SRZ Q3 Report - Better Days Ahead

Market Cap: 167.21 million CMP: 3.27Recently SRZ has reported Q3 2009 financials. It has been another loss making quarter. But then we are looking forward and what is of concern is the forward looking quarterly outlook.


There have been a number of changes (sale of assets and contract cancellation) SRZ management has provided us with data about remaining assets and their earning capability.


What we have here is that the remaining properties of SRZ have an operating profit of close to 120 million (per quarter) and we can expect a yearly operating profit of 120 x 4 = 480 million.

Assuming there are other expenses (for new communities being built as well as over head expenses) of 90% of earnings we can still expect SRZ to report conservatively 10% profit of 48 million. ie Assuming 432 million of overhead expenses. (link)
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As reported by SRZ the 21 communities sold to BKD had contributed 13.9 million of net loss for 9 months ended Sept 2009. The sale would net SRZ 50 million in cash. (link) So the 21 community sale will really help SRZ as it reduces debt by approximately 130 million and also nets 50 million in cash.
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What we have here, is a corporation that was taking advantage of the past positive factors by agressive growth, which is now adjusting itself to the new reality of conservative financing and de-leveraging its balance sheet.
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If one takes a pot shot at BKD (which has close to 2 billion dollars of debt in its books) and a market cap of 1.95 billion. I would say within 1-2 years we can expect SRZ to overtake BKD in market capitalization as BKD still has lot of Debt which will unfold in the coming years. (I expect BKD market Cap to fall below 1 billion and SRZ's market cap to rise above 1 billion
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SRZ: Shareholders as of Sept 25,2009

Please find below the list of majority shareholders holding more than 5% in SRZ.
5 groups (including 11.5% by promoters Mr & Mrs Klaassen) hold more than 45% of shares.

And these holders exist from Dec 2008 so they are long term holders.

Largest holder is an Insurance company: Guardian Life insurance Company:
Here is the list




The SEC filing link is here

SRZ: Sells 21 Communities for 204 million.

SRZ has on Oct 9,2009 sold 21 communities with 1389 units for 204 million plus customary transaction expenses. The break up of the 1389 units are :
- 92 independent units
- 876 Assisted units
- 421 Alzheimer's units

The 21 communities sold are located in the following 11 states in US:
California - 1, Colorado - 1, Connecticut - 2, Georgia - 1, Indiana - 4, Michigan - 1, New Mexico - 1, North Carolina - 1, Ohio - 6, Pennsylvania - 2, Virginia - 1
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BKD is the buyer and some of the salient points are:
- BKD will finance this transaction with 134 million of mortgage debt (substantially through the assumption of existing debt)
- Balance payment (70 million) to be paid from cash on hand.
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As per SRZ the following are the salient points:
- SRZ will record an impairement charge of 7 million in the Q3 2009 to write down 5 of the 21 communities to fair value.
- SRZ will expect to record a gain in realestate of approximately 50 million.
- SRZ will receive 60 million in proceeds after payment or assumption by the purchaser of certain mortgage loans.
- SRZ will use the funds to pay down the bank line of credit and for working capital requirements.===========================================
Observations:
- SRZ has sold 5 communities below their value book value and taken an impairement charge of 7 million. I am sure these 5 communities are in Ohio and Indiana.
- Since these communities are whollly owned subsidiaries we can expect a reduction of SRZ debt by 130 million.
- Out of 70 million cash payment by BKD (my assumption is) 50 million will be used to pay down the bank line of credit and 10 million will go towards working capital and 10 million to paydown debt related to sold properties.
- SRZ had 614.5 million of debt and 69.2 million of bank credit facility on June 30,2009. (683.7 million)- This transaction should reduce the total (683.7 million) debt to approximately 503.7 million. 26% reduction in debt.
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Observations with regards to SRZ's Debt Levels:
- SRZ has stated that the German community debt in its books is worth 190.2 million.
- German community debt is partially recourse to SRZ and it is expected that on settlement of debt SRZ will record a gain.
- Once the German community sale is legally closed we can expect a reduction in debt of 190.2 million ie total debt will be reduced to 313.5 million.
[683.7 million -130 million(21 community sale) - 50 million (credit line payback) - 190.2 million (german community sale)]
- It has also been stated in the Q2 report that 170.2 million of debt is in default (has become short term) due to Sunrise failure to meet certain financial covenants.
- I assume with the reduction of debt to approximately 313.5 million from 683.7 million (54% reduction) SRZ will be able to pass the financial covenants test. This will make 170.2 million of short term debt into long term debt and also reduce SRZ's short term cash requirements.
========================================Conclusion: All the communities sold were wholly owned subsidiaries (which means they were really the best assets) Some of these assets (5 out of 21) are located in non performing areas and SRZ has found it prudent to sell them at a loss. These assets are like family jewels and will impact SRZ networth on the long term.

SRZ's problems are however due to short term cash flow issues. This transaction along with German community sale will help reduce SRZ's debt levels by 50% and hopefully bring the company back to stable financial condition.
SRZ then can continue to leverage its brand equity and work on strengthening its financial base improve its market capitalization. We can expect SRZ's market cap (Curent 262.25 million) to double from these levels. Equity dilution is possible when market cap reaches close to 1 Billion dollars (Stock Price 20)

Since we are at an inflection point and news updates will be positively biased we can expect rapid improvement in SRZ's market capitalization. Q3 report would still be negative but we will see substancial improvement in Cash flows

PN: These are my personal views and assumptions about information available in the public domain.
- Link to SEC filing for Q2 2009 report
- Link to SEC filing for sale of 21 communities

SRZ: Senior Assisted living company Valuations 6.39 USD

Quarterly results are out for Q2 2009 and we can compare the valuation of different companies in Assisted senior living industry. This will help us objectively value companies.

Cash flow is what I would consider along with market capitalization for comparision of the companies. Cash flow is generally considered as a better indicator than Earning Per Share (EPS) or Net Profit.
The following table for reference of : Cash flows, Market Capitalization & Multiple [Multiple= (Market Cap)/(Cash Flow)] Five Star and Sunrise Senior Living are two companies in the list of 5 Senior living companies that is quoting at a discount (MarketCap)/(Cash Flow) ratio. Expected share price column mentions the share price when the Market Capitalization will be 11.135 times cash flows.
PN: This is not a suggestion/recommendation to invest. Please make your own decision with respect to valuations and investment rationale.

