What 10 Years Can Do

With everyone so fixated on the future (the upcoming flu season, the 2026 Boomer Boom, etc…), and rightfully so, we also think it’s important to peak back in the past to gain some perspective. A #flashbackfriday, if you will.

November 2008 doesn’t conjure many fond memories for most industries, but particularly for the capital markets. By that month, the Dow Jones Industrial Average dropped below 8,000 (on its way to 6,443 in March 2009). Liquidity had dried up, and investors, more often than not, were looking to sell, not buy (even if some of those buys would have paid off many times over in hindsight). And when those selling shareholders had a target in mind, they went for blood, selling until the company virtually became a “going concern” case.

One of those targets was one of the higher-end providers of seniors housing at the time, Sunrise Senior Living. After a 75% drop in its share price in October 2008, shareholders took no prisoners, tanking it another 91% in the first three weeks of November to rest at just $0.27 per share, or a market cap of $14 million.

[from the December 2008 issue of The SeniorCare Investor] “Out of the numerous calls we received in the past few weeks, the number one question was, Will Sunrise file for bankruptcy protection? The easy answer would be, only if they are forced into it by their creditors. The second easy answer would be, perhaps, if that is the only way the company can remain intact.”

So, what prompted the sell-off?

It didn’t help that just the previous month, Health Care REIT (now Welltower) terminated its $643.5 million acquisition of Arcapita’s 90% interest in 29 Sunrise-managed properties. But really, it was a combination of Sunrise’s looming debt maturities (and prior covenant violations) and uncertain development pipeline. The company had a total of $209 million of debt maturing in 2009, $95 million of which was from its bank line, and had a January 31, 2009 deadline for a non-bankruptcy recapitalization. That issue, we believed at the time, could be resolved.

But the bigger issue for the company was if its development pipeline dried up. Sunrise, up until then, had found its niche developing Class A properties, selling them at a premium and then managing them under long-term and lucrative contracts. But when 54 development projects were abandoned in the third quarter of 2008 alone, red flags shot up.

“Development fees are gone, profits on sales of properties are gone and now the company is basically left with its management fee revenues, and that just isn’t enough, at least, not for this the company in its present form. No one knows how long this capital market crisis will be strangling us, but 2010 seems to be the earliest date when liquidity may return to the market in any meaningful way, and that assumes the economy begins to pick up in the second half of next year, an assumption that is a bit risky right now.”

Later in 2009, Sunrise did default on its bank line and its financials and occupancy took significant hits, but the seniors housing market fundamentals were far from disastrous (the start of the “recession-proof” reputation) and seniors housing stocks recovered, including Sunrise’s. It was generally accepted that the Sunrise situation was a bit of an overreaction, and the company began to take steps to right the ship, including selling 21 of its owned and managed properties to Brookdale Senior Living for a higher-than-expected price of $204 million, or nearly $147,000 per unit. Sunrise also reached a restructuring agreement with its lenders, Capmark Finance and Natixix, which owned about 77.5% of the company’s outstanding debt.

The turnaround continued the next two years and culminated in Health Care REIT’s 2012 acquisition of the company for $1.34 billion, or $14.50 per share plus $495 million in assumed debt. Quite the comeback from $0.27 per share in November 2008. Health Care REIT turned around and sold an 80% interest in the management company to KKR in January 2013 for about $104 million. KKR then offloaded its interest in early 2014, with Health Care REIT increasing their share to 24% and Revera Inc. picked up the remaining 76%. All in, the 80% interest was rumored to have sold for $350 million. A turnaround indeed.

Today, the dark days of November 2008 are far behind Sunrise, which currently operates more than 300 communities across the United States, Canada and the United Kingdom. Its communities are still often the high-end choices in their markets, and new development continues to chug along, albeit at a more conservative pace than 10 years ago. What a difference 10 years and a Great Recession make.

 

 

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