Sunrise Sale May Be Complicated By Credit Crunch-Expansion Costs Could Rise

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By Cecilia Kang and Alejandro Lazo
Washington Post Staff Writers
Monday, August 13, 2007; Page D01

Sunrise Senior Living may find it harder to attract a buyer in the aftermath of a credit crunch felt around the world last week, and the turmoil could also affect the company’s ability to fulfill its expansion plans, analysts said.

The McLean operator of assisted-living communities has been embroiled in accounting troubles and a Securities and Exchange Commission investigation, and pressure from major shareholders forced the company to seek alternative strategies, including a possible sale.

The possibility of a sale was announced in July, when private-equity firms were still offering large sums for such companies as Hilton Hotels and the Manor Care nursing-home chain. But the debt market upheaval, which threatens to end the buying spree, may complicate Sunrise’s plans, analysts said.

“The surrounding weakness of the credit market is central to Sunrise’s ability to sell the business,” said Derrick Dagnan, a senior analyst who follows Sunrise for Avondale Partners in Nashville. “The credit crunch has made investors question valuations of these companies and certainly question the ability of any potential buyer to finance and close the deal.”

Sunrise’s steady cash flow and growing business make it an attractive target for private-equity buyers and other investors, analysts said. The company’s shares, which closed Friday at $38.84, could be valued $10 higher in a buyout deal, they said.

On Friday, the company filed a partial report of second-quarter results with the SEC, but it did not hold a conference call with investors and declined interview requests.

Despite internal troubles, Sunrise remains the leader in the assisted-living industry and is expected to continue growing as baby boomers age. The company operates 453 communities in North America and Europe and has plans to begin building homes with capacity for 15,000 more residents by the end of 2009.

Analysts, however, questioned whether the credit-market troubles could make it tougher for Sunrise to finance those communities.

“If development were to slow due to financing, part of future growth would be temporarily impacted,” said Frank Morgan, managing director at Jefferies and Co.

In its SEC filing, Sunrise said the housing downturn has not affected its business so far. The company said occupancy rates in its independent-living division — considered more sensitive to economic trends — have not fallen significantly.

“We believe we are well-positioned to meet our development goals in terms of locations identified, internal resources and continued demand for our communities,” chief executive and co-founder Paul J. Klaassen said in the filing.

Meanwhile, the wholesale operations of Fieldstone Investment, a mortgage lender in Columbia, will be shut down less than a month after it was acquired by a privately held New York company that invests in the subprime market, according to regulatory filings last week.

What will happen to Fieldstone’s local employees is not known. The company filed a notice with Maryland authorities indicating that it had laid off 90 employees, according to Rhonda Wardlaw, a spokeswoman for the state’s Department of Labor, Licensing and Regulation.

The news that most of Fieldstone’s operations would close was disclosed on Thursday by MGIC Investment, a provider of mortgage insurance, in a quarterly SEC filing. MGIC and Radian Group, another mortgage insurance provider, jointly own a 46 percent stake in Fieldstone’s new owner, a venture called Credit-Based Asset Servicing and Securitization.

Fieldstone was purchased last month by C-BASS for $188 million. The sale price was reduced from the $260 million announced in February, before the troubles in the subprime-mortgage market intensified. The fortunes of C-BASS and Fieldstone since have deteriorated swiftly. On July 30, Radian and MGIC announced that they may write off their joint stake in C-BASS, which had been valued at $1 billion.

Joseph E. Rooney, the Maryland deputy commissioner of financial regulation, said about 50 mortgage lenders had closed offices in Maryland this year. Most were based outside Maryland.

“It does affect employment,” Rooney said. “I expect more closures to come as the credit lines dry up.”

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