Sunrise Senior Living(SRZ)
Ross PevitzDave Wetherell
RCMP PresentationApril 5, 2007
Position
Purchased on May 21, 2006 600 shares at $37.00 Original Value of $22,200
Current Stock Price at $40.65 Current Value of $24,390 $2,190 unrealized gain (9.86%)
7.4% of Portfolio
Sunrise Senior Living Mission: “Champion the quality of life for all seniors”
Full range of personalized senior living services
Independent Living
Assisted Living
Alzheimer’s Care
Skilled Nursing
Meals, Transportation, Hospice, Emergency Response, Monitoring, Rehab, Daily Activities, etc….
Company History 1981- Founded by Paul and Terry Klaassen 1996- Initial Public Stock Offering (IPO) 1999- Expand International (UK), launch Frognal 2000- Canada 2004- Established Sunrise REIT 2005- Germany 2007- Pending Sale of Sunrise REIT (Ventas vs HCP)
Acquired companies, Participated in JV’s
Company Background Headquartered in McLean, Va. Largest global senior living provider 440 communities open, 50 more under construction
5 in UK, 2 in Germany, 16 under construction in EU 176 have ownership interest
Over 52,000 seniors $2.3 billion in revenues under management 40,000 team members
Ownership Style Consolidated Communities
Wholly Owned
Joint Venture Communities Management Fees (5-8%) Equity (20-25%)
Managed Communities Management Fees (5-8%) Equity (0%) Over 60% of Portfolio
Leased Acquired and Leased to 3rd Party
176 communities have equity interest including consolidated and JV
Economic Factors
InflationInterest Rate
RiskSupply/Demand
of LTC
Variable Debt,Notes Receivable
Bonds
Revenues fromFee’s & Services
Expected Costs
Credit Risk Competition
Economic Forecast
Mixed Reviews Flat GDP Growth Flat Interest Rates Steady Inflation (2.5%)
Long-Term Care Industry
16.4 Billion Industry Existing supply is old, institutional, poor quality
Nursing homes, Hospitals
Source of Pay Medicare/Medicaid pays for 60% of LT care expenses 36% out of pocket, 4% Private LTCi (↑21% annually) Assisted Living market, 96% revenues are private funds
Regulation Training of Nurses, Licensing, Safety Precautions Benefit Big Firms
Long-Term Care Supply
Short of demand Highly fragmented market High barriers to entry
Capital and Time Management expertise Economies of scale Regulations
Escalating costs of care Healthcare costs growing 2× CPI, (5% annually)
Long-Term Care Demand
Attractive Demographics Baby Boomers Retiring Over 15 million 80+
population by 2020 Better Health Care 1/3 of 80+ require LTC Avg. Resident 80-85 yrs old
Seniors Increase Income ↑ Proportion of Women
Trend of Market
Consolidation Benefit big firms
Shift from Nursing Homes (NH) to ALF ALF charge 66% of nursing homes More autonomous lifestyle
Beginning separation between ALF and NH Improve ALF credit
Competitive Advantage
Market Leadership Strong Brand Name Operational Excellence and Innovation
39K community, 1K headquartered team members Quality Assurance, Sunrise University
Principles of Service and Environment Award winning architecture design Fresh cut flowers, “Yes” policy
Competitive Advantage
Strong Financial Position Sustainable Growth Strategic Partners Management Services Model
1 of the only in the industry Management Contracts Less Debt Reduce Risk Profile Stable Revenue Stream
Business Relationships JPMorgan Fleming MetLife Pramerica Prudential Public Pension Funds Sunrise Living REIT Investcorp Healthcare Properties GE Healthcare Financial Carlyle Group Arcapita HSH Nordbank AEW / CaIPERS
Management Services Model Enter into Management Contracts Professional fees from Development
Market feasibility analysis Site selection, zoning approvals
Management fees, Post-opening Training, HR, IT Resident Care, Dining, Facilities Service Sales, Accounting
Incentive Fees Equity of Earnings Recapitalization Potential
Growth Drivers
Metropolitan Focus Deep Markets Regional Infrastructure
Same Community Growth Occupancy (↑ 3.5%) Ancillary Services
Return on Invested Capital Interest Income Repurchase Shares
Communities with ownership interest
Growth Drivers New Construction
2,000 to 2,500 units per year (8-10 communities)
Joint Venture Acquisition and Development September ’06- Trinity Hospice, $73 million September ’06- 6 Aston Gardens communities, $460 million
Acquired Time Properties Property Type
The Fountains July, ’05 17, Joint Venture Senior Living
Greystone May, ‘05 14, 17 Construction,
Management
CCRC; not-for-profit
Eden Care November, ‘03 22, Management Senior Living
Marriot Senior Living
March, ‘03 129, Management and Leased
Senior Living
Growth Drivers New Management Contracts!!
