Millennium Partners Demands Changes at Sunrise Senior Living.Appeals to Sunrise Board to Act in the Best Interest of All Sunrise Shareholders NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Millennium Partners, L.P., a New York-based multistrategy hedge fund hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" , today released a letter it sent on May 31, 2007, to the Board of Directors of Sunrise Senior Living  This article or section needs copy editing for grammar, style, cohesion, tone and/or spelling.You can assist by [ editing it] now. Inc. (NYSE NYSE See: New York Stock Exchange : SRZ SRZ Schulte Roth & Zabel LLP (New York, NY law firm) ). In the letter, Millennium called on the Sunrise Board to take prompt action either to sell the company or to replace management. The Board has not responded to Millennium. The full text of the letter follows: 05/31/2007 To: Paul J. Klaassen Teresa M. Klaassen Ronald V. Aprahamian Craig R. Callen Thomas J. Donohue J. Douglas Holladay William G. Little Ladies and Gentlemen: Millennium Partners, L.P. (together with its affiliated entities, "Millennium") currently owns approximately 1.3M shares of common stock of Sunrise Senior Living Inc. ("the Company"), or about 2.5% of the shares according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Company's latest filings. We have been shareholders of the Company for approximately one year. Like many--perhaps most--of your shareholders, we are deeply disturbed "Deeply Disturbed" is a CD single by the Israeli psychedelic trance duo Infected Mushroom, realeased in July 2003 on the label Absolute. and distressed at the current state of affairs. We believe that the assets of Sunrise have real value, as discussed in greater detail below, yet it is apparent that the market does not recognize the value of those assets, leading to a considerable disconnect between the Company's public market value and its intrinsic value Intrinsic Value 1. The value of a company or an asset based on an underlying perception of the value. 2. For call options, this is the difference between the underlying stock's price and the strike price. . Furthermore, it is clear to us that the public activities and statements of management have served to exacerbate, rather than ameliorate a·mel·io·rate tr. & intr.v. a·me·lio·rat·ed, a·me·lio·rat·ing, a·me·lio·rates To make or become better; improve. See Synonyms at improve. [Alteration of meliorate. , the market's misunderstanding of the Company's intrinsic value, and we worry that maintaining the status quo [Latin, The existing state of things at any given date.] Status quo ante bellum means the state of things before the war. The status quo to be preserved by a preliminary injunction is the last actual, peaceable, uncontested status which preceded the pending controversy. might lead to further value destruction. We believe that this Company, with this management, does not belong as a participant in the public securities markets. Accordingly, we urge the Board to take appropriate steps to (1) sell or merge the Company either in a public market transaction or in a "going private" transaction; (2) restructure the Company in a transformative way so that its different elements--primarily, real estate development and ownership on the one hand and healthcare facility operation on the other--can be more readily appreciated and valued by the market or, if neither of those seems feasible, then, at the very least, (3) recruit new management that is more professionally competent at successfully managing a public company. To facilitate any such course of action, we urge the Board to eliminate all of the defensive measures that the Company has in place. While such measures may have been useful in the past, at this point they serve only as an impediment to a value-creating transaction for the Company's various stakeholders Stakeholders All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. . The factors which lead us to our conclusion are many. They begin with the timeline of events over a period of slightly more than a year: April 2006--Sunrise's management began a preliminary review of its accounting treatment for Joint Ventures. April 27, 2006--SEC sent a comment letter to the Company regarding the application of EITF EITF Emerging Issues Task Force EITF Edinburgh International Television Festival EITF Europe International Taekwon-Do Federation 04-05 to its Joint Venture accounting. May 9, 2006--over a year ago now--the Company announced to the public that it was delaying its quarterly earnings release due to an accounting review of the treatment "applied to its investments in unconsolidated senior living communities." May 10/11, 2006--the Company stated, "Although no resolution has been reached yet, Sunrise does not expect the outcome of this review to adversely affect its earnings guidance for 2006 and 2007 due to the limited number of current joint ventures affected and the various stages of these ventures. Sunrise will not file its Form 10-Q Form 10-Q See 10-Q. until it completes its review. This review encompasses a multi-year analysis of each affected venture and is being completed as thoroughly and quickly as possible. Sunrise is unable at this time to provide an expected date for filing the Form 10-Q." July 31, 2006--the Company issued a press release in which it communicated estimates about the impact of the restatements, including the cumulative impact of the restatement of Net Income for the years 1999-2005 of $60-$110M USD USD In currencies, this is the abbreviation for the U.S. Dollar. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. . The statement clearly painted a picture of gross mismanagement mis·man·age tr.v. mis·man·aged, mis·man·ag·ing, mis·man·ag·es To manage badly or carelessly. mis·man  age·ment n. of accounting policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental at the
Company.
