Sunrise Senior Living, Inc. (NYSE: SRZ), today provided an update to its ongoing accounting review and said the Company will restate its financial statements for the years ended December 31, 2003, 2004 and 2005 primarily to adjust the accounting treatment related to ventures that contain partner preferences and the timing of sale accounting and recognition of income from prior sales of real estate. The cumulative impact of the restatement is expected to reduce net income for all periods impacted, including the years 1999 through 2005, by an estimated $60 million to $110 million. The Company expects the substantial majority of the reduction to be recaptured in 2006 and 2007. Sunrise is unable at this time to provide the precise impacts of the restatement since its review of these issues has not yet concluded. A further discussion of the accounting review appears later in this press release. The Company noted that its previously issued audited consolidated financial statements for the years ended December 31, 2003, 2004 and 2005, including the associated auditor's report currently on file with the SEC in the Company's 2005 Form 10-K, and its unaudited quarterly financial statements during these years should no longer be relied upon.
"We are committed to maintaining the highest possible standards of financial reporting and have expanded our complicated and detailed accounting review to include every venture and every significant real estate transaction," said Brad Rush, Sunrise Senior Living's chief financial officer. "This restatement does not affect the cumulative amount of profits and losses we generate from our venture partnerships or sales of real estate, but rather the timing of the income we recognize. With no impact to the Company's cash flow or the operations of our communities, and with continued high demand for our resident-centered approach to senior living, we fully expect to maintain our strong financial momentum in the fast-growing senior living industry."
Upon completion of its accounting review, Sunrise will report relevant financial information and file amendments to its 2005 Form 10-K and 2005 Form 10-Qs, as well as its Form 10-Qs for the first and second quarters ended March 31, 2006 and June 30, 2006. Adjustments for periods prior to 2003 will be reflected in the opening balance for retained earnings in 2003. As announced in a separate release today, Sunrise will provide a further update on August 8, 2006, when it provides its preliminary second-quarter selected financial and operating data.
Discussion of Accounting Review
In the last several years, the accounting for real estate ventures has received increased attention and new interpretations of the accounting treatment for ventures have developed. The accounting for real estate ventures is determined in accordance with SOP 78-9, Accounting for Investments in Real Estate. Sunrise, in consultation with its auditors, considered these new interpretations and its accounting for the profits and losses of its ventures. A discussion of this consideration is addressed in the first bullet below. As this review unfolded, Sunrise looked not only at partner preferences, but also at all guarantees and commitments provided to our venture partners and third party investors. Certain of these guarantees and commitments should have been considered at the time of the sale of real estate to these entities. Consequently, Sunrise is reviewing the timing of its income recognition associated with the sale of real estate and the potential financial statement presentation of the associated real estate. This area of the review is discussed in the second bullet below. The following is a summary of Sunrise's restatement by category.
Additional Accounting Item Under Review
EITF 04-5 - Rights of limited partners in ventures. The Company typically serves as the general partner or managing member of its ventures. EITF 04-5, effective January 1, 2006 for all ventures, provides guidance that the general partner or managing member in a venture is not deemed to control and, therefore, does not consolidate the venture when the limited partners have certain substantive participating rights within the venture. Sunrise believes its partners have substantive participating rights. From time to time, the SEC will review public company filings as part of its standard review cycle. Sunrise received such a comment letter from the SEC accounting staff with respect to its Form 10-K for the year ended December 31, 2005 which included a request for additional information regarding the application of EITF 04-5 to Sunrise's unconsolidated ventures. Sunrise has responded to the comment letter but is unable to predict the timing or outcome of the SEC accounting staff's review of its response.
Excluding the impact of accounting adjustments described above, Sunrise's business has performed in line with expectations through the first half of the year. The Company continues to experience strong occupancy, increasing average daily rates, the benefits of the industry leading development pipeline (which has produced 16 new community openings adding 1,400 to resident capacity in the first half of 2006) and robust acquisition opportunities. As announced in a separate press release today, Sunrise will acquire three additional communities in the San Francisco Bay area. This accretive acquisition, as well as Sunrise's anticipated acquisition of management of six Florida communities announced on June 30, 2006, which is also expected to be accretive in 2007, should add to Sunrise's EPS in 2007. As of June 30, 2006, Sunrise's balance sheet remains strong with cash in excess of $250 million and the lowest debt levels in over 10 years.
Sunrise anticipates that its earnings guidance for the period 2006 through 2007 will be increased due to the expected recapture in those years of the substantial majority of the expected $60 million to $110 million reduction in prior period income from the accounting adjustments. Sunrise will provide updated earnings guidance for 2006 and 2007 when it has completed its accounting review and filed its restated financial statements.
Conference Call Information
Sunrise will host a conference call today, Monday, July 31, 2006 at 8:30 a.m. ET to discuss the restatement of prior period financial results. Paul Klaassen, chairman and chief executive officer, Thomas Newell, president, Tiffany Tomasso, chief operating officer and Brad Rush, chief financial officer, will host the call. The conference call can be accessed by dialing (719) 457-2654 or (888) 208-1812 (access code not required) or via the Investor Relations section of the Company's web site. Those unable to participate in the live call may hear a rebroadcast by dialing (719) 457-0820 or (888) 203-1112 (access code: 4773234). The rebroadcast will be available through August 7, 2006. In addition, a link to a recording of the call and a copy of this earnings release will be available on the Company's Web site in the Investor Relations section.
Sunrise Senior Living, a McLean, Va. based company, employs approximately 40,000 people. As of June 30, 2006, Sunrise operated 422 communities in the United States, Canada, Germany and the United Kingdom with a combined capacity for approximately 50,000 residents. Sunrise also had 43 communities under construction in these countries with a combined capacity for more than 6,000 additional residents. Sunrise offers a full range of personalized senior living services, including independent living, assisted living, care for individuals with Alzheimer's and other forms of memory loss, as well as nursing and rehabilitative care. Sunrise's senior living services are delivered by staff trained to encourage the independence, preserve the dignity, enable freedom of choice and protect the privacy of residents.
The estimated range of the financial statement impacts of the Company's restatement, the Company's expected recapture of restatement amounts in future periods, the anticipated earnings contributions from the two recent acquisitions and the anticipated increase in Sunrise's earnings guidance are, and certain other matters discussed in this press release may be, forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Sunrise believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurances that its expectations will be realized. Sunrise's actual results could differ materially from those anticipated in these forward- looking statements as a result of various factors, including, but not limited to, completion of Sunrise's accounting review and finalization of the restatement, the actual performance of the recent acquisitions, development and construction risks, licensing risks, business conditions, competition, changes in interest rates, Sunrise's ability to manage its expenses, market factors that could affect the value of its properties, the risks of downturns in general economic conditions, satisfaction of closing conditions, availability of financing for development and acquisitions and other risks set forth in the Company's annual report on Form 10-K filed with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.
Example of Venture Allocations
Assumes a single community venture, revenues from the community of $6,000,000 with NOI of $2,000,000 upon stabilization, 33% margin after a 7% management fee, annual debt service of $1,000,000, and refinancing of the community at the end of year three. Assumes that venture partner has a preference in the return of capital, and that they also apply HLBV. Refinancing assumed value of $28,500,000 based upon a 7% cap rate applied to year three NOI of $2,000,000. Sunrise receives a 10% incentive upon a capital event.