Sunrise Senior Living

Caitlin BizzottoBen HierPatricia Shongedza Zhihao TongGleb Zarkh

November 27, 2007

Agenda

Company & Industry Overview Macroeconomic Outlook Position in portfolio Accounting & Financial Restatement Issues DCF Comparable Multiples Analysis Recommendation

Company Overview Offers short and long term personalized

care to seniors including medical care

Services include• Assisted living• Independent living• Memory care (including Alzheimer's)• Skilled nursing and rehabilitation services

Resident Focused Approach

Profile

Largest global provider for the elderly

Founded in 1981 by Paul & Terry Klaassen

Publicly traded for 11 years

Headquartered in McLean, Virginia

Expanded internationally in 1999

Operations in United States, Canada, United Kingdom, & Germany

Over 480 facilities serving 52,000 seniors

Business Model

Keys to Success

Rigorous training program for employees

Continuous improvement• Sunrise University• Gallups Q12C13• Mystery Shopping• Quality Assurance Audits

One Year Stock Performance

Long Term Care Facilities Industry

Part of the Health Care sector

Increasing demand for retirement options in the next 5-10 years

Sunrise’s top three competitors: Assisted Living Concepts, Inc. (ALC) GGNSC Holdings LLC. (Private) Manor Care Inc. (HCR)

Aging Population

In 2006 people age 65 or older accounted for 12.4% of the population or 37.3 million people

Within the next three years it is estimated that over 40 million people will be over 65

In 2030 those over 65 will grow to 20% of the population

Recent Trends

Downsizing: Seniors are choosing to move into smaller houses or condos which require less maintenance and up-keep.

Independent Living: Seniors are leading more active lifestyles and opting to stay independent. Many communities are catering to their changing lifestyle.

More Trends

Alzheimer’s and Mental Disorders: As more people are diagnosed with mental diseases, there will be an increased demand for specialized care.

Respect, Dignity, and Values: Many residents are moving from traditional ideals to modern living arrangements.

Industry Analysis

Rivalry: Low rivalry between competitors. Companies compete on a diversification strategy rather than on price. The large aging population and increasing demand allow each company to have their share.

Barriers to Entry: Barriers are high due to the specialized nature and large expenditures of the business.

Power of Buyers: Power of buyers is moderate. Individual residents do not have much power in affecting prices. However, large insurance companies can influence what a company charges their residents.

Power of Suppliers: Power of suppliers is high because a community needs their employees to function. If they cannot keep and attract a professional and caring staff, their residency rates will decrease.

Threat of Substitutes: This threat is moderate. When it comes to retirement, a person has many options. They can chose to move into a retirement community, continue with their current living situation or move in with their children. Finances play a major role in what option a person chooses.

Industry Analysis Continued

Macroeconomic- Real Estate

Sunrise either acquires or develops its living communities As of Sept. 2007: 40 Communities

under development Past quarter decided to discontinue

four development projects due to “adverse economic conditions”

Macroeconomic Overview

U.S. Housing Market

Weak Dollar & Inflation

High Crude Oil Prices ($96.90)

Declining Consumer Confidence

195.2

219 221.9 219

180

190

200

210

220

230

$

2004 2005 2006 2007YTD

Year

Median Existing Home Sale Prices

Sources: NAHB & Conference-Board.org

Macroeconomic Effects

Seniors may be willing to hold off selling their primary homes and move to an assisted living community

The average daily rate per senior citizen is $155--- worsening economic conditions can limit seniors to pay the high expenses

RCMP Transaction History

May 1, 2006 Bought 600 @ $37.00 Initial Investment of $22,200

April 5, 2007 Held 600 @ $40.39

Portfolio

Portfolio

Cash 41%

Stericycle6%

Ameren6%

American Eagle9%

Copart6%

Discover1%

First Industrial10%

Walgreens5%

Sunrise5%

Macrovision2%

Kimberly Clark6%

Jack Henry3%

Correlation

AEE AEO CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFSAEE 1AEO -0.03 1.00CPRT 0.38 0.20 1.00FR 0.30 -0.03 0.28 1.00JKHY 0.22 0.38 0.40 0.12 1.00KMB 0.36 0.10 0.48 0.08 0.31 1.00MVSN 0.16 0.41 0.32 0.21 0.55 0.03 1.00SRCL -0.13 0.11 -0.02 -0.06 0.08 -0.01 -0.12 1.00SRZ 0.11 0.21 0.41 0.18 0.38 0.00 0.46 0.04 1.00WAG 0.06 0.13 0.08 -0.15 -0.02 0.24 -0.05 0.09 -0.17 1.00DFS 0.31 0.28 0.10 -0.02 0.40 -0.18 0.80 -0.55 -0.61 -0.11 1.00

Preliminary Charges (2006-2007)

Project Pretax Charge

Joint Venture (Germany) $30M

Luxury Condo Loss Restatement $26.5M

20% Joint Venture Shortfall $21M

Discontinued 4 Condo Developments $21M

Total $98.5M

22-Story Sunrise Condo Dallas, TX

Accounting Issues (1999-2005)

$130M Cumulative reduction in net income

Will not affect cash flow or current cash balance

44% of Communities are joint ventures

$26M After tax stock option expense Offset by an increase in contributed capital to SE

Assume $7-$8M future annual expense

Restatement – Item explanation

Revenue from managing the communities

Reimbursable expenses for Managed communities

Services (construction supervision, training, marketing) after transferring of property to JV

Delivery of senior living services to the residents

Services (site selection, zoning & design) prior to transferring of land to JV

Restatement – Income Statement

Adjustment according to the 3Q 07 report and statement made by Sunrise

Restatement – Income Statement

Net income (loss) as reported is the NI in former report

Adjusted NET INCOME report is the NI reported deducts the adjustment in 3Q07 report.

The last line is the Net Income computed from the restated income statement.

Restatement – RatiosCurrent Rat i o

0

0. 5

1

1. 5

2

2. 5

2000 2001 2002 2003 2004 2005 2006

Year

CA/CL

MergentAdj usted

ROE

02468

101214

2000 2001 2002 2003 2004 2005 2006

Year

Net income/Equity

MergentAdj usted

Forecast

Valuation

SRZ current price: $31.92

Current Mkt Cap: 1,680,287,000

Rf – 10 years treasury yield

Rm-Rf – Historical risk premium

Discounted Cash Flow

DCF for 2006 and 2007

Capex keeps stable as Sunrise changes focus to management model.

Sensitivity Analysis

Sensitivity Analysis

DCF Sensitivity Analysis

Growth Rate is 5%

WACC is 9.85%

P/E Multiple

P/E for the industry is about 22, as P/E for Sunrise is normally lower than the industry from history data, P/E is 21 for 2007 estimation.

Multiples Valuation

Rough estimate because TTM Earnings, Sales, Book, and Cash Flow figures for Sunrise are estimates

Company P/E Price/Sales Price/Book Price/Cash Flow

Sunrise Senior Living 18.14 2.33 2.75 14.19Assisted Living Concepts 27.1 1.98 1.44 13.08Manor Care 29.39 1.18 5.84 14.4Sun Healthcare 22.37 0.49 3.87 12.2Healthcare Facilities Industry 21.05 1.6 3.97 13.67

IMPLIED PRICE: $30- 40

Recommendation

Sell 300 Shares (Market Order) Stock is within DCF/ Multiples range Do not see a short term (1yr) catalyst Challenging economic environment Financial reporting issues Tax loss advantage