Sunrise Senior Living's Turnaround Complicated By Weak Results
By Veronica Dagher, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Weak financial results are creating more headaches for
Mark Ordan, the former Mills Corp. chief executive who was brought in last year
to help turn around Sunrise Senior Living Inc. (SRZ), the troubled operator of
senior housing.
In recent months it appeared that Ordan was making progress by steadily
reducing debt, cutting expenses and putting assets up for sale. The stock of
McClean, Va.-based Sunrise, which operates 403 senior living communities in
North America and Europe, soared to over $5 a share from 27 cents in March when
the company warned that it might have to seek bankruptcy protection.
But disappointing third-quarter results, which the company reported Monday,
reminded investors the company's struggle is far from over. Sunrise's shares
have plummeted over 30% since the company said its revenue fell to $382.6
million compared with $412.6 million one year earlier and a key occupancy rate
fell to 86.7% from 90.5%. On Tuesday, Sunrise's shares closed down 9.2%, to $
2.66, on the New York Stock Exchange.
Ordan, 50, who also was one of the founders of the Fresh Fields Markets
organic food chain, acknowledges Sunrise still faces challenges. He called the
company's turnaround "a work in progress." When he was asked what inning the
game was in, he replied: "Good games sometimes go into extra innings."
Sunrise's stumble is a sign of the pressures in the senior care segment of the
real estate industry. Sunrise and other companies invested heavily on the
assumption that seniors in North America and Europe would continue paying high
prices for homes in housing complexes geared toward their needs.
But many seniors are opting for more frugal alternatives to save money for
their children and grandchildren who are struggling with the economic downturn.
This has meant higher vacancies in some of the more discretionary segments of
the business, like independent living residences, and has forced providers to
tailor their strategies. Sunrise, for example, has been offering more shared
units as an option to its more expensive private residences.
In this adverse climate, Sunrise faces several hurdles it needs to overcome
soon. The company is in default on about $412 million in long-term debt, much of
it borrowed to finance its ill-fated expansion into Germany that it began around
2005.
In October, Sunrise entered into a restructuring pact with most of the lenders
on those troubled German communities to settle their claims against the company.
Investors viewed the deal as a major milestone for Ordan. Once finalized, the
pact will effectively settle about $121.6 million of the defaulted debt.
Still, Sunrise has to reach agreements with some remaining German lenders. In
addition, Sunrise has about $82 million of debt due by year-end and roughly $110
million of debt due next year.
Ordan said he is in constant contact with the company's lenders. "I'm always
reachable. I let them know I'm on their side. I didn't create these problems and
I'm here to find solutions," he said.
Ordan has been successful so far--namely by extending the company's bank
credit facility for the 13th time this fall, and inking a pact to shed the
company's stake and management of its problematic Fountains venture, which
included 16 several continuing care communities, located around the U.S.
Sunrise, which makes much of its money through managing senior housing
facilities for property owners, also faces a lawsuit from one of its largest
customers, HCP Inc. (HCP). HCP shocked the normally clubby world of real estate
investment trusts this June by filing the suit alleging that Sunrise is managing
HCP-owned properties inefficiently and that it improperly charged HCP for
certain items. Sunrise has denied the charges and claimed that HCP is trying to
get out of onerous management contracts.
Many watchers say the complicated suit, which is being tried in two states,
may be settled out of court. In July, Sunrise scored a slight victory when a
Delaware judge refused to expedite the proceedings as HCP requested.
"You either wilt or fight back and we fight back," said Ordan, who adds that
the lawsuit has "galvanized" the company.
William Wallace III, an attorney representing HCP, said the REIT brought the
suit "when Sunrise made it clear they couldn't or wouldn't satisfy their
obligations."
The first Sunrise community opened in Oakton, Va., by Paul Klaassen and his
wife, Terry, in 1981. Rapid expansion mostly in the earlier part of this decade
created Sunrise's debt woes today. Sunrise also was dogged by an accounting
scandal and an investigation by the Securities and Exchange Commission, which
forced the company to restate about $173 million of previously reported profits.
Now, Sunrise's recently announced third quarter might make it more difficult
for the company to deal with its balance sheet problems.
Jerry Doctrow, analyst at Stifel Nicolaus, said Sunrise's performance is
suffering relative to its peers partly because the financial uncertainty
surrounding the company is keeping some residents away. He also said Sunrise's "
premium product" may be less competitive in a soft economy.
Ordan said although he was "not pleased" with the company's financial
performance, "tremendous progress" has been made.
"I don't think the third-quarter results will make our turnaround harder. We
saw these results coming and have been working to address our weaknesses for
some time," he said.
-By Veronica Dagher, Dow Jones Newswires; 212-416-2261; veronica.dagher@
dowjones.com
(END) Dow Jones Newswires
11-10-091649ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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