Market Spotlight: Senior Housing

If seniors have trouble selling their homes, investors worry that providers of senior housing could suffer.

Shares of assisted-living facility operators have dropped in the past year, due to fears that potential customers are delaying moves into facilities until the housing market improves. Shares of the largest U.S. provider of private-pay senior housing, Brookdale Senior Living Inc., have dropped sharply in the past 12 months.

Since peaking at $11.01 last spring, Five Star Quality Care Inc. shares have fallen 45 percent to reach a low of $6.05 earlier this month. And shares of peer Emeritus Corp. also traded at a year-high of $39.40 during the summer, but have since declined 47 percent.

But analysts say occupancy rates have held steady and facilities have even been able to raise prices, as demand remains strong and supply relatively tight.

Brookdale Chief Executive Bill Sheriff said recently that he sees demand continuing to grow. Lehman Brothers analyst Kevin Fischbeck says Brookdale is still seeing solid occupancy rates in Florida of 89.3 percent, and of 88.3 percent in Arizona _ states which are "supposedly troubled markets." He rates Brookdale "Overweight."

"The bottom line is there's been a little pressure on occupancy, but the pressure is not significant enough that companies have had to reduce rates," says Stifel Nicolaus analyst Jerry Doctrow. His top picks in the industry include Brookdale, Five Star Quality and Emeritus, which he says faces limited risk from the weaker U.S. for-sale housing market.

But even the most bullish analysts say if real estate prices keep sinking, it will hurt senior housing occupancy and rates. On Tuesday, the closely watched Standard & Poor's/Case-Shiller index showed home prices in 20 cities fell nearly 11 percent in January from a year earlier, the biggest drop in its two-decade history.

Almost no major cities appear immune from the spiraling market, and analysts worry that even the usually reliable spring selling season will fall flat.

In another area of the senior living sector, some investors have been concerned that recent proposals by the Medicare Payment Advisory Commission (MedPAC) could hurt profits at nursing home operators such as Skilled Healthcare Group and Sun Healthcare Group.

MedPAC is proposing an overhaul of Medicare reimbursement to skilled nursing facilities that could lower payments to those facilities performing high volumes of therapy-related services.

But Morgan Keegan analyst Robert Mains said any MedPAC proposal is years from enactment, and in fact may be at odds with recent efforts by the Centers for Medicare & Medicaid Services to move patients into cost-effective skilled nursing facilities. He also noted that Congress routinely ignores MedPAC's recommendations regarding such facilities, and likely could choose to do so again.