Consolidated, JV, and 3rd party managed community revenues
Ratios Transferred Property to Sunrise REIT in ’04 Reduction in Working Capital Huge Reduction in Debt levels
99 00 01 02 03 04 05Current Ratio 2.34 0.80 1.49 2.22 1.43 1.31 1.22Quick Ratio 1.74 0.64 1.91 5.94 6.43 4.67 4.05Operating Margin 20.14% 23.35% 25.16% 22.09% 21.66% 14.51% 17.94%NWC/TA 0.11 (0.01) 0.05 0.18 0.18 0.24 0.24Interest Exp/TA 0.03 0.04 0.03 0.03 0.03 0.01 0.00Interest Coverage 1.58 1.61 2.80 3.57 4.30 9.94 30.24Rev/TA 0.22 0.28 0.31 0.39 0.42 0.41 0.44EBITDA/TA 0.23 0.30 0.36 0.45 0.50 0.44 0.45TA/E 3.29 3.20 2.87 2.40 2.06 2.11 2.10
will continue this trend going forward
Trends
Development Costs
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
800,000,000
900,000,000
2000 2001 2002 2003 2004 2005
Property & equipment, net:
Shift from Owned to Managed Communities
Trends
Strong & Increasing ROE
Operating Margin reflects shift to Management Model
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2005 2006 2007 2008 2009 2010 2011
Oper. PM
TAT
ROE
Year Oper. PM TATInterest
Exp RateEquity Mult.
Tax Retention ROE
1999 20.14% 0.231 0.030 3.29 0.67 3.76%2000 23.35% 0.304 0.044 3.20 0.67 5.78%2001 25.16% 0.364 0.033 2.87 0.67 11.30%2002 22.09% 0.453 0.028 2.40 0.67 11.57%2003 21.66% 0.501 0.025 2.06 0.67 11.49%2004 14.51% 0.438 0.006 2.11 0.67 8.09%2005 17.94% 0.447 0.003 2.10 0.67 10.89%2006 22.54% 0.469 0.002 1.92 0.67 13.30%2007 27.93% 0.478 0.002 1.88 0.67 13.31%2008 30.55% 0.461 0.002 1.84 0.67 15.64%2009 31.81% 0.439 0.001 1.81 0.67 16.11%2010 33.28% 0.426 0.001 1.78 0.67 16.05%2011 34.68% 0.424 0.001 1.78 0.67 16.67%
Extended DuPont Equation
TrendsRevenue Trends
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
2003 2004 2005 2006
Management & professional services - operating communities
Management & professional services - preoperating communities
Resident fees
EBITDA
Reflects Shift to Management Model
Away from Wholly Owned
Flattening of Resident Fees
NPVFCF $2,274,086,321Shares Outstanding 50,385,000
Price/Share $45.13+ 10% $49.65- 10% $40.62
DCF & WACC
Terminal Growth Rate 4.00% Total Debt 200,828,000 200,828,000 200,828,000 Market Cap 1,990,000,000 1,990,000,000 1,990,000,000 Firm Value 2,190,828,000 2,190,828,000 2,190,828,000 Debt/Firm Value 9.17% 9.17% 9.17% Equity/Firm Value 90.83% 90.83% 90.83% Cost of Debt 6.40% 6.40% 6.40% Tax Rate 33.00% 33.00% 33.00% After-tax cost of debt 4.29% 4.29% 4.29% Cost of Equity: Risk Free rate 4.63% 4.63% 4.63% Beta 1.38 1.38 1.38 Average Annual Return, S&P 8.00% 10.40% 12.00% Market Risk Premium 3.37% 5.77% 7.37% Market Risk Premium*B 4.65% 7.96% 10.17% Cost of Equity 9.28% 12.59% 14.80% WACC 8.82% 11.83% 13.84% WACC in Percent 8.82% 11.83% 13.84%
NIDepr & AmortΔ NWCCapExFCF
