Remember MCI? After emerging from bankruptcy in 2004, the renamed Worldcom again had shares trading on the Nasdaq. While many seemed skittish about the company's troubled past, savvy value investors saw that its assets were of very high quality, and those that followed through with their convictions reaped a nice return when Verizon (NYSE: VZ ) bought it out in 2005.
Much as I'd like to say otherwise, I don't see any similarly happy ending for Sunrise Senior Living (NYSE: SRZ ) , which has also considered seeking bankruptcy protection to help deal with its big debt burden.
Hard times
Sunrise provides senior living services including luxury independent living, assisted living, and skilled nursing services. It's a small industry that has been hit hard by the recession. Two larger companies in the niche, Brookdale Senior Living (NYSE: BKD ) and Emeritus (NYSE: ESC ) , have suffered substantial GAAP earnings losses in recent years. So has Sunrise.
In the third quarter, Sunrise saw its occupancy rates plummet, offsetting a rise in average daily revenue per occupied unit. Comparable-community revenues (think same-store sales for senior living facilities) were down 2.2% year over year.
Revenue slipped 7% to $383.6 million, and the company lost $44.4 million, or $0.88 per share. The loss was actually less severe than last year's, but investors quickly hammered the stock following the results; shares dropped by nearly a third Monday.
Great expectations
Despite its financial woes, Sunrise is still trying to accentuate the positives. In its most recent quarter, management highlighted the progress with its ongoing balance sheet restructuring.
Sunrise has about $412 million in defaulted debt, so restructuring that debt is clearly a top priority. One of many initiatives includes selling a portfolio of 21 communities to Brookdale, which will hopefully provide some of the proceeds necessary to extend its loan maturities so it can live to fight another day. That would not only keep its residents and shareholders happy, but also REITs like Ventas (NYSE: VTR ) and Senior Housing Properties Trust (NYSE: SNH ) , both of which obtain substantial revenue from properties that Sunrise manages.
The battle of its life
Even before the latest drop, Sunrise hadn't seen much sun lately. Shares traded above $30 in late 2007, but go for less than $3 today.
The company has been cutting jobs and other operating expenses, but revenues have fallen at an even faster pace, resulting in operating losses. The company may need to offer more incentives to attract new residents and bolster revenues, but such actions must also be accompanied by further, sustainable cost reductions.
Things could get even worse before they get better -- if they get better. As I see it, there are more attractive bargains than Sunrise that have better potential for profits.
Worried about your investments? Alex Dumortier is, too -- and he can show you how to protect your assets from the mother of all bubbles.
A previous version of this article incorrectly suggested that Brookdale and Emeritus had negative operating cash flow. The Fool regrets the error.
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