EXPERT OPINION: A Conversation with Jerry Doctrow


Steve Monroe caught up with Jerry Doctrow at the NIC Conference in September. In this latest "Expert Opinion" interview, Doctrow talks about investors' concerns with occupancy levels in seniors housing, significant swings in stock values over the past month, and the future of seniors housing stock.

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Jerry L. Doctrow leads the Stifel Nicolaus six-person health care services and health care real estate research team. He has been recognized six times by The Wall Street Journal and twice by Forbes/Starmine as one of the best health care or real estate analysts in the United States. Mr. Doctrow has over thirty years experience in equity research, consulting, public policy, finance, and market analysis. He spent eighteen years at Legg Mason, where he led the health care services research team for eight years, served as president of the firm's real estate consulting unit, and advised not-for-profit and corporate clients on the development of seniors housing and health care facilities. Stifel Nicolaus acquired Legg Mason capital markets division in December 2005. Mr. Doctrow has a B.A. in social and behavioral science from Johns Hopkins University and a Masters in Public Administration from George Washington University. He is an Associate on the faculty of the Department of Health Policy and Management at the Johns Hopkins University Bloomberg School of Public Health and is advising researchers at the World Bank on using private investment to improve health care delivery in developing countries. Mr. Doctrow's recent publications include "NIC Data Contradicts Conventional Wisdom About Senior Housing Performance," and HCREITs "See Better Investment Prospects, But Perhaps Not Yet," both June 2008.

Contact Information:
Jerry L. Doctrow, Managing Director
Stifel Nicolaus
One South Street
Baltimore, MD 21202
(443) 224-1309
jldoctrow@stifel.com

  
Read the interview transcript:
SeniorCare Investor Managing Editor Steve Monroe interviews Jerry Doctrow, Managing Director, Stifel Nicolaus & Company, Incorporated.

Steve Monroe:
Okay, we're here today with Jerry Doctrow, managing director of Stifel Nicolaus, one of the major seniors housing equity analysts on Wall Street.

Jerry, you started to get concerned about occupancy in seniors housing late last year, perhaps before others did. Do you think investors punished the public companies too harshly during the first seven months of 2008, based on those occupancy concerns and what impact it might have?

Jerry Doctrow:
It's sort of a yes and no. There have been some radical short-term swings, but I think overall investors were right to be concerned. We have seen declines in occupancy. There is a lot of uncertainty in the economy. So I think the general sell-off was probably appropriate, although there have been some more violent, short-term swings than probably made sense based on the facts.

Steve Monroe:
Were you surprised by the significant bounce back in stock values in August, where I think it was probably the best we've ever seen in some stocks, up 40-45 percent?

Jerry Doctrow:
Well, again, I think some of the short-term swings, both down and up-what you saw in August-was partly both a correction for what was an overreaction in June to things like the GPT news, where occupancy was off and some other public company comments, and what ended up just being sort of a late flu season. And then a big bounce back from that as people actually reported not so much better second quarter results than were expected, but started suggesting that occupancies were rising again here in June and July. It would be nice if the market took a little bit longer-term view of this, but it's a very nervous market for lots of other reasons and you're going to continue to see these swings.

Steve Monroe:
It seems that investors in August were reacting to an up tick in occupancy that really occurred over a very short time period. And if that July-August upward trend is reversed by the time companies report third-quarter earnings, how badly will investors punish the stocks with that news?

Jerry Doctrow:
Well, I think they will punish it. As I said, I think if the subject is short-term swings, we recommended a couple of seniors housing stocks, and specifically when we recommended them, we said these are stocks that make sense over a year or two-year investment horizon and will do very well when the housing market economy stabilizes and starts rebounding. We are much more cautious short-term. And again, I think what you've seen short term is a lot of reactions, a lot of trading strategies based on short-term moves and occupancy.

Right now, my expectation is that you are going to see good third-quarter numbers. The question is how much discounting or incentives are being used to drive those numbers and if we back down in the fourth quarter, they come back down again. So, again, I think it's a nervous market. We're going to see gyrations and I think we'll just have to live with it.

Steve Monroe:
And if the industry in fact did hit an occupancy bottom in the June-July-August time period, what do you think providers will be focusing on going forward? And perhaps a better question may be what should they be focusing on, assuming they've solved the occupancy problem?

