New Accounting Problems At Sunrise

October 16, 2008

October 16, 2008
We have just about had it, and we assume investors have had it as well. When will the real Sunrise Senior Living finally stand up? We thought it was a bad joke (or at least a deja vu experience) when we saw the October 16th SEC filing which stated that the somewhat recently filed 2007 financial statements (you know, the ones that finally came out after a two-year accounting restatement process) can "no longer be relied upon." You've got to be kidding! These results were released just 10 weeks ago on July 31 and now we are told they can't be relied upon? Will we be hearing the same thing about the first and second quarters too? Now we know why Sunrise shares have plunged further than its peers, as this tidbit must have been leaking out.

As we have said for a few years now, accounting is not rocket science, and after a two-year "scrubbing," one would think that the auditors and internal accounting staff at Sunrise would be able to get it right. Wrong. It turns out that the net cash provided by operating activities, originally reported as $235.0 million for 2007, was really only $128.5 million, or just a 45% reduction. If there was a credibility gap before, it has grown even wider. In a market environment like the one we're in, why give investors another reason not to buy your stock? They already have enough reasons, both market-specific and company-specific, but this just makes everyone wary about any numbers coming from the company. Given the rampant price-discounting we have been hearing about around the country, third quarter earnings, from Sunrise and its peers, may be worse than we feared.

What we have no way of explaining is why, as the Dow was dropping by 400-plus points this morning, Sunrise shares actually rose a little despite the new accounting information being available. The rise didn't last very long, and the shares subsequently plunged by more than 30%, hitting an all-time low of $4.72 per share before recovering to just over $5.00. This downward spiral also pushed Brookdale Senior Living to a new low of $8.25 per share as well. Unfortunately, the Sunrise price levels are getting very close to the market questioning the long-term viability of the company, at least in its current form. That would, of course, be calamitous, and quite a shocker, but obviously the problems at the company still run deep. About the worst thing that could happen next would be for Health Care REIT to pull the plug on buying the 29 communities managed by Sunrise and owned by Arcapita, a deal where Sunrise (as minority owner) is supposed to get upwards of $40 million of much-needed fresh cash. The cap rate on the deal was aggressive at the time, but it is even more so now. All we know is that it has been almost seven weeks since the deal was announced...


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