Healthy Manor Care poised to expand in growing long-term nursing market

February 20, 1994|By Patricia Meisol | Patricia Meisol,Staff Writer

Manor Care Inc. has spent the last quarter century building itself into one of the largest franchised hotel and nursing home chains in the world.

Now, as it aims to become a $2 billion company, the Silver Spring-based giant is preparing to play catch-up in a marketplace marked by uncertainty in the face of national health reform.

During its first two decades, Manor Care grew the old-fashioned way -- driven in one direction and then another by the instincts of its entrepreneurial founder and a handful of aides. It was a monumental success, blossoming into a $500 million company.

When Stewart Bainum Jr. took over from his father in 1987 as revenues doubled to $1 billion, his chief task was to apply modern management practices that would allow Manor Care to prosper no matter who was at the top.

But while the new chairman and chief executive officer was attending to internal affairs, decentralizing leadership to manage spate of acquisitions, upstart competitors in the skilled nursing business moved ahead to develop and grow newer, more lucrative products and tap the burgeoning managed care market.

Now, as the long-term care industry grows by leaps and bounds and competition moves in from all sides, Manor Care is making its move: It will invest $800 million in the next four years in new Alzheimer's programs, where it already is the industry leader; in assisted living communities, where it brings a unique knowledge of the lodging business; and in "subacute" care, the most important new product in the nursing home industry in years.

The company acknowledges that others are there already. In a recent interview, Mr. Bainum tipped his hat to a Maryland rival, Integrated Health Services Inc. of Hunt Valley, which has achieved industry dominance in the fast-growing subacute arena and now gets two-thirds of its profit from 25 percent of its beds.

In fact, Manor Care, the premier private-pay nursing company in the country, stubbed its toe on subacute care before Integrated was born. It wanted to be sure-footed before it tried again.

"We had to walk before we could run," Mr. Bainum said.

Manor Care is now ready, according to both Mr. Bainum and analysts. In its favor are its management team, its pricing strategies and its tight cost controls. It has always known its market: private-pay patients willing to pay a premium for quality. Its goal: to be a world-class service organization.

While the brand names in Manor Care's Choice Hotels International franchise system are well-known -- Econo Lodge, Clarion, Quality, Comfort, Sleep and Rodeway Inns -- more than 80 percent of its revenues, and the same percentage of its profit, comes from health care. It owns 1.5 percent of the nation's nursing home beds, a fast-growing institutional pharmacy business, and has real estate expertise that gives it an edge over competitors in building or buying new facilities.

The company earned $112 million before taxes from its health care operations for its fiscal year ended last May 31 on revenues of $831 million. Growth on the health side has slowed somewhat to 8 percent annually, but Manor Care continues to maintain the highest margins in the industry.

Its approach to one new venture illustrates why: Last year it bought a three-year-old hotel in Boynton Beach, Fla., and transformed it into an assisted living facility at a cost of $39,000 per unit. Competitor Marriott Corp. spent $100,000 per unit to build and outfit a new hotel for the same purpose two miles away.

Earnings for its current fiscal year, which ends May 31, are expected to increase 23 percent to $1.28 a share, according to a survey of 15 analysts by Zack's Investment Research. The company earned $1.04 a share in 1993.

The company's story is familiar to many Marylanders: Stewart Bainum , now 75, a conservative Republican who invested in apartments, hotels, and nursing homes, became enamored of the cleanliness in Quality Courts hotels when he traveled, bought a stake, and eventually took control of the company. He incorporated Manor Care in 1968 and took it public that same year. Manor Care is still very much a family affair: The Bainums own 34.3 percent of the company, valued today at more than $522 million, and the older Bainum remains on the board.

Stewart Jr., 47, is a Democrat active in state politics. He served two terms in the Maryland General Assembly and last month set up a committee to consider a race for governor. But like his dad, he is a fiscal conservative, and the company headquarters reflect a watchful eye over every dollar. His office is a modest rectangle in a plain but functional headquarters on Columbia Pike. The board room doubles as a law library. Envelopes have the feel of a Staples-special. Mistakes get Wite-Out.

It's this attention to costs that helps explain why the company's return on equity for the past five years has averaged 19.5 percent compared with 11.5 percent for a list of the best managed U.S. companies compiled by Forbes.

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