Sunrise Senior Living

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Sunrise Senior Living

• Caitlin Bizzotto
• Ben Hier
• Patricia Shongedza
• Zhihao Tong
• Gleb Zarkh
• November 27, 2007

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Agenda

• Company Industry Overview
• Macroeconomic Outlook
• Position in portfolio
• Accounting Financial Restatement Issues
• DCF
• Comparable Multiples Analysis
• Recommendation

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(No Transcript)
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Company Overview

• Offers short and long term personalized care to
  seniors including medical care
• Services include
• Assisted living
• Independent living
• Memory care (including Alzheimer's)
• Skilled nursing and rehabilitation services

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Resident Focused Approach
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Profile

• Largest global provider for the elderly
• Founded in 1981 by Paul Terry Klaassen
• Publicly traded for 11 years
• Headquartered in McLean, Virginia
• Expanded internationally in 1999
• Operations in United States, Canada, United
  Kingdom, Germany
• Over 480 facilities serving 52,000 seniors

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Business Model
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Keys to Success

• Rigorous training program for employees
• Continuous improvement
• Sunrise University
• Gallups Q12C13
• Mystery Shopping
• Quality Assurance Audits

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One Year Stock Performance
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Long Term Care Facilities Industry

• Part of the Health Care sector
• Increasing demand for retirement options in the
  next 5-10 years
• Sunrises top three competitors
• Assisted Living Concepts, Inc. (ALC)
• GGNSC Holdings LLC. (Private)
• Manor Care Inc. (HCR)

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Aging Population

• In 2006 people age 65 or older accounted for
  12.4 of the population or 37.3 million people
• Within the next three years it is estimated that
  over 40 million people will be over 65
• In 2030 those over 65 will grow to 20 of the
  population

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Recent Trends

• Downsizing Seniors are choosing to move into
  smaller houses or condos which require less
  maintenance and up-keep.
• Independent Living Seniors are leading more
  active lifestyles and opting to stay independent.
  Many communities are catering to their changing
  lifestyle.

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More Trends

• Alzheimers and Mental Disorders As more people
  are diagnosed with mental diseases, there will be
  an increased demand for specialized care.
• Respect, Dignity, and Values Many residents are
  moving from traditional ideals to modern living
  arrangements.

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Industry Analysis

• Rivalry Low rivalry between competitors.
  Companies compete on a diversification strategy
  rather than on price. The large aging population
  and increasing demand allow each company to have
  their share.
• Barriers to Entry Barriers are high due to the
  specialized nature and large expenditures of the
  business.

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Industry Analysis Continued

• Power of Buyers Power of buyers is moderate.
  Individual residents do not have much power in
  affecting prices. However, large insurance
  companies can influence what a company charges
  their residents.
• Power of Suppliers Power of suppliers is high
  because a community needs their employees to
  function. If they cannot keep and attract a
  professional and caring staff, their residency
  rates will decrease.
• Threat of Substitutes This threat is moderate.
  When it comes to retirement, a person has many
  options. They can chose to move into a
  retirement community, continue with their current
  living situation or move in with their children.
  Finances play a major role in what option a
  person chooses.

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Macroeconomic- Real Estate

• Sunrise either acquires or develops its living
  communities
• As of Sept. 2007 40 Communities under
  development
• Past quarter decided to discontinue four
  development projects due to adverse economic
  conditions

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Macroeconomic Overview

• U.S. Housing Market
• Weak Dollar Inflation
• High Crude Oil Prices (96.90)
• Declining Consumer Confidence

Sources NAHB Conference-Board.org
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Macroeconomic Effects

• Seniors may be willing to hold off selling their
  primary homes and move to an assisted living
  community
• The average daily rate per senior citizen is
  155--- worsening economic conditions can limit
  seniors to pay the high expenses

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RCMP Transaction History

• May 1, 2006
• Bought 600 _at_ 37.00
• Initial Investment of 22,200
• April 5, 2007
• Held 600 _at_ 40.39

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Portfolio
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Correlation
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Preliminary Charges (2006-2007)
22-Story Sunrise Condo Dallas, TX
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Accounting Issues (1999-2005)

• 130M Cumulative reduction in net income
• Will not affect cash flow or current cash balance
• 44 of Communities are joint ventures
• 26M After tax stock option expense
• Offset by an increase in contributed capital to
  SE
• Assume 7-8M future annual expense

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Restatement Item explanation
Revenue from managing the communities
Reimbursable expenses for Managed communities
Services (construction supervision, training,
marketing) after transferring of property to JV
Delivery of senior living services to the
residents
Services (site selection, zoning design) prior
to transferring of land to JV
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Restatement Income Statement

• Adjustment according to the 3Q 07 report and
  statement made by Sunrise

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Restatement Income Statement

• Net income (loss) as reported is the NI in
  former report
• Adjusted NET INCOME report is the NI reported
  deducts the adjustment in 3Q07 report.
• The last line is the Net Income computed from
  the restated income statement.

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Restatement Ratios
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Forecast
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Valuation

• SRZ current price 31.92
• Current Mkt Cap 1,680,287,000
• Rf 10 years treasury yield
• Rm-Rf Historical risk premium

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Discounted Cash Flow

• DCF for 2006 and 2007
• Capex keeps stable as Sunrise changes focus to
  management model.

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Sensitivity Analysis
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Sensitivity Analysis

• DCF Sensitivity Analysis
• Growth Rate is 5
• WACC is 9.85

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P/E Multiple

• P/E for the industry is about 22, as P/E for
  Sunrise is normally lower than the industry from
  history data, P/E is 21 for 2007 estimation.

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Multiples Valuation

• Rough estimate because TTM Earnings, Sales, Book,
  and Cash Flow figures for Sunrise are estimates

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Recommendation

• Sell 300 Shares (Market Order)
• Stock is within DCF/ Multiples range
• Do not see a short term (1yr) catalyst
• Challenging economic environment
• Financial reporting issues
• Tax loss advantage