The Business of Value Investing.pdf

More Than One Way to Find Value 201

good reason. But Sunrise was a different company at the time, and

the overall market pessimism for the industry created an opportu-

nity to acquire it at an attractive price.

Investment Analysis

Sunrise essentially had two sources of revenue:

1. The sale of mature properties, in which case Sunrise would
   retain the right to manage the properties for a fee


2. Long - term management of Sunrise properties and others
   using its expertise

At the time, the economics of the Sunrise “ develop, build, and

sale ” model went something like this: It cost Sunrise about $ 11 mil-

lion to build a facility plus start - up costs of $ 700,000, so the total

cost was $ 11.7 million. Sunrise would use a combination of debt

and equity to fund each property development. Each facility was

being funded with about $ 2.5 million in equity with the remaining

$ 9 million or so coming from debt.

Once developed, Sunrise would sell the properties for about

$ 16 million, yielding a pretax profi t of $ 4.3 million, or about 170

percent return on investment.

ROI = $ 4.7 / $ 2.5 = 1.7 or 170 %

As part of the sale, Sunrise typically would retain a 20 percent

residual interest so it was getting about $ 12.3 million after the sale.

With the pretax profi t of $ 4.3 million, Sunrise was able to inter-

nally fi nance the build - out of four properties for each two sold.

The economics of this model creates tremendous value. The com-

pany would invest $ 2.3 million, sell the property for $ 16 million,

and have enough left over to repeat this process twice. At the time,

Sunrise was still a company with tremendous growth potential, and

this model was able to use leverage to create tremendous value.

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