BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESSWEEK INVESTOR

Stockpickers Move Back to Senior Housing
After a serious downturn, the sector is perking up

The graying of America ought to mean great prospects for the elder-care industry. But the two main areas--assisted-living communities and nursing homes--have been in the doldrums for two years. Now, a turnaround may be in the making.

One sign is that shares of Sunrise Assisted Living ( SNRZ), the Rolls Royce of the assisted-living group, shot up 33% in four days, to $28.38, after the company disclosed improved profits on Nov. 1. Earnings could soon turn up for nursing-home stocks, as well. Last month, Merrill Lynch gave Manor Care ( HCR), one of only two nursing-home operators still solvent, a buy recommendation.

Meanwhile, some smart investors have been moving in on second-tier plays they hope will rebound next. Gary Hatton, a fund manager at Granahan Investment Management in Waltham, Mass., bought 700,000 shares of Beverly Enterprises ( BEV), the other solvent nursing-home operator, in September. ''Expectations are so low for the group that it wouldn't take much to beat those expectations,'' Hatton says.

Don't confuse assisted living and nursing homes: The troubles that plague them are quite different. The nursing-home sector, an old business often marred by poor management, depends on Medicare and Medicaid payments. Operators were staggered by the 1997 Balanced Budget Act, which slashed Medicare payments to nursing homes by as much as 25%. That's why such companies as Genesis and Vencor ( VCRIQ) had to file for bankruptcy protection in the past two years. Congress restored some Medicare cuts in April, however, and is expected to restore more next year.

Assisted-living communities--which cater to patients who may need help bathing or preparing meals but not everyday nursing care--don't qualify for government payments. Their customers are families who pay privately. In the mid-1990s, Wall Street turned assisted living into a hot-stock fad, and a slew of new companies used their initial public offering proceeds to build more facilities than they could fill. When that led to losses in 1998, investors dumped the shares.

One reason beds are vacant is that most people don't sign up for an assisted-living facility unless they have to. Take Minnie Schortau, who in 1998 moved into a Sunrise Assisted Living center in Old Tappan, N.J. ''It was a tearing experience to leave my home,'' says the tiny 92-year-old. But managing a six-room house--her home for 64 years--had become impossible. ''Everyone is very nice here, and the activities are great,'' Schortau says. But her ambivalence is palpable: Sunrise is not home.

Schortau's landlord is the best managed of the group. Based in McLean, Va., Sunrise is also high-end: Rooms at its 162 facilities average $3,190 a month. Still, its occupancy rates exceed 90%. ''It has turned marketing into a science,'' says PaineWebber analyst Andrew Gitkin. He expects Sunrise to earn $1.14 a share this year and perhaps $1.84 in 2001--a dramatic rebound.

REAL ESTATE. Another assisted-living play attracting attention is American Retirement ( ACR) in Brentwood, Tenn. The company has yet to turn around: It is likely to lose about 17 cents a share this year. But Merrill Lynch analyst A.J. Rice notes the stock is so depressed, at $4.95 a share, that its real estate alone is worth twice as much.

Among nursing-home stocks, Manor Care of Toledo, Ohio, has managed to cut back on labor costs and has socked away big sums to cover patient lawsuits. ''Its management is the best in the industry, and it has a strong balance sheet,'' says Gitkin. Beverly, in Fort Smith, Ark., has yet to cope with patient liability claims and probably won't see earnings turn up before next year.

The portion of the population that's 85 years old or older is growing three times as fast as any other age group. With that potential market, the assisted-living and nursing-home companies ought to have a bright future--once they get their acts together.

By ELAINE S. SILVER

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