The SeniorCare Investor: The Business Of CCRCs--
Entrance Fees, Capital Adequacy, Confidence And The Clare
There are some industry professionals who are worried about the CCRC business. While we understand their concern, this issue is not really about the CCRC sector itself, but about individual communities, both new and old, and what the capital structure should look like moving forward. Obviously, there is significant interest in what is going on in the CCRC market, and one has to look no further than our online conference last month, The Future of CCRCs, which had the largest attendance of our 36 (so far) online conferences. While the attendance was striking, what was more unusual was that the majority of the attendees were in the for-profit sector, while 75% of CCRCs are operated by not-for-profits. Obviously, it’s not just the not-for-profits that have an interest in the future of CCRCs.
What does this tell us? Does this mean we will be seeing a lot more for-profit activity in the CCRC market?
Did the Chapter 11 bankruptcy filing of The Clare at Water Tower in downtown Chicago two days before the conference stir the interest of those who might otherwise not have been interested? Or was it because the CCRC business really embodies everything in seniors housing and care: all the customers, the services, the risks, reimbursement, aging in place, capital structure and, yes, the housing market, all wrapped up in one campus across the care spectrum. We think this is what is driving the increased interest, and the impact that successes, and failures, in the CCRC sector will have on the rest of the seniors housing and care industry. In other words, if the CCRC sector is flourishing, our bet would be that the rest of the seniors housing industry would also be doing well. If it is struggling, or in some cases failing, it is unclear the degree of impact it will have, but it will be there, and that is what worries some people.
And just to assure those readers whose livelihood depends on the successful future of CCRCs, the consensus of the panel of our online conference was that entrance-fee CCRCs are here to stay and will remain popular with a certain segment of the seniors population. That said, there was also the belief that CCRCs will experience increasing competition from other upscale communities with amenities and services that will equal or be superior to those of CCRCs, with the exception of on-site skilled nursing. From a financial point of view, however, that skilled nursing center, which used to be a cost center and became a profit center with higher Medicare rates, has taken a financial hit with the new rates and reimbursement protocols that went into effect October 1. That is certainly not something CCRCs had ever really experienced.
The other common thread was that the capital structure of CCRCs will need to change, with less leverage and more upfront equity. No one really had an idea where that equity will come from for thinly capitalized or single-site not-for-profits, but for the sake of financial stability, more is needed and more has to stay in the community for a longer period of time. This is especially true for start-ups where the alignment of interests between the sponsor and the providers of capital, especially the initial equity capital, is not always in sync. A case in point is the disaster called The Clare at Water Tower.
Naysayers will claim that the Great Recession and collapse of the housing market were what did in this 50-plus story high-rise development in downtown Chicago that had the potential to be one of the finest CCRCs in the country. Fortunately, it still does have that potential, but not until severe financial losses, lawsuits, name calling and a little bit of apprehension among the residents who did brave the economic storm, sold their homes and plunked down entrance fees between $500,000 and $1.0 million, are behind us. And let’s not forget, other CCRCs did not fare as badly as The Clare. A big part of the problem was a crisis of confidence, and once that gets out in the market, forget about it. And while none of the debt was paid off with the more than $60 million of entrance fees that were initially collected, we suppose the reason was because they needed the liquidity for working capital losses that were significantly in excess of what was forecast...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today