SRZ: Q2 2009 Quarterly Report

Sunrise recently came out with quarterly report on August 8,2009.
The following are some of the positive information available in their Q2 filings.

1. In the Conference Call Mark Ordan mentioned about the “Adjusted Income from Ongoing Operations.” which was a positive 10 million. the 8K filing states the following with regards to "Adjusted Income from Ongoing Operations"
Adjusted income from ongoing operations is used by management to focus on liquidity generated from the ongoing operations of the Company and to help management assess if adjustments to current spending decisions are needed.




2. Closer look at the 10Q filing and the cash flow statement we get an even better news. Cash flow from operations is positive 29.20 million "WOW!!!"

3. 10Q filing (also the 8k) state that SRZ has 190 million of debt for the german assets. It has been stated by SRZ in this filing that the debt is partially recourse to SRZ. "Any difference between the recorded amount of the debt and the amount ultimately paid to the lenders to settle the debt will be recorded as gain on the extinguishment of debt at the date the debt is legally satisfied. "
My interpretation is: SRZ does not legally have to fully pay back all the debt for german assets as the debt is partially binding to SRZ and in turn SRZ might have to account for some paper gain in the event that the debt is settled for less than 190 million. sounds good to me as the cash outflow reduces by the same amount.

4. SRZ has close to 614 million of debt. Look at the interest rate on the debt majority of it has interest rate of 3.1%
5. SRZ has Student Loan Auction Rate Securities (SLARS) of Face value 38.4 million and right now they are on the books for 31.38 million. SLARS are 98% guaranteed by the federal govt against default. As the credit market returns back to normal we can expect another 6-7 million in additional assets.
Conslusion: The 29.2 million positive cash flow from operations means we are on the road to recovery. The 29.2 million easily warrants a market cap of 292 million that would be in the range of 5-6 USD for a 1+ billion sales senior living company. I hope going forward in the quarterly report mangement decides to state the "Adjusted Income from Ongoing Operations"
P.N. These are my views about the 10Q and 8K filings available at the SRZ website (Link)

BTIM: BioTime

BTIM: May 11, 2009: Is it time for BioTime
BTIM: May 13,2009: Products for Stem cell Research
BTIM: Aug 18,2009: iPS Patent List

BTIM: Products for Stem Cell Research

The following are some of the products that are being sold by BioTime for stem cell research.

- Embryome Database: Detailed map of the human and mouse embryome to permit the researchers to chart the cell lineage of human development, the genes expressed in those cell types and antigens present in the cell surface can be used in purification. The database is available in www.embryome.com

- ESpan Cell Growth Media: BioTime/Embryome Sciences will market cell growth media product. These growth media cell types are optimized for growth of primitive embryonic progenitor cell types for laboratory settings as well as commercial sector. BioTime expects that the manufacturers/researchers instead of propogating hES cells in large quantities will instead propogate cells using media optimized for the propogation of embryonic progenitor cells created from hES cells.

- ESpy Cell Lines: ESpy product lines will be developed with Lifeline (ISCO) using ACTCellerate technology licensed from Advance Cell Technology Inc. ESpy cell lines would be derivatives of hES cells that send beacons of light in response to the activation of perticular genes.

- Other New Products: BioTime is also planning to bring other new growth and differentiation factors and kits which will permit researchers to manufacture specific cell types from embryonic stem cells and also market purification tools useful to researchers in the quality control of products for regenerative medicine.

My Take: Company is all set to storm the research market with products which are the best in the breed (based on BioTime's vast experience). They have already identified the tools and critical products and have licensed the same from the actual product vendors. These tools are already being used in the research field and with these agreements the product pricing would be consistent. Standards will be set and once the critical level of acceptance they will be the coke and pepsi of the stem cell research world.

The following statement Sums up BioTime's Strategy:
We are focusing our current efforts in the regenerative medicine field on the development and sale of advanced human stem cell products and technology that can be used by researchers at universities and other institutions, at companies in the bioscience and biopharmaceutical industries, and at other companies that provide research products to companies in those industries. These research-only markets generally can be marketed without regulatory (FDA) approval, and are therefore relatively near-term business opportunities when compared to therapeutic products.

PN: These are my personal views from publicly available info about BioTime

BTIM: Is it Time for BioTime

BioTime http://www.biotimeinc.com/ is a california based biotech company with established products in the "plasma expanders" market "Hextend". These plasma expanders are used in high blood loss surgery. Hextend is approved for major surgeries and is distributed in US and Canada by "Hospira" http://www.hospira.com/ and in south Korea by CJ Corporation. (1.2 million USD royalty payment year ending Dec 2008 from Hospira for Hextend). Hextend is also going to be licensed to Summit Pharmaceuticals International/ Maruishi Pharmaceutical for Japan, China & Tiwan.

BioTime also has other products such as "PentaLyte" (Phase II Trial completed), HetaCool all part of the "plasma expander" family of products for specialised conditions.

BioTime through its wholly owned subsidiary "Embryome Sciences Inc" is entering into emerging field of "regenerative medicine". Embryome Sciences plan is to provide advanced stem cell technologies related research products and services to the research companies/institutions.

(I must state that Embryome and BioTime have been working on developing Embryonic stem cells from a non controversial source)

- Embryome Sciences will provide and maintain a commercial database (website) that provides the first detailed map of the embryome, aiding researchers in identifying many hundreds of cell types comming from embryonic stem cells. The new website will also be used to market the stem cell research products developed by Embryome Sciences and other companies.
- Embryome Sciences will also market products (growth & differentiating factors) researchers need to induce the cells to become desired cell types. these products are also available for sale on the website since June 2008.
- Embryome Science will sell purification tools usefull to researchers in purification and quality control analysis of products in regenerative medicine.

