Wall $treet Week with FORTUNE co-anchor Karen Gibbs recently sat down with program contributor Michael Farr and Legg Mason analyst Jerry Doctrow to talk about the assisted living industry. Part of their discussion first appeared on our Dec. 3, 2004 program and will be shown again on May 20, 2005. Here are excerpts that have never been aired:

MICHAEL FARR: And people are living longer, too, so that is adding to that growth in that part of the population. Okay, so Jerry, if I'm an investor and I see this growing trend, okay, I'm seeing all of this explosion of this area of the population over 85, how do I make money and benefit from that?

JERRY DOCTROW: Well, certainly it's a question that we think about a lot. There are several companies in the public market in the assisted living industry. Sunrise is the largest of those at about a $500 million market cap.

We currently have a hold rating on Sunrise. I like the company a lot. I think for a long-term investor what we've said is on a pull back we would find it attractive, but it has a run in the price a bit recently, so we've had the hold rating on it currently.

FARR: It's considered really the flagship Cadillac in that space, right, the Sunrise?

DOCTROW: Absolutely. There are a few other smaller companies in that space that we don't follow: American Retirement Corporation, ACR is the ticker; Capital Senior, CSU; Emeritus, ESC. Again, we don't follow those, but they're also in that space.

I think you will see some additional companies coming public in the senior housing space, as well. The industry from an investor standpoint got very exciting in sort of the late '90s, got overbuilt, you know, created a lot of disappointment for public investors, but some of those companies have gone private. They're likely to come back. Construction levels are way down, which is another thing that's driving the investment opportunity today. Construction levels are down about 80 percent from 1998, so with construction levels down, demand, as you said, growing, we're seeing occupancies rise, average daily rates rise and, you know, the earnings of these companies improve.

KAREN GIBBS: Can we talk about that average daily rate and the total cost of these services. A lot of people don't have the resources -- not just the money, but the time, the energy, the patience. What's the cost involved here?

DOCTROW: The cost I think ranges over a fairly wide range. If we're talking about private pay assisted living or independent living, again at a non-subsidized facility, you're probably talking at the low end a couple of thousand dollars a month up to probably $5,000 a month or more. There is one of these facilities in Battery Park City, New York where it's probably $8,000 or $10,000 a month. But I would say typically in the $2,000 to $4,000 range is probably most likely for an assisted living facility.

GIBBS: And is there an entry cost as well?

DOCTROW: For most assisted living, there's not an entry cost. There are alternatives, which are entry-fee communities.

I think, you know, just for what you're getting for that fee is you're getting an efficiency size apartment, you're getting meals, you're getting hospitality services, much like you'd see at a hotel such as the concierge. And you're getting assistance with what are called the activities of daily living, getting up, getting about, you know, conceivably helping get fed, medications management, so there's a range of services, and typically there's several levels, depending on where you are, and that may affect certainly the price.

Traditionally before assisted living, before some of these new independents, many not-for-profits ran, typically CCRCs (Continuing Care Retirement Communities), the full continuum, and those in many cases are fee communities where you pay an up-front entrance fee or perhaps buy the unit. I think most new development is being done on sort of more of a rental kind of a basis or a monthly fee basis rather than the up-front fee, but both exist out there.

GIBBS: Where does the government fall into this? Do they pick up any of the tab?

DOCTROW: The government for the facilities that we've seen really does not pick up the tab. It's all private pay. You know, in the traditional nursing facility, once you pay down your resources, if you're sick enough to really need nursing care and if you exhaust your resources, then the government through the Medicaid program will pay. The government will also pay in a nursing home after a three-day hospital visit for rehabilitation care, and both of those things go on in a traditional nursing home. But it's only available for nursing and it's only available again if you deplete your resources.

FARR: As an investor, I think it's a bonus that it's private pay of course, because it takes away that government regulation and whether they're going to be funded or not funded and how much reimbursement they're going to get. I was very impressed with (Sunrise CEO and Chairman) Paul Klaasen. I mean, this guy struck me as an outstanding manager. But I also, in looking at the stock and the fundamentals, agree with you, it looks pretty fully valued.

