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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
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Sunrise Senior LivingNYSE: SRZ April 1, 2008 Caitlin Bizzoto Ben Hier Jeremy Smith
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
RCMP Transaction History • Purchased 600 Shares @ $37.00 a. On May 1, 2006 b. Total Investment of $22,200 • Sold 300 Shares @ $32.06 a. On November 27, 2007 b. $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 • Management Fees • 5-30 year contracts to operate communities • Resident Fees • Owned properties • Development and Pre-Opening Fees • Communities under construction • Income from communities with ownership interest • Ventures with SRZ • Sale of communities • 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 $1.5BILLION in debt and equity to develop the remaining communities in our 2008 development plan. Additional financing will be required…”
2004 Balance Sheet Adjustments $554M In Unreported Liabilities
2005 Balance Sheet Adjustments $391M In Unreported Liabilities
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)
DCF DCF Fair Value: $16 +/- 10%: Between $18 and $15 Current Price: $22 Sell!!!
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