sunrise senior living nyse: srz
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Sunrise Senior Living NYSE: SRZ. April 1, 2008 Caitlin Bizzoto Ben Hier Jeremy Smith. Sunrise Senior Living. Agenda. Economic Overview Company & Industry Overview Accounting & Valuation Recommendation. Economic Overview. Tightening lending standards - PowerPoint PPT PresentationTRANSCRIPT
Sunrise Senior LivingNYSE: SRZ
April 1, 2008
Caitlin BizzotoBen Hier
Jeremy Smith
Sunrise Senior Living Stock Price $22.28
Market Cap $1.12B
2006 EPS $0.40
2007 EPS TBD
P/E 55.7
Agenda Economic Overview
Company & Industry Overview
Accounting & Valuation
Recommendation
Economic Overview Tightening lending standards
Homeowners unwilling to sell at depressed prices
Housing market significantly affects SRZ
Slower GDP growth expected
Economic Overview
RCMP Transaction History1. Purchased 600 Shares @ $37.00
a. On May 1, 2006b. Total Investment of $22,200
2. Sold 300 Shares @ $32.06a. On November 27, 2007b. $1482 Loss on sale of 300 shares
Company Overview Provide Senior Living Services
Independent Living Environment around peers with housekeeping, meals and activities Minimal reliance on assistance of activities
Assisted Living Seniors who need housing and daily support activities Alzheimer’s care and other memory loss patients
Nursing, and Rehabilitation 24/7 specialized care to help seniors following injuries
Hospice services End of life care and support services for terminally ill
Company Overview Cont. Sunrise Revenues
1. Management Feesa. 5-30 year contracts to operate communities
2. Resident Feesa. Owned properties
3. Development and Pre-Opening Feesa. Communities under construction
4. Income from communities with ownership interest a. Ventures with SRZ
5. Sale of communities 6. Fees for hospice service
Senior Living Services Three main components
Independent Living: Living communities with limited assistance. Assisted Living: Housing and supportive care Skilled Nursing: 24/7 rehab nursing services
Baby Boomers (1946-1964, 76 million) 44-62 Years of Age today, leaning toward the latter 67 years of age is the average age of full retirement
2/12/2008 Kathleen Casey-Kirschling (1st Boomer) receives S.S. retirement benefit
Over next 20 years 10,000 per day will begin receiving benefits Outlook is extremely bright
Large numbers of wealthy boomers poised to help fuel industry for decades
1. http://www.socialsecurity.gov/retire2/agereduction.htm
Current Management Paul Klaassen – Founder and CEO
Teresa Klaassen – Founder and Chief Cultural Officer
Richard Nadeau – CFO
Tiffany Tomasso – Chief Operating Officer
John Gaul – General Counsel
Michael Lanahan – Chairman Greystone Division
Mark Ordan – Chief Investment and Administrative Officer
Julie Pangelinan – Interim CFO 2006 to 2007; Current Chief Accounting Officer
Management Changes Thomas Newell – President from 2000 to 2007
Larry Hulse – CFO from 2000 to 2005
Carl Adams – Chief Accounting Officer 2000 to 2004 and Treasurer 2005 to 2007
Previous three executives were fired in 2007 after evidence of inappropriate accounting was found. The inappropriate actions took place between the third quarter of 2003 and the end of 2005.
Board of Directors Lynn Krominga – Chair Board of Directors Paul Klaassen – Founder and CEO Teresa Klaassen – Founder, CCO, Executive Vice President and
Secretary Ronald Aprahamin – Business Consultant Craig Callen Thomas Donohue – President and CEO of the U.S. Chamber of
Commerce Stephen Harlan – Partner, Harlan Enterprises LLC J. Douglas Holladay – General Partner in Park Avenue Equity
Partners, LP and the Thornton Group, LLC William Little – President and CEO of the Quam-Nichols Company
Board of Directors Lynn Krominga was appointed Chair in 2007 after
the company was required to extend the number of board members from 8 to 9
Shareholders approved a nonbinding resolution which states that the board of directors will be reelected every year instead of every three years
22% of shareholders did not support Paul Klaassen’s reelection to the board. He currently holds 10.5% of the company’s stock.
Millennium Partners, LP Hedge Fund which owns 2.5% of the shares
In May of 2007 sent a letter to the Board of Directors and called for the replacement of top management or sale of the company
Three issues to be addressed: Sell or merge the company Restructure the company so that the different aspects of
business can be more easily valued and appraised Recruit new management that is capable of running a
company efficiently
Rumors of Sale In July 2007 the Board of Directors in a press
release said the they were looking to “explore strategic alternatives intended to enhance shareholder value”
Mark Ordan was recently hired for his experience in selling companies. He founded Fresh Fields Markets which was sold to
Whole Foods Market. Was later the CEO of the Mills Corporation which was
sold to Simon Property Group & Farallon in May of 2007 Current CFO Richard Nadeau was the CFO of the Mills
Corporation and worked under Mark Ordan
Accounting Restatements Real estate sales Cost of real estate projects Equity method investments with preferences Stock based compensation Revenue recognition for Greystone contracts Reimbursed expenses Other adjustments
Liquidity “Our Bank Credit Facility requires us
not to exceed certain leverage ratios, to maintain certain fixed charge coverage ratios and to have a consolidated net worth of at least $450 million as adjusted each quarter and to meet other financial ratios”
“We cannot give any assurance that we or our ventures will generate sufficient cash flow from operations to cover required interest, principal, & operating lease payments.”
“We estimate that it will cost us or the applicable development ventures approximately $1.0 to $1.5 BILLION in debt and equity to develop the remaining communities in our 2008 development plan. Additional financing will be required…”
Market Capitalization $1.13 Billion (3/31/08)
Balance Sheet Debt $253.7M (12/31/07)
Venture Debt Guarantees $2.4 Billion (12/31/06)
Future Minimum Lease Payments
$508.6M (12/31/06)
Unrestricted Cash & Equivalents (Unaudited)
$150M (12/31/07)
Available Borrowing Capacity Under Credit Facility
$23.6M (2/28/08)
Operating Margin
2002 2003 2004 2005 2006
Reported 22.08% 9.56% 4.86% 5.84% N/A
Restated 0.64% -0.52% -0.76% 2.73% -3.92%
Ratio Reported Restated Impact
Fixed Charge Coverage
1.53 0.63 Negative
D/E 0.37 0.52 Negative
Current Ratio
1.31 1.38 Positive
$554M In Unreported Liabilities
2004 Balance Sheet Adjustments
Ratio Reported Restated
Impact
Fixed Charge Coverage
2.98 1.47 Negative
D/E 0.32 0.50 Negative
Current Ratio
1.22 1.16 Negative
$391M In Unreported Liabilities
2005 Balance Sheet Adjustments
2005 Upward Revision Misleading 2005: Ex-RE gain add stock option expense: Net Loss ($0.07)
2004: Add stock option expense: Net Loss ($0.17)
DCFBeta 1.2
Rf 3.47%
Rm-Rf 8.53%
Re 13.71%
Rd 7.24%
Debt $253,700
Equity $1,136,680
Total Value $1,390,380
G 5.00%
Tax Rate 35.00%
Debt/Total Value 18.25%
Equity/Total Value 81.75%
WACC 12.06%
DCF Fair Value: $16+/- 10%: Between $18 and $15Current Price: $22Sell!!!
Recommendation Sell Remaining 300 Shares at The Market
Significant Financial Reporting & Internal Control Risk
Excessive Off-Balance Liabilities
Bleak Housing Forecast
CEO’s Leadership Ability Remains Questionable at Best
Overvalued - Further Downside Risk Remains