Jerry Doctrow:
Well, I think that the market will remain skeptical about occupancy for a while to come. I don't think that one quarter and even the managements-if you catch them in a reflective mood-are not going to guarantee occupancies continuing to rise based on one quarter's performance. But I think what people should be focused on is trying to sustain occupancy and rent growth, despite difficult conditions, and probably be a little less concerned, less focused on the quarter-to-quarter moves than we are.

Steve Monroe:
Well, speaking of rent, are you worried about the industry being able to maintain these 5, 6, 7 percent annual rate increases?

Jerry Doctrow:
I think we're modeling something below 5 percent. Again, when you step back and put it in context-which many investors aren't doing-the truth is that we've had really good rent increases, probably 7, 8, 9 percent over several years here. They've been coming back to 5, 6 percent, and I think they will be lower. And, again, as long as they're above the drop in occupancy or certainly above the rate of inflation, given economic conditions, I don't think it's too bad an event.

Steve Monroe:
Will those rate increases that the industry has been having, will they be enough if labor costs are to rise significantly on top of food and energy costs, which they've already been hit with?

Jerry Doctrow:
We're watching-we are watching the cost side. I think for a variety of reasons it's more of a concern. My own view is the benefit of the recession is labor costs are probably not going to be under as much pressure. I think people are seeing some issues indirectly from fuel costs, where some of the CNAs and that kind of level are actually having to pay more just to be able to afford to drive to work.

But, again, as long as you're getting top-line growth at least in line with what your growth in expenses are, you're still fine.

Steve Monroe:
Okay, let's change the subject a bit. You've always been fairly bullish on Sunrise Senior Living over the years through their ups and downs. And now, as they finally have become a current SEC filer, you seem to want to wait a little longer before getting on the bandwagon again. How long do you think it will take for the new management to convince shareholders that they can deliver the results that the investors have been waiting for?

Jerry Doctrow:
We do rate Sunrise hold, and I have in the past recommended it. I had the same question from some of my own salespeople after Sunrise reported. The truth is, the milestone of completing the second quarter 10-Q and becoming a current filer is a very significant milestone for the company. I think the changes that they've put in place in terms of strategy, in terms of the new management, are very important. And I think generally positive. The fact is that I think there are still issues to work through with Sunrise. You've got some other stories that are simpler. In some ways, I think everybody in the seniors housing space works once you get stability and a rebound in the housing market.

In terms of our willingness to recommend Sunrise I think, again, we would like to see a little bit more in terms of execution, a little bit more clarity on what's going on, again, with Germany and some of their other things before we'd probably recommend the stock.

Steve Monroe:
Do you think investors who you talk with, do you think these investors believe there's still a plan to sell the company or take it private? Or perhaps split it up?

Jerry Doctrow:
Yeah, I think there's less focus in the whole market, Sunrise included, on anybody doing a sale transaction just because the credit markets have made it a lot more difficult to get a deal done. I think that one of the interesting things, because of the change in the REIT legislation-which gives you much more flexibility for REITs to invest in a Sunrise-like structure, if you will-that's starting to open up a whole new range of possibilities, not just for Sunrise but for other operators.

So, again, I don't think anybody is investing in Sunrise today because they expect a quick sale of the company, but changes in how people handle their real estate versus their operating companies, how they might monetize real estate, maybe restructure the business to take advantage of the new REIT laws in part, there's a little bit of that I think being considered by operators [of] REITs and investors across a number of companies right now.

Steve Monroe:
Final question. Seniors housing stocks had their best month I think ever in August. Is that it for the year, or is there still some upside left before year-end in these stocks?

Jerry Doctrow:
Well, I think one of the reasons we're here, as are you, is probably to answer that question, so we'll see. We still have, again, I think two buys in the REIT space. I think there's some discussion right now, as of 9/11 here, with where people expect occupancies to improve. In a number of the public companies, that seems to be some of the sentiment. I think if that happens, then there's probably some room to go, and particularly if it can be sustained beyond the third quarter.

Steve Monroe:
Okay. All right, very good, so a little bit more room, a little more optimism. Thank, you, Jerry, for joining us today.


DISCLOSURE STATEMENT
Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel Nicolaus' coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks.

Recorded September 11, 2008