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SUNRISE SENIOR LIVING, Inc. April 27, 2006. AGENDA. Introduction Stock Market Review Industry Review Company Review Investment Thesis Recommendation. INTRODUCTION. Sunrise Senior Living, Inc is a provider of senior living services Business Model

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Agenda
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Introduction
INTRODUCTION

  • Sunrise Senior Living, Inc is a provider of senior living services

  • Business Model

    • Provide range of Senior Living Services

    • Develop Senior Living communities for third parties

  • Geographies covered

    • US, Canada, UK & Germany

  • Stock Ticker : SRZ


Company background
COMPANY BACKGROUND

  • Founded in 1981 by current CEO Paul J Klaassen

  • Listed in 1996

  • Approximately 3/4th of the company held by Institutionals

  • Component of

    • S&P Small Cap 600 Index,

    • NYSE Healthcare Index,

    • S&P 1500 Composite Index


Agenda1
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Stock market review
STOCK MARKET REVIEW

  • US markets have returned < 10% in last 5 years

  • US Stock Markets lagging behind world markets

  • YTD MSCI US Index is the second worst performer


Agenda2
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Industry review
INDUSTRY REVIEW

  • Sunrise Senior Living (SRZ) is classified under :

    • Long Term Care Facilities (Yahoo Finance)

    • Health Care Facilities (GICS)

CCRC – Continued Care Retirement Centers, Source: American Senior Housing Association, Citigroup


Industry review1
INDUSTRY REVIEW

  • Fragmented Industry with 2.8% market share for SRZ

    • Top 10 companies control only 12.5% of the market

  • Recent consolidation in the Industry

    • Average price paid for Assisted Living Facility in M&A transactions increased 54% in 2005 to $115,600 per bed

  • Over last 2 years the industry has seen a rebound

    • Beds have grown by 0.7% CAGR

    • Revenues have grown by 3% CAGR

(Source: American Senior Housing Association, Citigroup)


Agenda3
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Company review
COMPANY REVIEW

  • Largest Operator of Senior Living Communities

  • 415 ‘communities’ across the globe

    • Canada – 11 UK – 5 Germany – 2

  • (Source: American Senior Housing Association, Citigroup)

  • 11 new communities added in Q1 of 2006

  • Upscale metropolitan presence

  • Only company in the industry focusing on ‘Management Model’


Services communities
SERVICES & COMMUNITIES

  • Managed communities share increased from 10% in 2000 to 47% in 2005

  • Presence in Skilled Nursing limited

Source: 10k, Citigroup


Ownership pattern
OWNERSHIP PATTERN

  • Consolidated Communities

    • – Owned & Leased by SRZ

  • Joint Ventures Communities

    • – 5 – 8% Management Fees + 20 – 25% equity income

  • Managed Communities

    • – No ownership

    • – 5 – 8% Management Fees


Income statement snapshot
INCOME STATEMENT SNAPSHOT

Reimbursable expenses for Managed communities – pass through

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

Removing the effect of the reimbursements

Income statement for year ended Dec 2005


Growing phase for sunrise
GROWING PHASE FOR SUNRISE

  • Revenue CAGR of 49% over last 4 years

  • Acquisitions propelled managed communities in 2003



Returns on an upscale
RETURNS ON AN UPSCALE

  • Net Income increasing as margin bounced back in 2005

  • Decline in margins because of shift to Managed Communities

  • ROE & ROIC showing an uptrend


Strong balance sheet
STRONG BALANCE SHEET

  • Net Debt in 2005 is in negative territory

  • Cash locked in Net Working Capital reducing

  • Falling Free Cash Flow suggests expansion mode


Stock performance
STOCK PERFORMANCE

  • Outperformed the S&P 500 by 9% in the past 6 months

  • Outperformed the S&P Healthcare Index by approx 130% in the past 5 years


Agenda4
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

    • Competitors Analysis

  • Investment Thesis

  • Recommendation


Outperformed competition consistently
OUTPERFORMED COMPETITION CONSISTENTLY

  • No dividends paid by SRZ

  • Stock Split of 2:1 on Oct 4, 2005


Competitors analysis
COMPETITORS ANALYSIS

Source: Yahoo Finance

  • Third largest player in terms of Market Capitalization

  • One of the highest Return on Assets

  • Trading at highest 5 yr PEG ratio (estimates by Yahoo Finance)


Agenda5
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Strong industry growth over 15 yrs
STRONG INDUSTRY GROWTH OVER 15 YRS

Elderly population expected to grow at CAGR of 1.3%

No of beds expected to grow at 1.6% CAGR

(Source: American Senior Housing Association, American Healthcare Association, National Investment Center, Citigroup)


Strong business model
STRONG BUSINESS MODEL

  • 415 communities with 53000 beds in 35 states

  • Future expansion into International locations

  • Insulated from reimbursement risks

    • About 91% of revenues of 2005 derived from private pay

  • Growth through acquisitions could continue

  • Management Model

    • Sale and long-term management contracts



Margins expanding
MARGINS EXPANDING

  • EBITDA Margin expansion -

    • Moving to management model

    • Increasing expertise in operating communities

  • EBIT Margin expansion because of minimal capex


Conservative capital structure
CONSERVATIVE CAPITAL STRUCTURE

  • Increasing ROA due to decreasing debt & limited capex

  • Net Income growth higher than EBIT

    • Income from excess cash


Agenda6
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

    • Valuation

  • Recommendation


Valuation
VALUATION

WACC = 8.12%

  • Rf – 6 month Treasury rate

  • Rm - Rf – Historical Risk Premium


Discounted cash flow
DISCOUNTED CASH FLOW

  • Terminal Value assumptions

    • EBIT – growing at sustained growth rate

    • Working Capital – assumed to be 20% of 2009

    • Capex – Maintenance caped because of move to management model


Dcf sensitive to wacc growth rate
DCF SENSITIVE TO WACC & GROWTH RATE

  • DCF value sensitive to WACC & growth rate

    • Sustained growth rate of 4%


Agenda7
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

    • Portfolio Diversification

  • Recommendation


Portfolio diversification
PORTFOLIO DIVERSIFICATION

  • Low correlation with all the stocks

    • Highest correlation with MVSN of 0.1535


Agenda8
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation


Buy 600 shares
BUY 600 SHARES

  • At $37.53 – represents 7.13% of portfolio (as on April 26, 2006)

  • Portfolio standard deviation drops from 1.38 to 1.27

  • INVESTMENT THESIS

  • Largest Operator of Senior Living

  • Strong Industry growth

  • Move to Management Model

  • Conservative Capital Structure

  • Net Income growth ~ 14% for next couple of years

  • Stock price includes $6.61 cash as of Dec 2005


Agenda9
AGENDA

  • Introduction

  • Stock Market Review

  • Industry Review

  • Company Review

  • Investment Thesis

  • Recommendation

  • Appendix



Standard deviation without srz
STANDARD DEVIATION (WITHOUT SRZ)

Portfolio standard deviation = SQRT (1.0013 + 0.7368)

Portfolio standard deviation = 1.3183


Standard deviation without srz1
STANDARD DEVIATION (WITHOUT SRZ)


Standard deviation with srz
STANDARD DEVIATION (WITH SRZ)

Portfolio standard deviation = SQRT (0.9153 + 0.7218)

Portfolio standard deviation = 1.2795



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