Ticker symbol: BTIM
Company Name: BioTime
CMP: 2.05 USD Market Cap: 52.95 million USD

My take: BioTime is really trying to be in the front and center of embryonic stem cell related development. Setting up the market place where people (research companies and institutes) will go to buy raw products and sell the finished products(hopefully).
It is trying to be the facilitator of all future developments in embryonic stem cell field.
It has acquired key technologies licenses which will then be sold/marketed to research firms.
It has acquired key technologies to induce growth of the desired cell types.
It is using a non controversial way to build stem cells using somatic cells. (Process is called induced pluripotent stem cells - iPS)
Dr. West who has worked on telomere extension (telemorase - Geron Corp www.Geron.com ) and with ACTC (Advance Cell Technology) as per my understanding is simplifying the stem cell technology through BioTime - Embryome Sciences initiative. Dr. West and his team are effectively going to provide the basic plumbing required for research groups to kick start their research in Stem cell field.

Just like the Internet before and after the web browser is a completely different story.
This collaboration initiative will bring stem cell research to prime time. BioTime - Embryome Sciences success will depend on how popular the site and its tools/services become. They need to strike a fine balance of freedom and control to see the site and volume of business to grow.

Considering the lineage of BioTime (Dr West) I would give more than a 50-50 chance for the company to hit big time. This is a good time to get in.

Interesting Read:
- Life Extension Magazine: Will BioTime reset the clock of Aging: Regenerative Medicine breakthrough
- BioTime Company Website

SRZ: May 4, Sunrise Announces Overhead Cost Reduction/Downsizing Plan and German Community Sale!!.

SRZ has made an 8k filing with regards to downsizing.



- Eliminating 150 positions which would save 20 million in annual recurring expenses.
- Downsizing would help SRZ's centrally administered services expenses would be reduced by approximately $1.5 million.
- Richard Nadeau employment is terminated for "other than for Cause" Richard will receive 2 years base salary + 75% of target bonus + accelerated vesting of Mr Nadeau's unvested equity awards.
- April 29 & April 30, 2009 SRZ entered into standstill agreement with lenders of 7 German communities and Hoesel land.

• SRZ also entered into standstill agreement with NATIXIS London branch with respect to Sunrise Hannover, Munich and Konigstein communities untill the earliest of occurance of certain events related to loan or May 31,2009.
• SRZ also entered into standstill agreement with Capmark Finance Inc with respect to Sunrise Villa Camphausen, Reinbeck, Oberursel and Frankfurt communities until occurance of certain events relating to loan or May 31,2009.
• SRZ entered into standstill agreement with HSH Nordbank AG with respect to Sunrise land in Hoesel until Sept 30,2009 unless revoked by HSH Nordbank upon certain events, which revocation would be effective on June 30,2009.
• SRZ entered into standstill agreement with Barclays Bank PLC remain in effect until the occurance of certain events related to the loans or June 30,2009.

My views: Its a good package for Richard for sure. It does help SRZ in some ways as the option expenses can be done at the now low price of $2.70 instead of the 1 year down the line SRZ stock price of $ 5-10.
Elimination of 150 posts will result in reduction of overhead expenses of non consolidated communities and make the communities profitable (hopefully) which would also help as SRZ would not have to invest in performance guarantee.
- SRZ has entered into standstill agreements with lenders of German communities. SRZ has stated in previous news releases its intention of sale of german assets. This 8k filing gives us an indication of timelines of the said sales. Most of these asset sales are by May 31,2009 through June 30,2009. So we should hear more news updates from SRZ about these asset sales. [Quite possible that there is no public announcement just like there has been no public announcement of the sale of 10% stake in UK communities for a profit of 19 million in Q1 2009]
Richard Nadeau will be leaving by June 15,2009 so most of these deals should be complete by June 15,2009.
Goodbye Richard!.. Thanks for all the help, last but not the least enjoy the millions for all the hardwork and bringing SRZ back to ship shape. You earned it!!
PN: These are my interpretation of the information available in the 8k filing. Original 8k filing document is available here

SRZ:May 8, Clarification regards Foxhill assisted living and condominium project

Fox Hill Assisted Living and Condominium project is a Sunrise Senior Living Community. In the earnings call there were some questions raised with regards to Sunrise Fox hill community and hence this 8k filing.

Following are some salient points.
- Foxhill is a new Sunrise community located in Bethesda Maryland which is still under construction/development phase.
- The Fox Hill community loan agreement and budget provide for the lender to fund construction costs and operating and interest shortfalls during the lease up and condominium sale period. If the lenders ceases to fund the load agreement, SRZ would have to incur additional obligations in connection with Fox hill.
- SRZ has provided project completion guarantee to the lenders. Construction of FoxHill is substantially complete but there are unpaid invoices of approximately 3 million. The company has paid approximately $ 51.1million in cost overruns under the project completion guarantee.
- SRZ has also provided an operating deficit guarantee to the lenders on the assisted living amenities portion of Fox hill to fund operating shortfalls and interest payments to the extent they exceed the amounts in the Fox Hill budget
- SRZ has provided an operating deficit guarantee to the condominium venture to fund cash shortfalls defined as interest on loan, real estate taxes, condominium assessment and any other expenses in excess of reserves established to pay such expenses in the Fox Hill budget.

My Views: There seems to be some difference of opinion between SRZ and the lenders. SRZ is of the view that there are legitimate invoices of 3 million which are unpaid by the lenders. SRZ has funded the project with additional $51.1 million in cost overruns under project guarantee.

Another point to be made is that 51.1 million in cost overruns are considered as subordinate debt. Subordinate to the debt taken for funding the project but paid before the owners are paid for their investment. This is the standard for all sunrise development projects.

I think this is part and parcel of being in the assisted living community development field and not an abnormal situation. The credit crisis would have caused the lenders to be more tight fisted but this is part and parcel of doing business where there are differences of opinion. there is a possibility that SRZ might have to make additional investment to see the project to completion.

PN: These are my views and interpretation of the 8k filing. The original documents are here . Link to Sunrise Foxhill community website

SRZ: May 8, Compensatory Agreement (Bonus to CEO Mark & CIO Greg Neeb - 2008)

8k Filing by SRZ with regards to compensation.

Mark Ordan (Chief Executive Officer) and Greg Neeb (Chief Investment Officer) have been offered bonus of 475,000 USD and 270,000 USD for the year ending Dec 2008.

