There was almost enough “big news” last week to have a weekly newsletter, but sometimes it helps to wait, reflect and analyze before deciphering everything that happened. The big three (and we are not talking about Detroit) last week were the Ventas rent reset announcement with Kindred Healthcare, the Sunrise Senior Living earnings release delay and the late Friday afternoon announcement that Brookdale Senior Living is buying American Retirement Corporation for an all-in cost of more than $1.3 billion, creating the largest seniors housing company in the world with more than 500 facilities with 50,000 units combined. We will have a more detailed analysis of the first and third news items in our June issue of The SeniorCare Investor, preferring to look at the Sunrise issue for now.
Sunrise Senior Living was supposed to release its first quarter earnings results on the morning of May 9, but the only thing investors received was a curt, two sentence notice that the company was rescheduling the earnings release to allow time “for further review of the accounting treatment applied to investments in unconsolidated senior living communities.” Almost in unison, you could hear investors moan, “Here we go again.” And fearing the worst, investors sent the stock down by more than 22% before it recovered a bit by the end of the day to close at $32.35, or a 17.7% plunge from the prior day’s close.
Unbelievably, the next day Sunrise issued a second release, stating that the accounting issue had to do with the allocation of profits and losses for a limited number of older joint ventures where the capital partner receives a preference, and that they did not expect the review to materially affect earnings guidance for 2006 and 2007. Come again? It is difficult to believe that they did not know this little fact the prior day, and that specific knowledge would certainly have gone a long way to soothe investors’ fears about valuation. Apparently, the accounting issue was something that Sunrise’s internal finance people stumbled upon several months ago and brought to the attention of their outside auditors, and that these JVs are relatively old. Management believes that the change in how they would be accounted for would be “better” because they would reflect the actual results of the JV.
What is a little disconcerting is that the company filed its 10-K on March 16, just two weeks before the close of the first quarter, without worrying about this potential accounting change. Although we are not CPAs, it is our understanding that the change they are looking at would allocate more of the losses in the early years of the JV, when they actually take place, with more of the profits being allocated in the later years, when the facilities are mature, and profitable. What is surprising is that if Sunrise itself started the ball rolling on an accounting change, why couldn’t it manage the timing of it better and not cause a disruption in the market, which shareholders are getting a little tired of? Also, putting our skeptic’s hat on, if the accounting change would result in a higher profit allocation in the later years of the JV, it would seem that this would inflate earnings a bit, while increasing losses in years long forgotten, with few investors carrying about increased charges to financial statements from the late 1990s (and rightfully so).
Is it this slightly higher earnings contribution that will keep the 2006 and 2007 earnings guidance in line with past disclosures? We don’t know the answer to this, but it goes back to Sunrise’s problem of not being very transparent with its financial presentation, and this has been a problem for several years. At best, the handling of the delayed earnings announcement can be called clumsy; at worst, it raises a question as to motive beyond simply a “better” presentation for what are old JVs using a structure that is not too common anymore. In other words, who cares, and why rock a boat that has already sailed into port? Sunrise is at a stage in its corporate life when it should not have to keep tweaking its accounting policies and should offer its shareholders the most transparent view of the company possible, each and every quarter. Their shareholders deserve no less.
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