EXPERT OPINION: A Conversation with David Reis

April 16, 2010

David Reis

In this "Expert Opinion" interview, David Reis, CEO of Senior Care Development, discusses what's happening in the CCRC market today and what long term effects market conditions are having on both for-profit and not-for-profit developers.

Listen now     Watch the video      Read the transcript

For the past twenty years David Reis (through his company Senior Care Development, LLC and its affiliates) has been a developer-owner of senior living facilities that span the continuum of care from independent living, assisted living, skilled nursing care, and continuing-care retirement communities.  He has personally developed for his own account over $500,000,000 in retirement oriented projects such as: Evergreen Woods, a full service CCRC of 296 total units in North Branford, Conn., and Meadow Ridge consisting of 410 total units located in Redding, Conn., as well as assisted living and nursing homes…all of which (other than Meadow Ridge) he sold in the frothy markets of 2006 and early 2007. Senior Care Development is currently pursuing the purchase of distressed CCRC's, hospitals, and other high barrier to entry and/or unique senior related projects.

Since 2001 David (through affiliated entities) has also been lucky enough to be both a partner and minority investor in Formation Capital, LLC led investments in the SNF space and currently holds minority interests in over 280 SNF's. Through his affiliated company Falcon Investors, LLC David along with his partners at Formation Capital recently entered the high end hospitality business with the development and construction of the St. Regis Deer Crest (www.StRegisDeerCrest.com) in Deer Valley a ski in/ski out world class property whose development David oversaw.
  
Contact Information:
David Reis
Chief Executive Officer
Senior Care Development, LLC
Phone: 203-222-6262
www.SeniorCareDevelopment.com

  
Watch the video of the interview: 

 Part 1 of the interview   Part 2 of the interview

Read the interview transcript:

Steve Monroe:
I'm here with David Reis, the CEO of Senior Care Development.  David has built CCRCs.  He has sold them, developed them, bought bonds of distressed CCRCs.  He's probably done about everything you can in the CCRC world.  So I am happy to have you here and shed some light on what's going on in the CCRC market. 

We know about 80 percent of the CCRC industry is not-for-profit.  Are current market conditions forcing more long-term changes on the not-for-profits or on the for-profit developers?

David Reis:
Well, years ago in the non-profit world, the Greystones or CRSAs of the world would find a group of individuals who knew nothing of the industry, who had no money, no financial backing, bootstrap them in business, put up 100 percent of the money and build a CCRC.  I always thought that that was a really ridiculous model because you had a lot of people who really didn't have the years of experience that most of the for-profit guys had in the industry.  I think that business is gone forever and the no money, no experience non-profits won't be financing facilities any time soon.  I think that the for-profit experienced players - eventually that market will come back.

Steve Monroe:
And do you think what happened to Erickson Retirement Communities and their Chapter 11 bankruptcy filing, is that unique to Erickson or is there some interesting aspect you've gleaned from that bankruptcy that you can use on your investments?

David Reis:
Well, I think hindsight is 20/20, and I think here it really applies but I don't think they will ever be building a new campus with the same financial model they used, predominantly because whether you build 200 units, 400 units, 600 units or 800 units, the Erickson model does not stabilize.   So even at 800 units, they don't have any communities that are stable communities.  I think for most of us for-profit guys who are building smaller communities where you're forced to get a Phase 1 to break even at 220 - 250 units and then a second phase, could be profitable.  The Erickson model is really "pedal to the metal" investing.  It is legs, don't fail me now.  It is a scary way of doing development when you can't stop until you get over that thousand-unit mark so, I don't think we'll be seeing a lot of developments like that, moving forward.

Steve Monroe:
And a thousand units, that's large for anyone.  There's been growing criticism of the use of the initial entrance-fee deposits in CCRCs.  What do you think?  How much of these initial fees should be used to pay off the construction debt or put in reserve or some other use?

David Reis:
Well, I think that every state has a different rule for this and regulates it differently but I think, in general, you have to balance off putting money in reserves on one hand and using money to pay off construction debt on the other.  Here you have a competing interest between the two of them and it has to be finely tuned in my mind. 

Now, if you're in the State of Florida, you can't release money until you are 70 percent occupied which, let's say, is totally different than in the State of Connecticut where you can't break ground until you sell 50 percent of the community.  Then again there is, let's say the State of Ohio, where you don't need any pre-sales.  So, every state varies so widely that it is really hard to see.  I think that every developer has to figure out where their comfort level is on how much debt and how much leverage they think they really want their community to have.

Going back one second to your question about Erickson - because I did want to mention one other item about their bankruptcy that I saw when I read over the bankruptcy auction transcript.  But, other than KKR and Coastwood getting an $8 million, in effect, loser's fee, the thing that I've been most amazed with is that although the Erickson way talks about a 100 percent refundable plan, in effect, their residents - not only do they take all the resale risk of the apartments because they don't get refunded until a new person moves in - but they also take the risk of the resale price achieved.

So when their Residency Agreement states that if they don't get - let's make believe you buy units for $250,000 - if that unit resells at $200,000 you have the ability to either take the $200,000 or continue waiting until maybe you do get your $250,000.  So, in my mind, with the recession and with how skittish consumers are, it's not only the financial plan that matters, it's also the refundability to the residents, the risks that they're assuming, all those things are now playing into the marketplace as never before.