Mark's target annual bonus amount was 975,000USD and he was already paid 500,000USD in November when the employment agreement was signed.
The Compensation committee of the Board of directors of SRZ agreed that: Though the company failed to achieve its goals and target for 2008. The market conditions and business environment was extraordinary and Mark has measurably improved the company's prospects. Improvements such as previously announced refinancing, debt restructuring, sale of assets and expense reduction.

Greg Neeb the CIO was also approved a bonus of 270,000USD by the compensation committee.
Greg Neeb's target annual bonus amount was 230,000USD. Mark Ordan recommended Greg's bonus (PN: Bonus more than the target bonus of 230,000USD ) as Greg has made vital contributions to the refinancing, debt restructuring, sale of assets, expense reduction as well as key operational, financial and strategic decisions.

My View: Mark Ordan has made significant improvements in SRZ's health as a viable company (maybe more than what is known publicly and the board acknowledged the same with a bonus) Greg has also been instrumental in getting the things implemented. CIO is Chief Investment Officer but looking at what comments are provided Greg looks like the point man for Mark and his successor. (if and when the question is put forward).

SRZ has now entered a new phase of consolidation the share price is reflecting the same. SRZ still is valued very conservatively and has huge upside potential from these levels (CMP: 2.70) on a medium to long term basis.

PN: These are my personal views. the original 8K filing document is available here

Interest payment on GM bonds till June 30 ,2009

Please remember:
- This is the interest paid to the bond holders in Cash for every 1000 Face Value of Bonds/Debentures till June 30,2009
- the 225 shares for 1000 Face Value of GM Bonds will translate to 2 shares due to 1:100 reverse split and the GM policy of not issuing fractional shares to GM bond holders.
- Ideally you should hold 100,000 Face value bonds to prevent loss of shares due to 1:100 reverse split. Please read my previous post "here" for more details

GM Bonds Exchange Offers & Consent Solicitations

Everybody is well aware of the Global Economic meltdown specially so of the US Auto Industry.

We will try and understand the GM Exchange offer and Consent Solicitations. Here are some of the important points.
1. Public GM Bonds holders who are individuals and institutions have been offered an Exchange of 1,000USD face value bonds with 225 GM shares.
2. These 225 GM shares would then be reverse split into 1:100 ie 2.25 GM Shares.(lets Say New GM shares just so that we can differentiate between the two)
3. GM is not going to issue fractional shares so anybody holding USD 1,000 face value bonds will actually receive only 2 shares (not 2.25 shares) and there will be no compensation for the loss of value for the fractional shares.
4. GM is going to pay interest in cash for the bonds/debentures till June 30,2009
5. Sale of the new GM shares will not result in Taxable income as the shares are part of the settlement/reorganisation hence not taxable.
6. My Calculation is that after the 100:1 reverse split the equity of GM will remain the same around 660 million shares.
7. Successfull exchange will result in atleast reduction in 44 billion reduction in total liabilities from bond holders, US Treasury and VEBA.
8. Current Bond holders will hold 10% of GM after exchange offer.
9. Current GM common stock holders would represent 1% of the new Equity
10. US Treasury and VEBA would hold 89% of new GM Stock
11. Current GM stock holders who may have fractional holdings after the 1:100 reverse split will receive the market price of the GM shares.
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Let us take an example of 100 bonds of BGM (CUSPID: 370-422-725) and see what the end result will be. Is it worth taking the risk of buying these face value USD 25 bonds for 1.60 USD (I have 100 BGM bonds)

100 bonds Cost = 160USD
Face value of 100 Bonds = 100 * 25 = 2500 USD
Interest received by June 30,2009 = 9.22 * 2.5 = USD 23.05 (paid in cash)
So actual Cost of 100 BGM bonds = 160 - 23.05 = 136.95USD
No of New shares = 2
Cost of new shares = 136.95/2 = 68.645USD
So if the new shares trade over 68.645 buying 100 BGM bonds is a good bet.
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the cost will reduce if we consider 100,000 face value bonds (since no loss of fractional shares)
if we consider 4000 BGM bonds (Face value would be 100,000) that would cost 6400USD.
Subtract the interest income (100 * 9.22) USD 922 Input cost will be 5478 USD.
Cost of 225 shares would be 5478 / 225 = 24.34USD
So at a price greater than 24.34 you will be making tax free profits on a short term basis.
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My take:
1. Buying GM bonds is not for the faint of heart..
2. Buy atleast 100,000 Face value bonds to prevent losses due to fractional shares being cancelled by GM
2. Buy bonds/debentures which have a high interest payout by GM (list of interest rates here)
3. Also please read the original Exchange Offer document here. This document mentiones about the tax free status and the fractional share cancellation and a lot more.

Please note: These are my individual views and interpretation of the offer. Please follow the following link to get original offer documents in GM site.

12th Ammendment to Credit Agreement

Well we have been waiting for this news and the stock has been displaying amazing resilience by staying above USD 1 and now we have the news.

A final 12th Credit Agreement which will last till the end of the credit agreement period ie. Dec 2,2009.

The following are some of the salient points.

1. The agreement is in place till Dec 2,2009 (no more quaterly updates)
2. The lenders are not going to extend any new letters of credit to SRZ till Dec 2,2009
3. The lenders are not going to extend any additional loans to SRZ through this facility till Dec 2,2009
4. The lenders will renew existing letters of credit that expire for upto 12 months.
5. SRZ has to maintain a cash balance of 5 million at the end of each month.
6. SRZ has to report on 15th of each month, certifying the cash balance as of the last day of the preceeding month.
7. SRZ has to report on 15th of each month a detailed occupancy level report for the preceeding month.
8. SRZ has to report on 15th of every month a 13 week cash flow projection for the company and its subsidiaries.
9. SRZ by June 1,2009 has to report cash flow projections and analysis of projected liquidity for the company and its subsidiary till the maturity date (ie Dec 2,2009)

