Because Sunrise already had properties generating revenue it did not have to capitalize these costs. This meant that it incurred less debt down the road. This strategy and its 15 years of experience led to its success, according to Thomas Newell, head of development and general counsel at the time Sunrise went public and now the company president. “We had already made a lot of our mistakes, and they were made under the radar as a private company. We went public knowing what the right product was and where the right places were. We also had a clear strategy–to be careful on the balance sheet,” he adds.
Shift In Management Focus Using this capital to grow, the company began to see even more opportunities. But, instead of going back to the public markets for capital and further diluting its ownership, the Sunrise management team decided it already had the best source of capital – its properties. While the company never owned all of the properties that its living facilities were on, it did own a large percentage, including the ones built in the growth spurt after it went public. Three years ago it began selling off the properties it owns but continues to manage.
Earlier this year, Sunrise continued this trend into property management by announcing that it was going to develop its new properties in partnerships with companies like California Public Employees’ Retirement System. In the Marriott deal, the company took over 120 management contracts and six operating leases, but no property ownership. [Sunrise Senior Living management believes that environment has a tremendous impact on a person’s health and sense of well being. Keeping this in mnd, the company designs interiors that help seniors feel at home.]
Under most of these arrangements, Sunrise will own a small piece – 10 percent to 20 percent – of any new development. But it has secured its long-term future by having a 30-year management contract for each community. The contracts generally pay 6 percent to 8 percent of the total amount of revenue in these communities.
While the company will lose some of the autonomy that comes with owning the real estate its businesses are on, it gains a number of benefits, most notably a reduced debt load and increased flow of capital, which it can recycle back into the company.
Wall Street also will react positively to the move, Nagle predicts. Often investors will shy away from real estate companies because they don’t know whether real estate sales are recurring income. Once Sunrise sells its real estate and relies on management fees, it will have a much more predictable income, be self-funded, and won’t need as much capital. “Within a year and a half, it will be a pure contract company,” Nagle says. “Wall Street will put a much better multiple on a contract company than one with earnings from two places – management services contracts and real estate.”
Once the company completes this transition, it will be able to focus on what it does best – running senior housing. And that, is something that Paul says could keep him energized for another 20 years. “This is more a calling to me than it is a business,” he says. “When you approach your work with a sense of mission, it’s not so much growing a company as it’s fulfilling a mission.”
