Sunrise Senior Living On The Ropes

November 7, 2008

November 7, 2008
Sunrise Senior Living released its third quarter earnings results this morning, and not only were the numbers bad, the tone of the release was a bit on the scary side. In the first paragraph alone, all we read were "very difficult," "reducing overhead," "slashing development-related spending and selling or repositioning assets." We were afraid to continue reading. How did the market react? The shares sank to a new low of $1.82 and as of mid-afternoon they recovered a bit from that and are down 28% on the day.

The rest of the earnings release talked about upcoming problems with debt covenants, needing to raise money for debt maturities that may not get rolled over, no money for new development and that they will suspend development at its Greystone subsidiary. And, their hospice subsidiary, Trinity, will discontinue operations at the end of this year! The bottom line is that the company seems to be in dire shape, and worse than we thought. That is why the cancellation of the Arcapita deal with Health Care REIT, which would have netted Sunrise close to $50 million, was so important for Sunrise, even though it was the right thing for the REIT to do. They are bleeding and someone had better throw them a lifeline. The only good news is that occupancy increased a bit, but we suspect that this may have been as a result of the price discounting that has become so common in the market.

After excluding all non-cash charges and one-time charges and writedowns, Sunrise was not cash flow positive in the third quarter, despite the fact that occupancy hovers close to 90% and facility operating margins improved from a year ago. Call us stupid, but this just doesn't make sense. Cash balances are down $86 million from a year ago, and debt outstanding is up $383 million, much of which reflects putting the German subsidiary debt on the books. This is a troubling situation for the seniors housing industry because Sunrise has been such a leader. While the industry can survive the dismantling of Sunwest Management, if Sunrise blows up, however, watch out. We still believe current management will work through the situation, but it reminds us a little of when the former American Retirement Corp. was on the ropes and trading at $2.00 per share five years ago, with some debt holders pushing for a bankruptcy filing. The company was thrown a lifeline by Health Care Property Investors and in 2006 was sold to Brookdale Senior Living for $33.00 per share. That was an historic turnaround. Let's hope for a repeat.

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