Note: Points 6,7 & 8 has been followed by SRZ for the past 2 quarters so its not anything new. Point 9 means that by June 1,2009 we as investors should also get a comprehensive analysis of how much cash flow will be there till the end of the year.
(actually its already predicted to be around 35 million in this filing)10. The following tests for financial viability have been omitted from the credit agreement: Consolidated Networth, Leverage Ratio, Fixed Charge Coverage Ratio, Required liquidity.
11. Only Test is unrestricted Cash balance of not less than 5 million each month and Company and its subsidiaries will maintain most of their unrestricted cash with Bank of America (Administrative Agents)
12. Letters of Credit will attract an interest of 4.25% and will be paid by SRZ on a quarterly basis.
13. Minimum rate of interest on loans (Euro or USD dollar denominated)is 5.75%
14. Euro loans: LIBOR + 5.25%
15. US Dollar loans: Bank rate + 3.75%
16. SRZ subsidaires are also included as part of the assets of the obligors(SRZ) and their cash balances to be included in the 5 million cash balance test.
17. SRZ can issue 5 million of subordinate debt.
18. SRZ can make additional investments with regards to projects when in build stage which are then paid back to srz when the projects get completed.(certificate of occupancy)
19. there is a contemplated sale transaction of 17 million in near future.
20. By 30th May 2009 SRZ subsidiaries will join as Loan parties to this agreement and SRZ can at the max have an extension of 15 more days to have the documentation done for their subsidiaries.

My take: The new management team is providing a lot of good positive feedback to the lenders and the lenders have agreed to reduce the financial test and are willing to accept a much more simple. Cash in the bank kind of test.

SRZ management will continue to keep the lenders in confidence and will share their cash flow projections making the situation more manageable. The original cash in the bank policy was 50 million(with all the financial tests) now its 5 million (with no financial test!!) just additional cash projection sharing.. So a great big Thumbs up to the new management team.

There is additional 17 million asset sale which has been disclosed already.

SRZ will be sharing their plans with regards to Cash flows with the lenders by June 1,2009. (I dont think these projections will be made public as the company no longer needs to disclose all this as the agreement is stable till Dec 2,2009 and had been mentioned specifically in previous SEC filings.)

There is a mention that anything more than 35 million of unrestricted cash flow by end of the year will be used to payback the lenders so we can expect net cash balances to be atleast 35 million by end of year (Dec 2008 quarter number is 29.5 million)

All said and done the tight restrictions leave no chance for the management to wiggle and hence the rights of the shareholders and the bond holders will be protected and enhanced.

A strong buy considering the fact that SRZ has a market cap of 94 million and BKD is about 1 billion while their sales figures are comparable (before the sale of Greystone). SRZ is no longer in default with its loan covenants.

PN: These are my views and interpretation of the 12 Credit Agreement. The actual 12 Agreement document can be obtained out here

SRZ: 11th Credit Agreement- New asset sale of 12 million projected.

SRZ on March 23 reported the 11th Credit Agreement.



Please note that this credit agreement with Bank of America as the administrative agent is for 118 million dollar loan only (93.5 million of current borrowings + 24.5 million of letters of credit)

My reading of the SEC filing:
1. The previous credit agreement end date (March 30 2009) when SRZ could be considered "in default" without a new credit agreement in place has been extended to April 31,2009.
2. The Credit limit of 160 million will be permanently reduced as SRZ pays back the loans. (This is positive as SRZ had a limit of 160 million but it could not take advantage of the remaining 42 million in the credit line because it had breached the financial parameters. SRZ however has to pay some holding amount for all the credit that is not utilized, by permanently reducing the credit facility to 118 million it is saving some 1-2% interest that was paid on an annual basis on 42 million.)
3. SRZ has filed for 20.759 million in federal tax refunds which will be used to repay the Lenders.
4. There has been an addition to the original credit agreement with regards to "Disposition of Assets" on March 23,2009
"The aggregate net sale proceeds for the Contemplated Sales Transactions shall not exceed Twelve Million dollars "
>>>> There already exist an agreed disposition agreement for 20 million dollars in Jan 21 ,2009 credit agreement<<<
and this is in addition so total disposition sales would net 32 million (20 million[Greystone] + 12 million [unknown - as per the new credit agreement]) .
5. Jan 21,2009 agreement also had an 8 million Land/Shut Down Communities cash inflow.

So in summary:
1. Extension of credit agreement due date by 30 days.
2. Additional asset disposition price of 12 million (I think this credit agreement was put in place to make another asset sale deal legal and use the proceeds to pay the lenders)
3. The original asset disposition price of 20 million closely matches the approximately 19.25 million that will be received from the Greystone agreement link

So by April 31,2009 you can expect news about:
- Asset sale news worth 12 million.
- Land sale news worth 8 million.
- Tax refund news worth 20.75 million
Total additional "cash inflow" of 40.75 million, if you include Greystone then it would be 60.75 million
Current Market cap of SRZ ( 69 cents ) is 35.11 million. Strong buy !! Strong Buy and Go Long!!

Link to Jan 21 Credit Agreement : Search for "Twenty Million Dollars" & "Eight Million Dollars"
Link to March 23 Credit Agreement: Search for "Twelve Million dollars" & "20,759,271"
Link to my Blog regarding Greystone Sale
Link to my blog regarding Jan 21 Credit agreement (which already mentions the 20 million asset sale and 8 million land deal in Q1 2009)
Please Note: Sometimes the management might not report the deal/sale. Considering the conservative tone of SRZ management that is quite possible. Also in Dec 31,2008 the credit due was 95 million and 24.5 million it has already been reduced to 93.5 million and 24.5 million but has not been projected out to the public.

Comments are Welcome!! Please do leave comments !! Thanks!!

Energy Solutions (ES) The Nuclear Option

Energy Solutions is a specialized technology based nuclear services company providing its customers a full range of integrated services and solutions including nuclear operations, characterization, decomissioning, decontamination, site closure, transportation, nuclear material management, processing, recycling and disposal of nuclear waste, research and engineering services across the nuclear fuel cycle.
The company is a 1.7 Billion dollar revenue company with current market capitalization of 697 million. Company has 5500 employees worldwide including 1100 scientists and engineers and has 175 patents to its credit.
The company is the largest transporter of radioactive material in united states. ES has also been operating the world's largest low level radioactive waste (LLRW) disposal site.
52 week high is 27.42 USD and 52 week low is 3.35USD. Recent purchases has been done at around USD 6 by insiders. There has been a recent ruling in favour of the company where ES Clive radioactive disposal site is not a regional disposal facility and not under the jurisdiction of "Northwest compact" (Agreement between a group of states to share common LLRW disposal facility.
Company website: http://www.energysolutions.com/ & http://envirocareutah.com/
Considering the facilities under its management and recent ruling the stock is posed to tread back to USD 20+ level and definitely a recession proof industry. Worth investing at CMP 7.97 USD levels.

