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SUNRISE SENIOR LIVING, Inc. April 27, 2006

SUNRISE SENIOR LIVING, Inc. April 27, 2006. AGENDA. Introduction Stock Market Review Industry Review Company Review Investment Thesis Recommendation. INTRODUCTION. Sunrise Senior Living, Inc is a provider of senior living services Business Model

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SUNRISE SENIOR LIVING, Inc. April 27, 2006

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  1. SUNRISE SENIOR LIVING, Inc. April 27, 2006

  2. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  3. INTRODUCTION • Sunrise Senior Living, Inc is a provider of senior living services • Business Model • Provide range of Senior Living Services • Develop Senior Living communities for third parties • Geographies covered • US, Canada, UK & Germany • Stock Ticker : SRZ

  4. COMPANY BACKGROUND • Founded in 1981 by current CEO Paul J Klaassen • Listed in 1996 • Approximately 3/4th of the company held by Institutionals • Component of • S&P Small Cap 600 Index, • NYSE Healthcare Index, • S&P 1500 Composite Index

  5. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  6. STOCK MARKET REVIEW • US markets have returned < 10% in last 5 years • US Stock Markets lagging behind world markets • YTD MSCI US Index is the second worst performer

  7. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  8. INDUSTRY REVIEW • Sunrise Senior Living (SRZ) is classified under : • Long Term Care Facilities (Yahoo Finance) • Health Care Facilities (GICS) CCRC – Continued Care Retirement Centers, Source: American Senior Housing Association, Citigroup

  9. INDUSTRY REVIEW • Fragmented Industry with 2.8% market share for SRZ • Top 10 companies control only 12.5% of the market • Recent consolidation in the Industry • Average price paid for Assisted Living Facility in M&A transactions increased 54% in 2005 to $115,600 per bed • Over last 2 years the industry has seen a rebound • Beds have grown by 0.7% CAGR • Revenues have grown by 3% CAGR (Source: American Senior Housing Association, Citigroup)

  10. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  11. COMPANY REVIEW • Largest Operator of Senior Living Communities • 415 ‘communities’ across the globe • Canada – 11 UK – 5 Germany – 2 • (Source: American Senior Housing Association, Citigroup) • 11 new communities added in Q1 of 2006 • Upscale metropolitan presence • Only company in the industry focusing on ‘Management Model’

  12. SERVICES & COMMUNITIES • Managed communities share increased from 10% in 2000 to 47% in 2005 • Presence in Skilled Nursing limited Source: 10k, Citigroup

  13. OWNERSHIP PATTERN • Consolidated Communities • – Owned & Leased by SRZ • Joint Ventures Communities • – 5 – 8% Management Fees + 20 – 25% equity income • Managed Communities • – No ownership • – 5 – 8% Management Fees

  14. INCOME STATEMENT SNAPSHOT Reimbursable expenses for Managed communities – pass through Services (construction supervision, training, marketing) after transferring of property to JV Delivery of senior living services to the residents Services (site selection, zoning & design) prior to transferring of land to JV Removing the effect of the reimbursements Income statement for year ended Dec 2005

  15. GROWING PHASE FOR SUNRISE • Revenue CAGR of 49% over last 4 years • Acquisitions propelled managed communities in 2003

  16. GROWTH THROUGH ACQUISITIONS

  17. RETURNS ON AN UPSCALE • Net Income increasing as margin bounced back in 2005 • Decline in margins because of shift to Managed Communities • ROE & ROIC showing an uptrend

  18. STRONG BALANCE SHEET • Net Debt in 2005 is in negative territory • Cash locked in Net Working Capital reducing • Falling Free Cash Flow suggests expansion mode

  19. STOCK PERFORMANCE • Outperformed the S&P 500 by 9% in the past 6 months • Outperformed the S&P Healthcare Index by approx 130% in the past 5 years

  20. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Competitors Analysis • Investment Thesis • Recommendation

  21. OUTPERFORMED COMPETITION CONSISTENTLY • No dividends paid by SRZ • Stock Split of 2:1 on Oct 4, 2005

  22. COMPETITORS ANALYSIS Source: Yahoo Finance • Third largest player in terms of Market Capitalization • One of the highest Return on Assets • Trading at highest 5 yr PEG ratio (estimates by Yahoo Finance)

  23. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  24. STRONG INDUSTRY GROWTH OVER 15 YRS Elderly population expected to grow at CAGR of 1.3% No of beds expected to grow at 1.6% CAGR (Source: American Senior Housing Association, American Healthcare Association, National Investment Center, Citigroup)

  25. STRONG BUSINESS MODEL • 415 communities with 53000 beds in 35 states • Future expansion into International locations • Insulated from reimbursement risks • About 91% of revenues of 2005 derived from private pay • Growth through acquisitions could continue • Management Model • Sale and long-term management contracts

  26. CONSERVATIVE REVENUE GROWTH

  27. MARGINS EXPANDING • EBITDA Margin expansion - • Moving to management model • Increasing expertise in operating communities • EBIT Margin expansion because of minimal capex

  28. CONSERVATIVE CAPITAL STRUCTURE • Increasing ROA due to decreasing debt & limited capex • Net Income growth higher than EBIT • Income from excess cash

  29. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Valuation • Recommendation

  30. VALUATION WACC = 8.12% • Rf – 6 month Treasury rate • Rm - Rf – Historical Risk Premium

  31. DISCOUNTED CASH FLOW • Terminal Value assumptions • EBIT – growing at sustained growth rate • Working Capital – assumed to be 20% of 2009 • Capex – Maintenance caped because of move to management model

  32. DCF SENSITIVE TO WACC & GROWTH RATE • DCF value sensitive to WACC & growth rate • Sustained growth rate of 4%

  33. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Portfolio Diversification • Recommendation

  34. PORTFOLIO DIVERSIFICATION • Low correlation with all the stocks • Highest correlation with MVSN of 0.1535

  35. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation

  36. BUY 600 SHARES • At $37.53 – represents 7.13% of portfolio (as on April 26, 2006) • Portfolio standard deviation drops from 1.38 to 1.27 • INVESTMENT THESIS • Largest Operator of Senior Living • Strong Industry growth • Move to Management Model • Conservative Capital Structure • Net Income growth ~ 14% for next couple of years • Stock price includes $6.61 cash as of Dec 2005

  37. AGENDA • Introduction • Stock Market Review • Industry Review • Company Review • Investment Thesis • Recommendation • Appendix

  38. RECOMMENDATION ANALYSIS

  39. STANDARD DEVIATION (WITHOUT SRZ) Portfolio standard deviation = SQRT (1.0013 + 0.7368) Portfolio standard deviation = 1.3183

  40. STANDARD DEVIATION (WITHOUT SRZ)

  41. STANDARD DEVIATION (WITH SRZ) Portfolio standard deviation = SQRT (0.9153 + 0.7218) Portfolio standard deviation = 1.2795

  42. STANDARD DEVIATION (WITH SRZ)

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