The Dealmakers Forum has an article about Sunrise charting a new course and discussion of how much money they are allegedly losing.
Sunrise Senior Living was founded 27 years ago by Paul and Terry Klaassen when they opened a small nursing home in Virginia they purchased for just $325,000. Now, 27 years later, the company manages more than 440 nursing homes in four countries, has revenues under management of more than $2.4 billion, boasts an average same-community occupancy rate that has been at 90% or better for four consecutive quarters and is perhaps the only company in the industry with a national brand name known to the consumer.
Mr. Klaassen will be relinquishing his chief executive officer duties and will become the non-executive chairman of the board. Mark Ordan, who was brought in earlier this year as the chief administrative and investment officer, will take over as CEO. And with this change, an era in our industry will come to a close
The company finally filed its 2007 10-K on July 31—the promised date—and the accounting mess that started two years ago is close to coming to an end. The 2007 financial statements stated that total operating revenues last year were basically flat with 2006, and the importance of "buyout fees" to the company’s overall financial performance in both 2005 and 2006. In addition, hospice and ancillary service revenues inceased by 64%, but the associated expenses increased by 80%, causing this business category to go from a small profit to an $8.8 million operating loss.
For 2007, Sunrise posted a net loss of $70.3 million, which was after $214.0 million of gains from real estate sales and the company’s share of earnings in unconsolidated communities. These gains and earnings more than offset the combined $166.5 million in unusual cost items such as loss on financial guarantees ($22.2 million), impairment of goodwill and intangible assets ($56.7 million), write-off of abandoned development projects ($28.4 million), impairment of owned communities ($7.6 million) and the accounting and legal cost of the accounting restatement ($51.7 million).
This means that operating EBITDA was a negative $73.4 million, compared with a positive $110.2 million in 2006. That is a downward swing of $183.6 million, caused mostly by the disappearance of the previously mentioned "buyout fees," which were $134.7 million in 2006 and next to nothing in 2007, and represent, we assume, the fees paid by Five Star Quality Care to Sunrise to buy out Sunrise’s management agreements for properties leased by FVE but operated by SRZ.
The other large item was G&A expense, which increased by a whopping 42.5% year-over-year to $187.3 million but should not include all those costs associated with the accounting restatement. If you do the math, this means that without those buyout fees in 2006, operating EBITDA would have been negative in that year as well, although not as large as 2007. We still have trouble understanding how the management model that Sunrise has adopted can work in this industry if a company can’t make money managing more than 440 properties around the world.
The end result is that the entire increase in cash during 2007 came from a net $56.7 million increase in borrowed funds. In addition, the company had a negative working capital of $116.3 million at the end of 2007 due to $222.5 million of short-term debt and the current portion of long-term debt. Although we usually don’t get worked up about working capital for Sunrise, when the bank line-of-credit is reduced (which it was in July) because of breeches in loan covenants, it does make one pay closer attention to some of the details.
So what has happened over the past several years to this giant in the industry? In an effort to make more money and exclude from themselves from liability or accountability, Sunrise entered into tricky financial loans and buyouts to prevent any judgments for neglect to be collected.
In looking back over the past five years or so, it seems that the biggest problem was that Sunrise got a little ahead of itself, believing that it was so good that it could take risks that others might not take, with some competitors accusing the company of a certain degree of arrogance. In addition, Sunrise decided to get quite aggressive with accounting interpretations several years ago, and it came back to bite them in a big way.
But enough of the past and on to the future. As management transitions from Mr. Klaassen to Mr. Ordan, there will be increased attention on cost control, and after the unprecedented increase in overhead expense last year, the company has announced a program to cut between $15.0 million and $20.0 million on an annualized basis beginning in 2009, which will include some "voluntary" employee reductions.
Second, while Mr. Ordan are concentrating on cutting overhead costs, the other complaint we hear is that management is not paying attention to operations at the local level. Quality of care is crucial, especially for the industry leader, and you don’t want what happened in Pennsylvania last year to happen again, anywhere. With less focus on development over the next 12 months, there should be renewed focus on operations. While it is great that Sunrise has grown to 440 properties under management, that itself may be part of the problem. This industry has some great leaders, but when you scratch beneath that, all we hear is that there is a huge management void, and we hear this from operators themselves.