SRZ : Material Definitive agreement for Greystone

SRZ has files an 8k Report for the material definitive agreement it has entered for Greystone properties.




Let me start with a statement made by SRZ in their Year ending Annual 2008 report (link)
"As previously announced, the Company has determined that it will not fund any new seed capital projects of its Greystone subsidiary. Sunrise has also informed the management of Greystone that it is exploring strategic options for the subsidiary, and is currently working with financial advisors to assist in this matter. The carrying value of Greystone at December 31, 2008 is $(9.3) million, which includes $43.6 million of goodwill and intangible assets, $2.6 million of working capital and $62.4 million of deferred revenue. Since the carrying value of Greystone is negative, there is no impairment as a result of the Company's decision to sell this business."

So basically on its books the greystone subsidiary has a negative networth of -ve 9.3 million. Now lets look at the current 8k filing data.
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SRZ has 2 subsidiaries "Sunrise Development Inc" (SDI) and "Sunrise Senior Living Investment Inc"(SSLII)
SRZ and its 2 subsidiaries have agreed to sell their stake in Greystone to "Greystone Partners II LP" (buyers) with following transactions.

Sunrise Development Inc(SDI):
1. 1.5 million USD in Cash to be paid to SDI.
2. 2.0 million USD in 30 days notes (ie. after 30 days SDI will receive 2.0 million)
3. 6.0 million USD in 7 year notes with interest rates: (First 5 years 10% & next 2 years 12%)
4. 2.5 million USD which will be paid whenever any cash withdraw is done by Buyers ..Maximum limit is March 2029 which is a hardstop for the 2.5 million payment.
Total payment rough estimate is 12 million with 3.5 million within 30 days.

Sunrise Senior Living Investment Inc (SSLII):
1. 0.5 million USD in cash to SSLII
2. 3.7 million USD within 45 days to SSLII
3. 3.05 million USD to be paid into Seed capital by the buyers on behalf of SRZ-SSLII
(SSLII will receive 35% share of the Seed capital in the future)
Total payment rough estimate is 7.25 million to SSLII over the lifetime of the contract with 4.2 million within 45 days

Conclusion: Greystone had a networth in SRZ books of negative 9 million but this sale will result in 7.7 million +ve cash flows within 45 days into SRZ and its subsidiaries. and total value of the Greystone will be more than 19.25+ million USD in the lifetime of the agreement. As I had mentioned in the previous post.. the house has been cleared and all this money is going to go directly into the bottomline (profits). Now we know why Richard (CFO) is getting the 1 million compensation package!!

SRZ: Annual Results for 2008: review

SRZ came out with annual results for year 2008. I have re phrased it for clarity.

It was a very negative readout and the summary is basically:

Q4 2008 Revenues: 435.6 million
Year end 2008 Revenues: 1.7 billion.
Net Loss Q4 2008 : 305.6 million
Net Loss Year end 2008: 439.2 million

My Observations: Q4 2008 losses are 305.6 million and Full year 2008 losses are 439.2 million. Q4 2008 losses are 69.6% of year 2008 losses which is very large and strange.

Solving the reason for such high Q4 losses is key to understanding majority of the losses for the year 2008 and also will help us understand what actually is being reported by the company management.

Here is "my" understanding of the Q4 result:

Company has reported in Q4 2008 large paper losses for "impairement of goodwill and intangible assets" related to Marriot Senior Living and Karrington Health (122 million in Q4), "impairement of owned communities and land parcels" (30 million in Q4) in total there are 184 million of onetime related costs which has resulted in Q4 losses being 305.6 million.

Also company has shown expense growth rate higher than the revenue growth rate for consolidated communities resulting in 9 million of additional operating losses. This could be because, the german venture is now a consolidated community due to 95% ownership by SRZ.

Company has cleaned the house with these reported losses. Infact SEC has raised questions with regards to why the impairement of MSL and Karrington health is being done after so many years and not before. SEC has requested SRZ to restate their old earnings. SRZ has reported that the impairement of assets/goodwill was realized after the downturn started.

Another way to shift through the fog of financial engineering is to look at Taxes paid out. Cause SRZ can report numbers to the public but to the govt there is no fooling around and if you are making money you have to pay your taxes period.

Look at Q4 2008 Taxes paid: 11.147 million.

Look at Q4 2007 Taxes paid: -22.598 million (refund)

Conclusion: Results are bad but the management spin is more negative than the actual result...Why?

- Maybe to scare off the various lenders to sign the dotted line?....

- To have losses to write off against profits in the near future. Your guess is as good as mine.

Here is the link to the actual 10K filing

SRZ: 8K filing: CFO Salary Increase

SRZ has reported an 8K filing on Feb 25,2009

CFO salary has been increased from 257,885 to 500,000 + incentives which could be 150% of the base ie additional 750,000 USD.
There are 750,000 options alloted on Dec 23,2008 (Option Price = 1.37 Price on Dec 23,2008)

Obviously SRZ is not close to any bankruptcy as a 100% salary hike is not something you get in the middle of a squeeze.
Richard Nadeau actually came in for the SOX (Sarbanes-Oxley) Section 404 compliance and for the restatement of the accounts and now he is the CFO.
Rick is also the person who got in CEO Mark Ordan.

Also if you listen to the Q3 2008 conference call, my feeling was that Rick is the foundation stone providing all the backup support, guiding direction and steering the ship.

Finance after all is like the blood flowing through the veins.. critical for sustainance.

if you listen to Q3 2008 conference call (link) I got a feeling that operations wise the company is doing just fine .. its the one time expenses that have really brought down the company stock.. and the way the management put a negative spin on the story.