Aug. 8, 2006--the suggested range of the cumulative effect of the accounting adjustments on Net Income was narrowed to $65-$100M. Nov. 7, 2006--the Company announced that, at that time, it expected to file its restated 2005 10-K before year end 2006. Dec. 11, 2006--the Company announced the creation of a Special Independent Committee of the board to review certain questions regarding the timing and pricing of stock option grants and insider sales of stock in light of a letter sent by the Service Employees International Union to the board and general media allegations of improper trading. Also, the Company delayed yet again the date for the expected filling of the 2005 10-K, this time to no later than March 31, 2007, by which date the Company said that it expected to be current on all its SEC fillings. Jan. 15, 2007--only one month later--the Company stated that it would not be able to have the restated 2005 10-K filed by March 31, 2006 after all, so it withdrew its promise to be current with the SEC by that date. With this announcement, it became clear that the 2005 10-K would not be filed before the 2006 10-K was due--over a year past its due date. The Company did not provide any timeframes at that time as to when it might be in a position to meet any of its legal filing obligations. The best management could do was to state (erroneously, again, as it turned out) that they were "close--weeks and not months--to submitting the financial information to the SEC." Feb. 27, 2007--the Company reported Selected Operating metrics for the 4th quarter and full year 2006. The Company had not yet filed any information with the SEC, but provided a new range for the cumulative effect on Net Income of the accounting adjustments, from $65-$100M to $98M-$107M, and expanded the time period for which management would be required to restate the Company's financials. March 2, 2007--the Company announced that the Board of Directors had expanded the scope of the previously-established Special Independent Committee of the Board. The expanded scope was to include investigating the facts and circumstances related to the historical accounting practices that led to the current financial restatement difficulties, as well as to come up with recommendations and remedial measures. April 25, 2007--the Company announced the unexpected suspension, with pay, of its CFO See Chief Financial Officer. because he did not comply with the document retention directives. May 2, 2007--the Company announced that it had terminated its CFO. May 8, 2007--the Company announced operating statistics, and refrained from providing any guidance or comment on the state of the investigation into options accounting, the firing of the CFO, or the accounting review. May 29, 2007--the Company announced that the SEC has commenced a formal investigation into its accounting and stock option practices. There are two fundamental maxims for public company managements in dealing with investors and the securities markets. The first is to avoid surprises. The second is to "under-promise and over-deliver." Both have been violated time and again by this Company's management. We do not necessarily blame management for poor stewardship of the Company's assets. While we don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. all the relevant facts, it seems entirely plausible that management has been continuously surprised and disappointed by these developments, just as we and the other shareholders have been. We do blame management for failing to have fostered the right corporate culture and team designed to avoid this situation. The securities markets demand, above all else, respect. This management has shown them none, and as a result the Company faces the possibility of having its shares de-listed from the NYSE within the next few months. Additionally, there are serious questions regarding the state of the Company's system of internal controls. To date, based on the Company's public disclosures, we do not have reason to believe that failures in the internal controls system have led to actual losses or actual diminution Taking away; reduction; lessening; incompleteness. The term diminution is used in law to signify that a record submitted by an inferior court to a superior court for review is not complete or not fully certified. in the value of the Company's assets (beyond, of course, the expense--not inconsiderable--of investigation and litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. resulting from those failures). It is clear to us, however, that the Company has not taken seriously its internal controls obligations (either under Sarbanes-Oxley SS404 or under normal good management practices) and as a result is unable to satisfy an increasingly skeptical market that the internal controls failures have not resulted in actual losses. In the present environment, we are surprised that the Board has accepted these failures as readily as appears to be the case. We