202 The Business of Value InvestingBecause Sunrise was building properties and incurring start - up
costs, net income was artifi cially low initially. Even more so, income
would always be lumpy depending on the volume of construction
that was going on at the time. Mr. Market doesn ’ t favor irregular
streams of income because he is unable to get comfortable with
the future earnings of the business. When the construction slowed
down, net income would rise signifi cantly. In the meantime, Sunrise
was building about 20 to 30 units each year and selling the same
amount, so net income was around $ 60 million. With approxi-
mately 20 million shares outstanding, earnings per share were $ 3.
The buyers of the properties were blue - chip companies, so it was
safe to assume that they would not lose appetite. Buyers included
General Electric and Prudential.
While the sale - leaseback gains historically have driven earn-
ings, over the long term Sunrise was going to generate most of its
earnings from management contracts. This segment ’ s earnings per
share (EPS) was growing at over a 25 percent annual rate and was
due to:- Development of new properties
- The emerging “ Sunrise At Home ” care services
- Management contracts on third - party - owned assisted living
facilities - Annual price increases per resident
The EPS of the management services was:
2000 $ 0.59
2001 $ 0.79Expectations were $ 1 and $ 1.29 for 2002 and 2003. Residents
were staying an average of 2.5 years, and growth was coming in at
29 percent per year, so it was safe to assume that 20 percent was
achievable over the next four to fi ve years.CH010.indd 202CH010.indd 202 9/2/09 11:50:54 AM9/2/09 11:50:54 AM