheimer’s disease or other memory-impairing conditions. Others are intended for people typically in their eighties needing some daily assistance from staff for tasks such as bathing or dressing but not the more medically oriented care of a nursing home. Despite a growing elderly population and consistent expansion by the company, Alterra encountered particular financial difficulties in the late 1990s and in mid-2001 made private arrangements with its creditors to restructure and thus avoid bankruptcy.

Filling a Need for Something Different

Alterra Healthcare was started by William Lasky in 1981, under the name Alternative Living Services. Lasky had a bachelor of science degree in psychology and further certification in healthcare administration, and had been in charge of running several nursing homes and a psychiatric treatment center. He then became the regional director for a company called Unicare Health Facilities. Unicare ran homes for the elderly, as well as residential programs for the mentally ill and developmentally disabled. Lasky had seen how the care of the elderly had changed since the federal government’s growing involvement in the nursing home industry in the 1960s and 1970s. Through the Medicare program, the federal government had become the biggest customer of the nursing home industry. The industry was highly regulated, and nursing homes had become uniform. Nursing homes were run on a medical model. They were more like hospitals and less like private homes. Lasky realized the need for a different model of elderly care, especially for people who did not require the degree of nursing care that traditional nursing homes provided. Lasky and his business partners opened what they called an assisted living facility, which was meant for people who needed help with some daily activities, possibly around the clock, but did not need constant medical supervision. The residents were often characterized as “frail” elderly. They did not need home healthcare, as someone with a grave illness might, but they had unscheduled needs that could not necessarily be met by helpers showing up by appointment. From a single building, Alternative Living Services soon expanded into a small chain of residences in Wisconsin. They were built as stand-alone houses or groups of townhouses, and residents or their families paid out of pocket for the monthly fees. Because assisted living facilities were technically not nursing homes, they escaped the federal regulations that dictated much of how a nursing home could be designed, built, and run. Lasky saw his company’s product as almost totally consumer-driven, answering a need that could not be met by the regulation-entwined traditional nursing home.

In 1985 Alternative Living began building a new kind of facility, designed for people with Alzheimer’s or other memory impairment. Such people were often otherwise healthy and mobile, but needed constant monitoring because of their mental state. Alternative Living’s residence for the memory-impaired was the first such facility in the state of Wisconsin. The company grew slowly, and over the next ten years it expanded to 17 facilities in four states. However, Alternative Living was on the verge of a period of rapid expansion. Providing services to the elderly was a growth industry, largely because of demographic factors. By 1990, U.S. Census figures put the number of people in the nation aged 65 and over at 31 million. That number was expected to more than double over the coming decades, reaching an estimated 65 million by 2030. Census experts predicted an even greater percentage increase in the number of people aged 85 and older. From about 2.5 million in 1990, there were expected to be around eight million people aged 85 and up by 2030, and 15 million by 2050. Because of social factors, including the increase in divorce, many of these elderly people were expected to be living alone. Hence the core population Alternative Living aimed to serve was enlarging year by year.

The company was ready to expand. In 1993 it received a capital infusion from two other healthcare companies, the publicly traded Evergreen Healthcare Inc. and Care Living Centers. Evergreen’s parent company eventually owned close to 20 percent of Alternative Living. Fresh with new cash, Alternative Living moved to build new facilities and to buy up others. The company’s revenue was still relatively small, estimated at under $5 million for 1994. The company ran less than 20 facilities in 1995, but by the next year it operated 62 residences in nine states. Alternative Living featured four distinct types of residences, offering different levels of service. Clare Bridge was the name of its facilities for people with Alzheimer’s, and its other lines were called Wynwood, Crossings, and Wovenhearts. The company also acquired other firms in the assisted living industry. It purchased Heartland Retirement Services Inc. in early 1996, and acquired New Crossings International Corp. a few months later. Alternative Living also had many more facilities under development.

IPO and Merger: Mid-1990s

Other companies had also entered the assisted living field. At least in part because of the incontrovertible math of the demographic picture, these companies were attracting investors. At least six assisted living companies went public over 1995 and 1996. Alternative Living had its initial public offering in August 1996, selling its stock on the American Stock Exchange. The company sold six million shares, including a large stake owned by a previous investor, GranCare Inc. The money raised went to retire debt and to fund further construction of new residences. Alternative Living did not have a particularly rosy financial picture for the short-term. It operated at a loss through 1994 and 1995, and even as it solicited investors for its IPO, it expected to continue in the red for at least another year. Yet the assisted living niche seemed hot. The industry as a whole served only a small fraction of the elderly, but brought in around $7 billion annually in the mid-1990s, according to an industry trade group. Revenue overall for the industry was growing at between 30 to 40 percent; consequently, Alternative Living forged ahead with expansion plans.