2007 2008 2009 2010 2011 2012 TV113,053,765 163,032,848 191,849,263 207,006,707 225,621,231 244,671,436
42,998,766 42,783,772 42,569,853 42,357,004 42,145,219 41,934,49382,541,524 189,089,100 115,659,599 110,988,077 69,395,760 53,261,466(3,167,985) 433,796 (2,320,694) (4,170,398) (2,995,730) (2,342,441)76,678,992 16,293,724 121,080,211 142,546,031 201,366,420 235,686,903 3,009,535,947
Sensitivity Analysis Net Income to Operating Income and Operating Expenses
Two major inputs
Highly sensitive to both
604,252,900 625,000,000 650,000,000 675,000,000 700,000,000 725,000,000 750,000,000 775,000,000 800,000,000 825,000,000 850,000,000 875,000,000 900,000,000450,000,000 122,929,740 143,676,840 168,676,840 193,676,840 218,676,840 243,676,840 268,676,840 293,676,840 318,676,840 343,676,840 368,676,840 393,676,840 418,676,840492,573,655 80,356,085 101,103,185 126,103,185 151,103,185 176,103,185 201,103,185 226,103,185 251,103,185 276,103,185 301,103,185 326,103,185 351,103,185 376,103,185550,000,000 22,929,740 43,676,840 68,676,840 93,676,840 118,676,840 143,676,840 168,676,840 193,676,840 218,676,840 243,676,840 268,676,840 293,676,840 318,676,840600,000,000 (27,070,260) (6,323,160) 18,676,840 43,676,840 68,676,840 93,676,840 118,676,840 143,676,840 168,676,840 193,676,840 218,676,840 243,676,840 268,676,840650,000,000 (77,070,260) (56,323,160) (31,323,160) (6,323,160) 18,676,840 43,676,840 68,676,840 93,676,840 118,676,840 143,676,840 168,676,840 193,676,840 218,676,840700,000,000 (127,070,260) (106,323,160) (81,323,160) (56,323,160) (31,323,160) (6,323,160) 18,676,840 43,676,840 68,676,840 93,676,840 118,676,840 143,676,840 168,676,840750,000,000 (177,070,260) (156,323,160) (131,323,160) (106,323,160) (81,323,160) (56,323,160) (31,323,160) (6,323,160) 18,676,840 43,676,840 68,676,840 93,676,840 118,676,840800,000,000 (227,070,260) (206,323,160) (181,323,160) (156,323,160) (131,323,160) (106,323,160) (81,323,160) (56,323,160) (31,323,160) (6,323,160) 18,676,840 43,676,840 68,676,840850,000,000 (277,070,260) (256,323,160) (231,323,160) (206,323,160) (181,323,160) (156,323,160) (131,323,160) (106,323,160) (81,323,160) (56,323,160) (31,323,160) (6,323,160) 18,676,840900,000,000 (327,070,260) (306,323,160) (281,323,160) (256,323,160) (231,323,160) (206,323,160) (181,323,160) (156,323,160) (131,323,160) (106,323,160) (81,323,160) (56,323,160) (31,323,160)950,000,000 (377,070,260) (356,323,160) (331,323,160) (306,323,160) (281,323,160) (256,323,160) (231,323,160) (206,323,160) (181,323,160) (156,323,160) (131,323,160) (106,323,160) (81,323,160)
1,000,000,000 (427,070,260) (406,323,160) (381,323,160) (356,323,160) (331,323,160) (306,323,160) (281,323,160) (256,323,160) (231,323,160) (206,323,160) (181,323,160) (156,323,160) (131,323,160)1,050,000,000 (477,070,260) (456,323,160) (431,323,160) (406,323,160) (381,323,160) (356,323,160) (331,323,160) (306,323,160) (281,323,160) (256,323,160) (231,323,160) (206,323,160) (181,323,160)
