Sunrise Senior Living Says Trouble Maybe On Its Horizon

Company ceases new construction and auditors give ‘going concern’ opinion

Sunrise Senior Living announced its fourth quarter results that show a net loss for the fourth quarter and twelve months ended December 31, 2008 was $305.6 million and $439.2 million, or $6.07 and $8.72 per fully diluted share, respectively, as compared to net loss of $124.0 million and $70.3 million, or $2.48 and $1.41 per fully diluted share, for the fourth quarter and twelve months ended December 31, 2007, respectively.  The company discusses the latest restructuring efforts for the debt of some of its subsidiaries and and warns that if it cannot come to some agreement prior to March 30, 2009, its lenders could exercise the rights to accelerate the payment of all amounts then outstanding under that credit facility.  According to its release, Sunrise does not currently expect that it would be able to fully repay its outstanding borrowings.  As of December 31, 2008, the company’s total debt was $636.1 million and had $29.5 million of cash and cash equivalents.  In mid-day trading, the company’s stock price was down almost 40% to .40 per share from its open.

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Sunrise expects that it has cash balances and cash flow to meets its needs through March 30, 2009 and cannot borrow additional funds under its bank credit facility .  In response to these factors, Sunrise is preserving cash reducing financial obligations and reach negotiated settlements with various creditors to preserve its liquidity and has also stopped funding certain projects and other obligations, and is seeking waivers with respect to existing defaults under many of its debt obligations to avoid acceleration of such obligations. Specifically, Sunrise has stopped or reduced payments associated with its German communities, development projects and its Fountains venture.  Additionally, Sunrise is in discussions with various venture partners and third parties regarding the sale of certain assets to increase liquidity and reduce its obligations.

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In a bold statement / request in its filing Sunrise says:

The Company believes it is in the best interests of all of its creditors to grant such waivers or reach negotiated settlements with Sunrise to enable the Company to continue operating. However, there can be no assurance that such waivers will be received or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy. There can be no assurance that any of these efforts will prove successful. In the event of a failure to obtain necessary waivers or otherwise achieve a restructuring of its financial obligations, Sunrise may be forced to seek reorganization under the U.S. Bankruptcy Code. The existence of these factors raises substantial doubt about the Company’s ability to continue as a going concern and its auditors have modified their report with respect to the 2008 consolidated financial statements to include a going concern reference.

Sunrise also announced that it does not intend to begin construction on any project in the United States in 2009 and has only two construction starts projected for the United Kingdom this year. At December 31, 2008, Sunrise had 26 communities under construction in North America and the United Kingdom and has strongly suggested to its lenders that they complete the funding of the projects through completion. The company states that is not in compliance with many of its construction loans and that its lenders could cease funding these projects.  The company addresses that once the projects are completed, it feels that there are adequate reserves to fund the lease up period.  However, based upon the current economic environment, are those assumptions still valid?

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For the full earnings release, click here.

For the company’s conference call, click here.

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