Five Star Quality Care, Inc. (FVE) Has a Four-Star Rating, But It’s Worth Five Stars

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Like Five Star, none of these three companies pays dividends or is a REIT, although each owns some of its properties while managing others for REIT landlords and has taken steps towards increasing the percentage of its communities that it owns. For example, Emeritus has gone from 6% owned communities in 2006 to 57% in 2011.

Each company faces similar challenges as well, which include increasing labor costs, changing government regulations and bearing substantial debt burdens, especially in the case of Capital Senior Living. The lists of risk factors in their annual reports are almost identical.

Stock Price/Book Value
Five Star Quality Care (FVE) 0.9
Senior Housing Properties Trust (SNH) 1.6
Brookdale Senior Living (BKD) 3.2
Emeritus Corporation (ESC) 5.3
Capital Senior Living (CSU) 3.4

Knowing that these companies share the same business model, ask why Five Star trades below book value and its fellow non-REITs trade at three to five times book value. (SNH is at 1.6x book value.)

I don’t claim to have all the answers, but I’ll tell you this: at least over the short term, the market is inefficient. And for us Fools, temporary inefficiencies can provide buying opportunities.

The article This Company Has a Four-Star Rating, But It’s Worth Five Stars originally appeared on and is written by Jonathan Lim.

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