Link to 8K filing

Summary: This is a good news for all SRZ fans. if you have shorts please watch them carefully. We should see the light at the end of the tunnel. Actually its like seeing a horror movie in a movie hall where the only lights on are to the "exit" sign. Some have got scared and ran for the exit.. others have enjoyed the horror movie. The movie is about to end and we all can see the real SRZ.

"God grant me the serenity to accept the things I cannot change;
courage to change the things I can and most of all to know the difference"

Q4 and full year 2008 Confernce Call

So here it is folks, this is the first quarterly report after the stock touched 27 cents and the first quarter the new management has had a chance to implement its strategy.
It is also a quarter where the external environment and the internal dynamics of the company has been in a state of flux.

We as investors should take this opportunity to attend the Q4 conference call. The conference call details are:
Call in number: Toll Free: 877-795-3638 or International Dial in: 719-325-4841 (Not a toll free number)
Please Reference: "Sunrise Q4 Earnings call"

The audio archives will be available at this location after the conference call. Also previous audio archives are available for people to go through. Here is the link

Here are some of the questions I would like to have them answered by the company executives.

1. Since there are a lot of "one time" expenses, can the company provide the normalized earnings for SRZ for the Q4 Quarter and year end 2008 also.
2. Are all German resident communities in 7 locations (Frankfurt, Konigstein, Oberursel, Weisbaden, Bonn, Klein-Flottbek and Munchen ) operating cash flow negative?
3. In how many resident communities is SRZ the majority owner (can you also provide the resident capacity of SRZ owned resident capacity)
4. What is the gross margin level the company is trying to strive for next 1 year ? what is the current gross margin level.

Overall I would expect SRZ to improve its operations cost and also with a decline in the various one time expenses you will see better Q4 Cash flow and income statement.

SRZ: 8K Filing: NATIXIS

SRZ has filed an SEC 8K report
1. With regards to new "Standstill Agreements" with NATIXIS.
2. Stockholder Derivative litigation settlement.

Standstill Agreements with NATIXIS:

There are 4 Players:
Player 1: Sunrise München-Thalkirchen Senior Living GmbH & Co. KG (Property Company for the German Asset under consideration for SRZ)
Player 2: Sunrise München-Thalkirchen GmbH, (Operations Company for the German assets under consideration for SRZ)
Player 3: Sunrise Senior Living Inc (Guarantor for the German assets under consideration for SRZ)
Player 4: NATIXIS London Branch (Agent on behalf of the other finance parties)

There are 2 loan agreement in place between NATIXIS and SRZ.
1. Loan Agreement for the property between Sunrise München-Thalkirchen Senior Living GmbH & Co. KG and NATIXIS
2. Loan Agreement for the Operations between Sunrise München-Thalkirchen GmbH and NATIXIS

SRZ is the guarantor of these loans as the parent company.

NATIXIS and SRZ have come to two standstill agreement till March 31,2009.
Standstill Agreement 1: "Funding Standstill Agreement"
Standstill Agreement 2: "Loan Standstill Agreement"

The following are some of the salient points for "Funding Standstill Agreement :

- NATIXIS has demanded that Euros 8,076,878 be paid for non compliance to Loan To Value (LTV) ratio. The LTV ratio is 119.8% as per evaluations done by Atrisreal.
- SRZ is of the opinion that the LTV ratio has not been violated and there are discussion going on between SRZ and NATIXIS to determine the course of action.
-NATIXIS has agreed not to commence any action to demand the Cash flow Deficit
- SRZ is not in "Default" till the "parties" agree on the amount of default
- Once Agreement is reached about the cash flow deficit amount and SRZ does not pay the same the "Funding Standstill Agreement" will automatically terminate.
- Other loans that come due during the Standstill agreement, NATIXIS will not serve request for interest payments on the demands
Interest under Loan Agreement on Feb 27,2009
Interest under Loan Agreement on March 31,2009

The following are the salient features of the "Loan Standstill Agreement"

- No request for prepayment due to LTV breach.
- NATIXIS will not enforce any claims for payment that are due as per original Loan Agreement namely:
Operating company Loan: EUR 56,981.28 (interest & principal) on Jan 29,2009
Property Company Loan: EUR 347,522.91 (interest & principal) on Jan 29,2009
- "Loan Standstill Agreement" will terminate if:
a) End date of March 31,2009.
b) Negotiations end between SRZ and NATIXIS
c) Commencement of insolvency proceedings against SRZ or its German affiliates by anyone.
d) Termination of "Funding Standstill Agreement"
e) NATIXIS has provided its agreement to selling of the Munich business.

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Conclusion:
1. More breathing space for SRZ to fix itself.
2. All agreements are ending on March 31,2009 as everyone wants to be at the table during discussions, it really does not make sense to have an agreement beyond March 31,2009 for NATIXIS as SRZ would be at default with other parties on March 31,2009.
3. SRZ can sell off the Munich property and NATIXIS is in agreement
4. Companies finances are improving for the Munich property as the LTV ratio was 204.7% and the Cash flow deficit was Euro 11,224,376 in Dec 18 2008 filing. for the Feb20,2009 filing the LTV ratio is 119.8% and Cash Flow Deficit is Euro 8,076,878.
5. SRZ has resident properties in German at the following locations: Frankfurt, Konigstein, Oberursel, Weisbaden, Bonn, Klein-Flottbek and Munchen . Only Munich (Munchen) property is being mentioned so its not all german operations but some specific location.

Its an operations game and with Tiffany heading Europe, hopefully we should see better days in Europe.
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Shareholder Derivative Litigation:

- The shareholder derivatives litigation has been settled, there are no payments to be made by the company as there was liability insurance for the directors of the company.
- Paul Klaassen 700,000 stock options have been repriced from USD 8.50 to USD13.09.

Here is the link to the 8k report.

GM Bonds

• May 08: GM Exchange Offer for Bond holders
• Feb 17,2009: GM Bankruptcy Package: Bond holder view
• Feb 12,2009: GM Bonds for Life

GM Bonds: GM Bonds: Bankruptcy Filings

GM has filed as per Feb 17, 2009 deadline new plans for restructuring.
There are 3 types of bankruptcy filings in consideration.