do not necessarily believe that the requirements of Sarbanes-Oxley SS404 are cost-benefit warranted and, in this respect, are in accord with some of the suggestions of Mr. Donohue's organization. We do believe (and believe that Mr. Donohue likely agrees) that sound internal controls are an essential element of prudent fiscal management; they appear to have been substantially ignored by the Company. Similarly, we do not particularly find fault with the Board of Directors, for it seems quite possible that all of these developments were completely surprising to the Board. Every Board of Directors, however, needs to know when to say "enough is enough." That time has come. By our analysis--unless there is something in the unresolved accounting uncertainties that we certainly don't expect--the Company has a solid, viable business, and significant underlying asset values. We calculate that value as north of $54 per share, and quite possibly significantly higher than that. Using basic information (which we think is not the subject of significant accounting uncertainty) from the 2005 10-K as filed, we reach that value from the following assumptions and related valuations: * We value Consolidated Beds (and we assume the number of beds is not being restated) at $189,000 per bed, and the joint venture beds (which are newer and at facilities that can command premium prices) at $275,000 per bed, with 19% Company Ownership. The same approximate results would apply if we were to use 6.25%-5.75% cap rates on 2007 estimated Net Operating Income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. (We assume a 6% compounded growth in Net Operating Income from Consolidated and Unconsolidated properties as well as Management Fees in 2006-07 from the 2005 reported levels, as well as 5% compounded growth in SG&A (excluding any expenses related to the current investigations).) * We use a 12x 2007 multiple for the Management Fee stream, the amount of which is not, we assume, being restated. * We value Development and Other Fee streams at 10x 2005 Income. * We capitalize leases using a 10X Rent (10% Cap rate) multiple, given current development yields. * We ascribe as·cribe tr.v. as·cribed, as·crib·ing, as·cribes 1. To attribute to a specified cause, source, or origin: "Other people ascribe his exclusion from the canon to an unsubtle form of racism" $230M of net value creation for the announced development pipeline. In our view, this is an appropriate time to sell the Company--either to another entity or in a private transaction (including, possibly, one that includes current management). While getting a new management team in place that is more responsive to the demands of the public securities markets, and more attentive to the need for sound internal controls, might be a reasonable alternative, we think such a course would be less likely to yield beneficial results for the various stakeholder stakeholder n. a person having in his/her possession (holding) money or property in which he/she has no interest, right or title, awaiting the outcome of a dispute between two or more claimants to the money or property. interests of the Company than a sale of the Company at this stage. First, it appears to us that the complexity of the Sunrise Senior Living business model, although quite rational as a business model, is not well understood by the sell-side analyst Sell-side analyst A financial analyst who works for a brokerage firm and whose recommendations are passed on to the brokerage firm's customers. Also called Wall Street analyst. community and probably never will be understood. Hence, it seems destined des·tine tr.v. des·tined, des·tin·ing, des·tines 1. To determine beforehand; preordain: a foolish scheme destined to fail; a film destined to become a classic. 2. always to trade at a discount to its inherent value. In fact, as we view it, Sunrise is two different companies combined, possibly inseparably, into one: a real estate developer/owner and a healthcare facility operator. Given the differences in market coverage of these industries, it becomes extremely difficult to understand for experts on either side. A good example of this is the lack of value given by the sell-side to the development pipeline. Furthermore; and as evidenced in the Company's May conference call, if Sunrise is forced to start consolidating development properties, including the construction debt associated with them, the Company will become even more difficult to value for non-real estate analysts as debt levels will increase substantially and Net Income will inevitably be affected. That may well be the proper accounting result; it will not facilitate market understanding of the Company. In our view, this disconnect is evidenced by the disparity in target prices for the Company reflected in the views of analysts: * Stifel Nicolaus Stifel Nicolaus is the largest subsidiary of Stifel Financial Corp. and is a member of SIPC and listed on the New York Stock