Sunrise May Seek Bankruptcy Protection

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The senior assisted living giant faces a deadline with a key group of creditors.

Washington Post Staff Writer
Tuesday, March 3, 2009; Page D01

Sunrise Senior Living said yesterday that it may seek bankruptcy protection if it cannot reach new agreements with its lenders.

A deadline with a key group of creditors looms at the end of the month, when the McLean company must renegotiate the terms of $95 million worth of debt and $24.4 million in outstanding letters of credit.

The senior assisted living giant is struggling with the legacy of an ambitious growth strategy gone awry, as well as an increasingly bleak economy that has hampered its ability to fill its properties.

Mark Ordan, the company’s chief executive, said he spent much of yesterday on the phone with bankers, and that the end-of-the-month deadline was real.

"If nothing else changes, then one way or another this company will reorganize itself this month," he said in an interview.

The company’s warning that it might turn to bankruptcy court was part of an announcement that it lost $305.6 million in the last three months of 2008 and $439.2 million for the year — its worst yearly performance since it went public in 1996. The company’s shares tumbled 41 percent to 39 cents in trading yesterday on the New York Stock Exchange.

Ordan told investors during a conference call that the company was continuing to negotiate with all of its lenders and was seeking to shrink in size, but he warned that the future was cloudy.

"While we clearly think all of our stakeholders benefit from such restructuring, we don’t control this process and we cannot assure anyone that we will succeed," Ordan said. "Let me assure you that as of now we believe we are working on viable initiatives to accomplish an out-of-court restructuring."

He said that the financial problems don’t endanger residents of Sunrise’s homes. "It means absolutely nothing for people living in the communities," he said.

Sunrise has faced a series of setbacks and missteps. Founded in 1981 by Paul Klaassen and his wife, Terry, in Northern Virginia, the company was one of the early pioneers of assisted living: care aimed primarily at seniors who are frail but don’t need constant nursing help. Sunrise became one of the dominant companies in the industry and, by the end of 2008, operated 435 communities in the United States, Canada and Europe, with the capacity for 54,000 residents. The company employs about 40,000 people.

Sunrise’s rapid growth, though, became its weakness. While most of its competitors own and operate their facilities, Sunrise partners with real estate firms, which then pay the company to manage properties. In many cases, Sunrise took a small ownership stake, typically about 20 percent. It profited when the properties were sold.

However, a slower economy, specifically the real estate market, has hurt the company. Its main source of growth has been potential residents who sell their longtime homes and use the profit to move to Sunrise facilities. The housing bust has curtailed such moves.

"While difficult to quantify, the economy is having a significant negative impact on the decision to move into senior living as seniors and their families face declining savings and challenges in selling their homes," Richard J. Nadeau, chief financial officer, told investors yesterday.

In the past few years, Sunrise unsuccessfully expanded into Germany, where the concept of high-end assisted living is not familiar. The company also entered the hospice business by purchasing a company that federal regulators then began investigating because of alleged improper Medicare billing by its previous owners.

Additionally, there have been financial issues that have distracted the company. Sunrise disclosed accounting errors in 2006 that later forced it to restate nearly a decade’s worth of financial results. The Securities and Exchange Commission also opened a formal investigation into the firm’s insider stock sales, the timing of stock option grants and its accounting practices. That investigation continues.

Last year Klaassen stepped down as chief executive and was replaced by Ordan, the former chief executive of the Mills Corp., who oversaw that mall developer’s sale to Simon Property Group.

Perhaps the most pressing problem is whether Sunrise will be able to meet the requirements of a line of credit from a consortium of banks. A waiver of those obligations is due to expire March 31. If the company can’t strike a new deal, the lenders are allowed to demand repayment.

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