EBITDA (Oper Inc)
OperEx
Share Price SensitivityCapEx minimal effect
WACC significant impact
8.00% 8.50% 9.00% 9.50% 10.00% 10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00%5,000,000 $91.68 $81.04 $72.54 $65.59 $59.81 $54.92 $50.74 $47.11 $43.95 $41.16 $38.69 $36.48 $34.494,000,000 $91.70 $81.06 $72.56 $65.61 $59.83 $54.94 $50.76 $47.13 $43.97 $41.18 $38.71 $36.50 $34.513,000,000 $91.72 $81.08 $72.58 $65.63 $59.85 $54.96 $50.78 $47.15 $43.99 $41.20 $38.73 $36.52 $34.532,000,000 $91.74 $81.10 $72.60 $65.65 $59.87 $54.98 $50.80 $47.17 $44.01 $41.22 $38.75 $36.54 $34.551,000,000 $91.76 $81.12 $72.62 $65.67 $59.89 $55.00 $50.82 $47.19 $44.03 $41.24 $38.77 $36.56 $34.57
0 $91.78 $81.14 $72.64 $65.69 $59.91 $55.02 $50.84 $47.21 $44.05 $41.26 $38.79 $36.58 $34.59(1,000,000) $91.79 $81.16 $72.66 $65.71 $59.93 $55.04 $50.86 $47.23 $44.07 $41.28 $38.81 $36.60 $34.61(2,000,000) $91.81 $81.18 $72.68 $65.73 $59.95 $55.06 $50.87 $47.25 $44.09 $41.30 $38.83 $36.62 $34.63(4,000,000) $91.85 $81.22 $72.72 $65.77 $59.99 $55.10 $50.91 $47.29 $44.13 $41.34 $38.87 $36.66 $34.67(6,000,000) $91.89 $81.26 $72.76 $65.81 $60.03 $55.14 $50.95 $47.33 $44.17 $41.38 $38.91 $36.70 $34.71(8,000,000) $91.93 $81.30 $72.80 $65.85 $60.07 $55.18 $50.99 $47.37 $44.21 $41.42 $38.95 $36.74 $34.75
(10,000,000) $91.97 $81.34 $72.84 $65.89 $60.11 $55.22 $51.03 $47.41 $44.25 $41.46 $38.99 $36.78 $34.79(12,000,000) $92.01 $81.38 $72.88 $65.93 $60.15 $55.26 $51.07 $47.45 $44.29 $41.50 $39.03 $36.82 $34.83
CapEx
WACC
ComparablesRATIO COMPARISON (As of 03/29/2007)Valuation Ratios Price SRZ Average BKD HCR Industry Sector P/E Ratio (TTM) $40.95 $1.67 23.69 24.52 NA 24.99 22.32 26.25Price to Book (MRQ) $58.11 $12.56 2.72 4.6275 2.56 6.9 3.67 5.38
Growth Rates(%) SRZ BKD HCR Industry Sector Sales (TTM) vs TTM 1 Yr. Ago 25.79 NA 5.73 20.97 12.48
Financial Strength SRZ BKD HCR Industry Sector Current Ratio (MRQ) 1.22 0.53 1.18 1.72 2.49LT Debt to Equity (MRQ) 23.93 95.75 166.65 133.4 39.1Total Debt to Equity (MRQ) 32.05 96.93 173.36 140.1 47.8Interest Coverage (TTM) 30.24 -0.45 11.32 9.26 12.48
Profitability Ratios (%) SRZ BKD HCR Industry Sector Operating Margin (TTM) 5.85 -3.41 8.06 10.99 17.84Operating Margin - 5 Yr. Avg. 9.61 NA 7.9 12.28 17.5
Management Effectiveness (%) SRZ BKD HCR Industry Sector Return On Assets (TTM) 6.55 -3.34 7.16 4.79 6.96Return On Investment (TTM) 8.59 -3.73 9.07 5.72 9.78Return On Equity (TTM) 13.79 -9.03 25.18 13.64 14.96
Efficiency SRZ BKD HCR Industry Sector Receivable Turnover (TTM) 30.53 37.64 6.81 10.54 7.05Asset Turnover (TTM) 1.5 0.41 1.52 1.08 0.78
© 1983-2007 Reuters Research Inc. All Rights Reserved. Published by OneSource Information Services, Inc.