GIBBS: I'd like to dig deeper into this home care trend. What's behind that? What's driving that? Is it lack of facilities? Or is it the desire to be in your own home?

DOCTROW: I think there's a couple of things driving it, and I think some of the themes that we're looking for in this business, you know, in addition to just the growth in the population, when we get into the people providing true healthcare, we're looking for companies that provide care that is attractive to the consumer and offers a lower-cost alternative.

I think our view is now that we're past the election, I don't know that it will be this year or next year, but you know healthcare costs are rising again. About 7.5 percent this year was just announced. We are going to see more pressure on trying to contain medical costs. One of the attractive things about nursing home care is that within the post-acute world, post-hospital visit, nursing home is a lower-cost alternative to things like a rehab hospital or a long-term acute care hospital.

In-home nursing again is a lower priced alternative than say a nursing home, lower priced than a rehab hospital. What a company like Gentiva is doing is going into orthopedic surgery, cardiac surgery, and say to the surgeons, we can care for your patient at home immediately following an acute episode or immediately following a surgery. The patient prefers it, they're more comfortable. You could argue in some cases less susceptible to infections and some of the other things that happen in a hospital setting potentially, as well as we can show you the same clinical outcomes because we've developed care protocols that allow us to achieve the same kinds of rehab, the same kinds of results in someone's home.

GIBBS: What's the potential that you see here? Is it growing?

DOCTROW: It is growing. Again, I think in some of these areas over the last few years there have been ups and downs, changes in reimbursement, changes in policy, and again if you're talking about not assisted living but home nursing, nursing homes, government reimbursement is a big issue. But we see a lot of potential again because the population is growing. Reimbursements right now are generally stable. And because these are lower cost alternatives we think in an era when both government and private payers are going to be more concerned about containing costs, these areas are likely to be winners.

GIBBS: We've also seen the price of the stock of say a company like Sunrise really run up in the past month or so. What's behind that? I'm going to ask you first, Jerry, and then back to you, Mike.

DOCTROW: Well, I think the market in general has sort of been coming up, but I think one issue that's affected healthcare specifically, as we've seen problems at companies like Merck on the Vioxx, as some money that's dedicated to healthcare has moved out of big pharma, I do think it's coming into healthcare services broadly. And again because these are such small-cap companies, you don't need a lot of money moving out of big-cap pharma to move healthcare services stocks.

GIBBS: Do you agree with that, Michael?

FARR: I agree with it, and I think there's also the, another factor with Sunrise, which is in the past couple of years, they've purchased a bunch of Marriott senior living facilities. And I think there's been a concern in the stock about the integration of those other facilities and residences, making sure that the balance sheets flow and the businesses flow. And as you came through sort of the end of this summer, I think a lot of that concern started to fade. And of course we've had this pre-presidential election, post-presidential election rally. It might even be turning into a Santa Claus rally. I just want to see it keep going up. I don't care why exactly, just keep it going up.

These (healthcare REIT) businesses are very focused. They are very professional. Yes, they're providing this sort of warm, comfortable environment with the nice facility and the nice people. They know how they're doing their marketing and how they're trying to get their sales accomplished. They focus on that eldest daughter, age 45 to 55, or daughter-in-law - be nice to your daughter-in-law. You can't count her out, you see -- but it's this 45- to 55-year-old woman to whom they market, and they market in those journals, in the magazines. They want the décor to appeal to that 45- to 55-year old woman, because that's really the decision-maker. The octogenarian typically doesn't want to be there at all. You say, "Do you like it?" "No, I don't like it. I want to go home," is the answer. But they're very focused. Sunrise, in particular, has found that they want to provide a way, guilt-free, to provide a guilt-free decision, to find a home for Mom or Dad in their facility for that 45- to 55-year-old woman.