1. Pre-Packaged Chapter 11.
2. Pre-Negotiated "Cram Down"
3. Conventional Bankruptcy


Out of the 3 Conventional Bankruptcy is a strict No-No due to the amount of time required to complete the same. The best/suggested alternative is pre-packaged chapter 11 filing.


Pre-Packaged Chapter 11 filing salient features:

1. Bond holders are to receive 1/3 30 cents to a dollar and the rest 70 cents in the form of equity interest.
2. This requires that the VEBA (Voluntary Employee Benefitiary Association) gets half their proposed funding of 10 billion in Equity
3. Current Equity shareholders will be reduced next to nothing due to large scale debt to Equity conversion.
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Company Net Present Value Calculations (Current GM Enterprise valuation is around 8 Billion) here is the break down.

Conclusion:

- 30 cents to a dollar for 25 dollar is 7.5 USD. So current bond holders will get new bonds worth 7.5 USD.

- All current bonds are quoting at close to 3.50 USD so there is a still lot of value in the current prices.

- Also for the remaining 17.5 USD bond holders will receive equity (could be 5 to 10 shares average 8)

So all in all a 3.50 USD investment will get you 7.5 USD worth of bond (in a solvent company) and 8 shares of GM. The bond interest rates could be higher than 7.5% also the shares would also get good valuations, if quoting at 2 USD will give you a total value package of 25 USD or more thats a 614 % return by Dec 2009 on investment of 3.5 USD

I would suggest a strong buy for GM bonds at these levels and a Strong Sell for GM shares (already at 2.18 USD)

Here is the link to GM News The complete PDF document can be downloaded here

SRZ: Valuation and Earning Estimate

This is with respect to questions on Yahoo message board with regards to valuations and earnings estimate of Sunrise Senior living (SRZ). Yahoo message board is the most active board for SRZ and here are my thoughts.

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PureGamble:

Basically when we buy a stock we are trying to evaluate if the company is worth the price that we are paying. Earnings can be doctored (legally) to show higher positive numbers even when the companies are not doing so well.

The question in our mind should be: If I am a business man/woman how much would I pay for a company and how do I calculate it.

The general rule of the thumb is 1 times annual sales. In case of SRZ Sales are 1.7 billion
Current market capitalization of SRZ is 40 million so thats a great value buy.

Ofcourse anything available at steep discount we need to do a deep dive and try to evaluate the networth of the company to determine the true price of SRZ as a company. (is it really cheap)

From asset prespective we know SRZ has 54,000 resident capacity and approximately 50% is owned by SRZ and the rest is under management contract (other people's Assets)

I have previously done some calculations (on Dec 22,2008) and we will use the same. The valuation comes to about 10 USD per share even considering bankruptcy levels. (here is the link)

That is, the company from an asset prespective.. throw away valuation is 10USD ie. 10 * 50 Million = 500 million market capitalization.
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Valuation 1: Let us now look at the company from Operating Cash flow basis.

Operating Cash flow is a pretty stringent and standard process to determine the health of the company. We will look at SRZ annual cash flow from operations for past 4 years and determine how much is the company worth.

Cash flow analysis has also been done before (Jan12,2009) and here is the Link

As we deep dive there are a lot of numbers and numbers can drag you down.

Gist of Cash Flow is : SRZ 4 years 2004,2005,2006,2007 Annual Operating Cash flow average is 130 million. If you can buy a company for equal to operating cash flows it would be a great buy
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The question is still what is the true worth of SRZ in market capitalization terms?

Generally when a company is valued, its true/ideal market capitalization is determined by ..
considering the "Time value of money" principles.
If we apply to the operating cash flow of SRZ (130 million) the time value of money fundas the question statement would be:

How much money would I need in super safe Govt bonds to earn 130 million each year.
Current 1 year MTA rate is : 1.633%
Last year 1 Year MTA rate is :4.326%
(from Bankrate.com Link)
SRZ loan rates are right now 6.5 to 7% assuming the worst case 7% interest rate, restating the question.

How much money do I need to earn 130 million each year when interest rate is 7%
= 130million /0.07 = 1857 million ie 1.8Billion
At different inetrest rates the numbers would be:

at 7% interst rate 130 million cash flow would be valued at : 1857 million
at 8% interest rate 130 million cash flow would be valued at : 1625 million
at 9% interest rate 130 million cash flow would be valued at : 1444 million
at 10% interest rate 130 million cash flow would be valued at : 1300 million

So we get 2 important observations.
1. the valuation (1.857 billion) is pretty close to 1 times sales (1.7 Billion)
2. As the interest rate goes up the valuation of the company goes down. So interest rates rise is a no-no for stock prices..

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Valuation 2: Another way to dice the valuation matrix is: how much would you need to get the company back on roll.. (pay out the debt and other issues which are depressing the company's valuations)

40 million (Current market cap) + 120 million (Current credit facility payment) + 180 million (German operations debt) = 340 million.

So if you have 340 million and if you could potentially buy SRZ for current market cap with a total investment of another 300 million the company would be as good as a new dime.

So by spending 340 million you can effectively get a company worth 1.8 billion.

PN: This is what the hedge fund/private equity players do.. invest 340 million and make 1.46Billion (1.8Billion - 340 million)

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Valuation 3: Another way to slice it would be if we need 300 million to fix the company how much time would it take for the company to become as good as new? (fix itself)

300 million /130 million (annual Cash flow from operations) = 2.3 years

So 2.3 years down the line the historical data available about the company tells us we can expect SRZ to have a valuation of 1.8 billion

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Earning 1: The final question that comes up is what is the earning estimate for the company.

SRZ current market cap is know 40 million.
Current interest rate is known 7%
using cash flow as equal to earnings we can determine cash flow 1 year down the line as 40 * 0.07 = 2.8 million

So my answer to PureGamble would be: SRZ earnings in Cash flow prespective is going to be +ve2.8 million cash flow within 12 months time frame.

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Conclusion: Anyway you slice it or dice it current valuation (40 million market cap) is noting but rediculous. Its a screaming Buy!!! for SRZ.

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