In 1997 Alternative Living agreed to merge with a Kansas-based assisted living company called Sterling House Corp. Sterling House was around the same size as Alternative Living, with 105 facilities. The two merged through a stock swap, and the new company, still for the time being called Alternative Living, found itself the largest assisted living company in the nation. It now had over 200 facilities in 20 states, with nearly 100 more under development and about 75 more already under construction. This was the peak of Wall Street’s infatuation with nursing home and assisted living companies. Though Alternative Living was still operating at a loss at the time of the Sterling merger, industry analysts predicted soaring revenue. By 1998, the company’s stock was trading at approximately double its 1996 IPO price, reaching a high of $35.25 a share that year.

In 1999, the company changed its name to Alterra Healthcare Corporation. It was running 365 facilities under five separate brand names, and chose Alterra as a unifying banner. The beginning letters stood for “alternative,” and “terra” was chosen for its connotation of firm foundation and groundedness. Around this time, the company was building new facilities so quickly that it claimed to be opening a new residence every 56 hours. But this quick pace led to a perception that Alterra, along with the rest of the assisted living industry, was overbuilt. The boom turned to bust as Wall Street retreated from the industry it had poured some $13 billion into in the mid-1990s. Alterra arranged for $230 million in financing in August 1999, finding a consortium of banks to provide credit for continued building and acquisition of residences. A few months later, Alterra engaged Merrill Lynch and another investment firm to help it put together a deal with private investors.

Company Perspectives:

Since our founding in 1981, the Company’s mission has remained steadfast: to maximize the quality of life and dignity of older adults .

Cutting Back to Keep Going in the 2000s

By February 2000, Alterra’s stock had plunged to just $7. The rest of the assisted living and nursing care sector was also doing poorly, and the company struggled to improve its cash flow. Alterra first moved to buy up 19 residences that it had operated through a leasing arrangement with a real estate investment trust. These residences were almost full and were quite profitable, so it was in Alterra’s interest to quit the lease arrangement and own them outright. Alterra had also developed some of its new residences through joint ventures with other companies. In early 2000 Alterra announced it would cut back on its development of joint ventures and shut down its construction subsidiary. It took a fourth quarter charge of some $38 million to do so. Next Alterra stated it would halt plans to develop some 100 new residences. It would complete what was already under construction, but concentrate most on running the homes it already had. During this same period, the company was hit by a lawsuit regarding charges of neglect at a home it ran for Alzheimer’s patients in Minnesota. Stories of understaffing and neglect circulated in the press, not only about several Alterra homes but about other assisted living residences. These stories often pointed out the lack of federal oversight for assisted living facilities. State laws did cover assisted living, but as Alterra had homes in 28 different states, it had to contend with a patchwork of regulations. Labor costs and liability insurance were both particularly high for the company, just as its stock was falling to less than a dollar. The company posted a third quarter loss of $16.7 million in November 2000, its fourth consecutive quarter in the red. Founder Bill Lasky offered to step down as CEO. He had held the job since 1985. He became vice-chairman of the board, and eventually the CEO post was filled by former COO Steven Vick, who had come over to Alterra with the Sterling House merger.

Alterra brought in $466.5 million in revenue in 2000, an increase of almost 25 percent over 1999. But it still showed a loss of $117.8 million. Even as Alterra’s financial difficulties deepened, Vick believed that Alterra had a sound strategy and a priceless niche. Assisted living was “something that was grass roots, fundamentally built, stick and bricks, by consumer demand and desire to have an alternative to traditional [nursing home] institutions and privately pay,” Vick told the Business Journal-Milwaukee in April 2001. Vick admitted Alterra had overbuilt in certain markets, but insisted that the assisted living concept was here to stay. In another interview, with Contemporary Long Term Care for March 2001, Vick also said, “The reason no one likes nursing homes is because they’re all the same. Assisted living offers ‘31 flavors’.” The business concept was good, and there was no reason to bail out of the industry. The residences Alterra had operated prior to 1998 were profitable, and the company made plans to sell off homes that were not doing well. This meant getting rid of 67 facilities, out of its mid-2001 total of 474. Vick believed that the assisted living industry was in the trough of a business cycle, like the cycles that affected hotels, nursing homes, and commercial office space, and Alterra would find itself on the upswing in another two to two-and-a-half years. In March 2001, Alterra secured a $7.5 million loan from some of its investors. The company hoped to arrange a private restructuring of its debt to keep it out of bankruptcy court. Even as revenue rose in mid-2001, Alterra reported a first quarter loss, and was in default with several of its creditors. Alterra increased the number of residences it offered for sale from 67 to 84. The company remained firm in its conviction that its core business was sound and improving, and that Alterra would be profitable again soon.

Principal Subsidiaries

Sterling House Corporation.

Principal Competitors

Sunrise Assisted Living, Inc.; ARV Assisted Living, Inc.; Manor Care, Inc.

Key Dates:

1981:: Company begins business with single building.
1985:: Alternative Living Services opens first residence specifically for people with memory impairment.
1996:: Company goes public on the American Stock Exchange.
1997:: Alternative Living merges with Sterling House to become the largest assisted living company in the nation.
1999:: Company adopts the name Alterra Healthcare Corporation.