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Is Sunrise overreaching?
Paul
Klaassen guessed right back in 1981 when he and wife
Terry launched Sunrise Assisted Living Inc. to give
retirees nicer and pricier ways to spend their golden
years. Creating a pioneering concept, the McLean-based
business began building tastefully appointed ‘homes’
where residents could live in relative independence
— an idea that grew to 206 properties.
Now
Klaassen is taking another big gamble: In late December
Sunrise announced a $150 million deal to buy out a major
competitor, Marriott Senior Living, and take over management
of 126 properties. The deal will more than double the
number of Sunrise residents from 17,000 to 39,500 and
add another 15,000 employees to its current 13,000.
It also gives Sunrise a presence in the nation’s
top 30 metro markets. The combined company will have
27 properties in Virginia.
The
move will make Sunrise a dominant player. But Klaassen,
Sunrise’s chairman and CEO, says the company wants
to grow even larger after it gets through a yearlong
transition. The seniors housing market has grown quickly
in the past five or six years but is ripe for consolidation,
Klaassen says. Top providers have only about 6 percent
of that market with the rest held by small providers.
“We believe we will pick up our share of the business
over the next five to 10 years,” he says.
The Marriott buyout is also part of Sunrise’s transition
to a management services company. It doesn’t own
most of the facilities; it just operates them. The company
wants to trade the volatility of owning real estate
for the more predictable income of operating contracts.
Since
the country is growing older, the deal seems like a
good move. Yet Friedman, Billings, Ramsey analyst Merrill
H. Ross still rates the stock only “market perform.”
Sunrise faces “a lot of execution risks” in
the twin tasks of absorbing the Marriott business and
transforming itself to a management firm, she says.
It is also entering new markets in retirement states
such as Arizona and Texas, taking over Marriott’s
more intensive skilled nursing care service, an area
in which Sunrise has limited experience.
Ross
also points to Sunrise’s problems with the 1999
acquisition of Ohio-based Karrington Health, a $191
million deal for 34 properties. “That was not a
particularly good acquisition for them,” she says,
while acknowledging that, unlike the Marriott deal,
the Karrington deal involved a lot of real estate. Sunrise
CFO Larry Hulse says Sunrise learned a lesson —
the Marriott deal won’t add any real estate, just
management contracts “which are profitable from
day one.” Thus far the company’s had a decent
year: net income for the third quarter of 2002 rose
24 percent from the previous year to $15.4 million.
The
company says the deal won’t affect its earnings
for 2003, though it will have more to say after the
deal closes at the end of March. Ross notes that Sunrise
has the advantage of being in a niche that requires
considerable experience, so the competition is limited.
If Sunrise makes it through the transition, it will
be positioned to offer the elderly and their families
a full range of living arrangements — from independent
living to skilled nursing for residents unable to care
for themselves.
—
by Robert Burke
Virginia
Business - February 2003
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