Exchange. Stifel Financial Corp. NAV See navigation system and navigation bar. of $46 (Currently rated a Hold) * Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. Target price $37 (Currently rated a Neutral) * Citigroup Target Price $44 (Currently rated a Hold) * Avondale Partners Target Price of $36 (Currently rated Market Perform) Beyond that, while the markets seem destined to misunderstand mis·un·der·stand tr.v. mis·un·der·stood , mis·un·der·stand·ing, mis·un·der·stands To understand incorrectly; misinterpret. the Company's business model, it appears from objective evidence that the sale values of the Company's principal assets--independent and assisted living as·sist·ed living n. A living arrangement in which people with special needs, especially older people with disabilities, reside in a facility that provides help with everyday tasks such as bathing, dressing, and taking medication. facilities and management services--are at or about an all-time high. Cap rates on healthcare real estate assets have compressed to historic lows not only on an absolute basis, but also relative to other property types. Furthermore; the unprecedented global liquidity and demand for real estate-backed businesses from private and public investors create an opportune op·por·tune adj. 1. Suited or right for a particular purpose: an opportune place to make camp. 2. Occurring at a fitting or advantageous time: an opportune arrival. time to explore alternatives in order to realize the embedded value Embedded Value A common valuation measure used outside North America particularly in the insurance industry. It is calculated by adding the adjusted net asset value and the present value of future profits of a firm. in the Company. It is hard to imagine a better backdrop against which to try to realize value, or a market environment that more clearly calls for such an approach. Evidence of this is the recent decision by Genesis Healthcare  This article or section is written like an .Please help [ rewrite this article] from a neutral point of view. Mark blatant advertising for , using . to "Go Private" (and the evolving fight for its assets), as well as the decision by Manor Care (HCR HCR High Commissioner for Refugees (UN) HCR Home Condition Report HCR Health Care Reform HCR Highway Contract Route (US Postal Service) HCR High Consistency Rubber HCR Human Cognitive Reliability ) to explore "Strategic Alternatives" at this juncture. The attachment to this letter identifies additional comparisons suggesting that the Company is undervalued Undervalued A stock or other security that is trading below its true value. Notes: The difficulty is knowing what the "true" value actually is. Analysts will usually recommend an undervalued stock with a strong buy rating. in the markets relative to comparable enterprises; we believe it unlikely that the market itself will come to appreciate the Company's values without affirmative action affirmative action, in the United States, programs to overcome the effects of past societal discrimination by allocating jobs and resources to members of specific groups, such as minorities and women. of the type suggested here. As you are aware, Millennium Partners is a hedge fund, not a private equity fund. We are not interested in acquiring the Company or its assets on our own. (Indeed, we will probably continue to buy and sell shares of the Company's stock on an opportunistic basis, even while we expect to maintain a sizable investment in the Company awaiting the Company's response to the considerations discussed in this letter.) We have discussed, and will continue to discuss, our views of the Company with others. We have not, and currently do not expect to, enter into any verbal or written agreement to act in concert with others (although, of course, we reserve the right to do so, and we recognize our implicit obligations vis-a-vis SEC filings in the event that we do). We are, however, very much interested in maximizing the value of our investment in the Company, and believe our interests are aligned with those of every shareholder in this regard. We are fully prepared to work with the Company in exploring these matters if the Company desires. We do not believe that the Company can legitimately claim a right to continue business as usual in these circumstances when time and again the shortcomings A shortcoming is a character flaw. Shortcomings may also be:
Should you believe it useful, we would be pleased to meet with the Company or its advisors to explore further the matters identified in this letter. To pursue any such questions, please advise our Vice Chairman and Chief Legal Officer, Simon Lorne, at 212.841.4114 or slorne@mlp.com.
Yours sincerely,
Eduardo Abush Simon Lorne
Portfolio Manager Vice Chairman and Chief Legal Officer
Millennium Partners Millennium Partners
Exhibits Share price performance vs. peers: [TABLE OMITTED] [TABLE OMITTED] |
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