Can We Talk About Bankruptcy Now?

November 11, 2008

November 11, 2008
Okay, it is now official. Sunrise Senior Living dropped below $1.00 per share today, hitting, perhaps all too briefly, $0.93 per share. For investors, this is a price level for companies that are close to a bankruptcy filing, and they are basically giving it a 50-50 chance at these levels. Since election day, Sunrise has plunged by 70%, and while one could blame Barack, it is really just a capital markets phenomenon. We say "just" because if capital was flowing and development was ongoing, Sunrise (and its shareholders) would not be in this dire situation. But now, with the current market price, everyone is mentioning the "B" word, and while possible, we still believe it is unlikely.

Why? Because what's the benefit? Or, who would benefit and who would trigger it? While branding is difficult in this industry, Sunrise is about the closest thing to a brand name with the consumer, and how do you think that eldest daughter would feel about moving mom into a facility that is managed by a company that can't keep its own financial house in order and is in bankruptcy protection? The only one who may benefit is a Sunrise property owner who wants to get a new manager in their buildings and, we have to assume, a bankruptcy filing would trigger an event of default in the management contract to allow that to happen. But that would also take time, and time is on no one's side right now.

The stakeholders in Sunrise-the shareholders, creditors, property owners, joint venture partners and, of course, the staff and residents, all have an interest in seeing Sunrise return to health. The silly thing is that we don't believe it would take much money (easy for us to say), even though money does appear to be in short supply these days. Someone can throw a lifeline, like a Ventas, which certainly has a lot at stake, or Sunrise could try to sell its minority interests in its joint ventures, either to the majority owner (like a Ventas) or to a third party. A few may go at fire-sale prices, but this is a fire-sale situation, isn't it? Another possibility is a high interest rate cash infusion with warrants. What's good enough for Goldman Sachs or GE should be good enough for Sunrise. One of the problems is that the company really has no real estate that it controls, which makes a corporate recapitalization more difficult, and this fact also keeps away investors who have a bias towards hard assets. So, despite the current stock price indication, we still believe that something will work out for Sunrise.

There has, however, been some market fallout, as both Ventas and HCP plunged by up to 15% earlier today, hitting new lows, because both REITs have large Sunrise-managed portfolios, although the structure of the relationships is different. If a Sunrise bankruptcy would hurt occupancy and operations, than both REITs would feel the impact, but differently. Again, we don't think it will happen at this point in time, but investors are always looking for a reason to sell in this market, and unfortunately, they have found one.


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