Shares Outstanding50,385,000
Outperform Competitors and Industry
Reflect DCF and current Market Evaluation
Lower margin due to inclusion of “reimbursable contracts/expenses”
• Netted line item with NO
effect on bottom line BUT
reduces perceived margin
Portfolio AnalysisAEE AEO CPRT FR JKHY JPM KMB MS MVSN SRCL SRZ WAG
SRZ 0.00118 0.00612 0.00448 0.00055 0.00551 (0.00047) (0.00048) 0.00128 0.00179 0.00094 0.01805 0.00083
AEE AEO CPRT FR JKHY JPM KMB MS MVSN SRCL SRZ WAGSRZ 0.188 0.221 0.209 0.075 0.318 (0.034) (0.057) 0.085 0.060 0.065 1.000 0.070
Correlation
Covariance Matrix
Portfolio Composition
AEE, 0.062072782
AEO, 0.178809236
CPRT, 0.08430163
FR, 0.138717268
JKHY, 0.029350358JPM, 0.136329797
KMB, 0.062961449
MS, 0.097436859
MVSN, 0.015454284
SRCL, 0.049881001
SRZ, 0.074246302
WAG, 0.070439034
Recommendation:
Strong Hold Fierce Demand Advantageous Supply Good Model and Growth Solid Financials Positive DCF Dominant Comparables
Marginal Benefit from Purchase Stock price at High, post-Sunrise REIT Sale
Citations Allan Coukell, Business is Booming for Assisted Living Industry, WBUR, (Feb. 15, 2007),
available at <http://www.wbur.org/news/2006/55876_20060215.asp> (last visited Apr. 1, 2007).
Assisted Living Rates Increase Slightly After Big Jump Last Year, Retirement Planning News, (Nov. 3, 2006), available at <http://www.seniorjournal.com/NEWS/Retirement/6-11-03-AssistedLiving.htm> (last visited Mar. 29, 2007).
Christine Bonney, ASSISTED LIVING RATES INCREASE SLIGHTLY, MetLife (Jan. 2007), available at <http://www.metlife.com/Applications/Corporate/WPS/CDA/PageGenerator/0,4132,P250%255ES883,00.html> (last visited Apr. 1, 2007).
Industry Performance and Statistics, National Investment Center, (2007), available at <http://www.nic.org/data/faq.asp> (last visited Mar. 28, 2007).
Karen Stevenson, Assisted Living Facilities, ElderWeb, (Dec., 2006), available at <http://www.elderweb.com/home/node/2699> (last visited Mar. 28, 2007).
Reuters Research Inc., Sunrise Senior Living – Competitors Report, OneSource Information Services, Inc., (Mar. 29, 2007), available at <http://businessbrowser.onesource.com/HomePage.asp> (last visited Mar. 29, 2007).
Sunrise Senior Living, Investor Relations, Investor Relations Home, (Mar. 25, 2007), available at <http://phx.corporate-ir.net/phoenix.zhtml?c=115860&p=irol-irhome> (last visited Mar. 28, 2007).