Demographics Spell Rebound For Senior-Housing Stocks

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March 16, 2008

Like other casualties of the housing slump, senior-housing stocks have fallen hard, but they can get up again.

Private-pay senior-housing stocks were long seen as recession-resistant, given the inevitability of aging and medical advances that help people live longer. According to the Census Bureau, the number of Americans aged 85 or above will jump 44%, to 6.1 million, between 2000 and 2010. Just 7% of those aged 75 or more live in senior housing.
But because older people often fund the move into retirement facilities through the sale of their homes, worries have increased that a deepening housing slump will force Grandma to delay — or even call off — her move. And that might hurt these companies’ occupancy rates and margins.

For example, Brookdale Senior Living (BKD), one of the largest U.S. senior-housing providers, has seen its shares slip about 47%, to $24, over the past year. The decline is as severe as that for homebuilders directly hurt by the housing collapse; the Standard & Poor’s Homebuilders SPDR (XHB) is off 41% in the same period.

The indiscriminate selloff misses some key distinctions. Occupancy at senior homes nationwide remains near a record high of about 90%. Although the pace of rate increases in payments has begun to slow in states hard-hit by sliding home prices, the impact isn’t nearly as drastic as the selloff predicts.

Also, the ages and medical needs of occupants increase as they progress along the adult-housing spectrum: from retirement communities and independent living to assisted living, and in some cases, dementia care.

With most seniors approaching what the industry calls “the age of apprehension,” when common tasks like lugging groceries can prove daunting, “there is a need-driven aspect even to independent living,” says Robert Kramer, president of the National Investment Center for Senior Housing and Care, an independent research group.

Stifel Nicolaus analyst Jerry Doctrow has buy ratings on Seattle-based assisted-living specialist Emeritus (ESC), and Newton, Mass.-based FiveStar Quality Care (FVE), which provides skilled nursing care.

Both of these small stocks offer need-driven services and recently were trading below 10 times projected 2009 cash flows. Mr. Doctrow also upgraded Brookdale to buy in late February.

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