Steve Monroe:
Is that the biggest risk or worry from a PR perspective for CCRC owners these days?

David Reis:
That's a good question and what I am worried about is that there was a deal done in Pennsylvania, a B'nai B'rith deal, which Madison Capital held the bonds and which was originally developed by Greystone.  That was the first time that I had ever seen that the residents were treated as unsecured creditors.  Now, residents are unsecured creditors in a bankruptcy, but no judge has ever let residents take the financial hit and then, in effect, let the bond-holders get as high a value as possible.

So in the B'nai B'rith deal, the residents, in effect, got written down to zero and Madison Capital got more on their bonds because they, in effect, handed over a community that had no debt on it to the buyers.  I think that's a very scary proposition for all developers because it gives, really, a black eye to the industry, where I think that the residents' entrance fee should really be sacred and let all of the equity people and let all the debt-holders take the risk.  This is my view on that.

Steve Monroe:
And those residents of that community are now suing everyone involved in that deal, as I understand it.

David Reis:
And rightfully so.

Steve Monroe:
You look at a lot of distressed properties.  Is there a difference in your mind in investing in a distressed CCRC that's not-for-profit or for-profit?

David Reis:
Well, the biggest difference I see is that if you - as a for-profit - buy a non-profit, normally you have to get attorney general's approval for the non-profit selling to a for-profit.  A year or two ago when I bought a non-profit hospital in the Southside of Chicago, we had to get the AG's approval, get a CON, and I also had to get Vatican approval.  We did all of that in about four months, from start to finish.  So clearly, where there's a will, there's a way. 

I don't think there is anything that really holds the for-profit from buying non-profits' assets.  In fact, I think we're going to see a lot of that coming in the next year.

Steve Monroe:
And do you think with everything going on in the CCRC industry, do you think the industry is going to be heading more to the straight rental market or do you think there is going to be some new variation on the rental entrance fee?

David Reis:
I think that, to build the full continuum of care, from independent living, assisted and a nursing facility all on one campus, that infrastructure is so expensive that I don't think a rental is really ever going to work for a full CCRC campus.  What I do think will happen is that, instead of having a 90 percent refundable plan, a 100 percent refundable plan, we'll go back to where it was decades ago where there were more 50 percent return of capital plans or zero percent refundable plans.  I think we're tilting more to that direction because, once again here, this way residents won't be, in effect, risking so much on a buy end and actuarially you could determine whether it's a zero percent refundable, 50 or 90, actuarially from a development standpoint, that could still all work out and it works out well for a developer.  I think that's the direction we are most likely going to in the immediate future.

Steve Monroe:
And what is all this doing to the lending market for CCRCs?  Are lenders pretty much staying on the sideline?  I know they're viewing the entrance fees differently than they did, maybe, five years ago.

David Reis:
Well, that's if you could find any lenders, right?  Although there are some regional lenders still in business, there are lenders out there for stabilized product.  All the big players - the Sovereigns, the HSH Nordbanks, the Paribas; all those guys are gone from the industry and I don't think they'll be coming back anytime soon.  I think to string together a large community of $150 to $200 million, you really can't do that off of small, regional players.  I think those are really going to be halted for a while.  Yet, people with stabilized assets, I think they will get them refinanced, I'll bet at higher rates.

Steve Monroe:
So it looks like, probably, the not-for-profits in the tax-exempt bond market will still be a lively area because that financing, I guess, is still there.

David Reis:
I think it's going to be there for non-profits who, maybe, system-wide, have some deep pockets of their own and to trade upon.  I think it is there for them but much harder for the one-off not-for-profit.

Steve Monroe:
Then when you're looking at an acquisition of a CCRC, distressed or not distressed, what's the most important financial ratio for you to look at in terms of stability?

David Reis:
That's a very good question and the answer is banks used to look at the debt/service coverage ratio and see where their comfort level was.  They never distinguished between dollars that were produced for monthly service fees that in-place residents paid versus turnover attrition income from units turning over.  There was never a very big distinction between the two of those. 

When I want to size an acquisition, I want to get as close to one-to-one on the monthly service fees that residents are paying, have that be the predominant piece of my cash flow versus the turnover income.  Obviously, in good times it's a non-issue because money is rolling in and people aren't putting a label on it, but when real estate stops, home sales stop, people stop moving in and, if you're relying too much on that turnover income, then you're going to be in a world of hurt.  Because you could have all your in-place residents even at a 90 percent occupancy but not be generating enough money to pay the debt service. 

I think that is really the most critical component, in my mind, is trying to size a purchase or look at a community and say, "how much of this money comes from in-place residents?"  Because you know what?   In 20 years of doing this, no resident has ever not paid me the monthly service fee they have owed unless it was a hardship case, and I can count those on one hand.  Some communities, and most non-profit communities, may be run at a 0.70 percent, being able to pay the debt service from monthly service fees.  The rest of it has to come from that turnover.  I don't like that at all.  I like the idea that monthly service fees should be sized to pay the debt service and then the turnover is really the income to the developer or the owner.  That's how I pretty much can judge who looks like they're more solvent than not when you're looking at numbers in the business.

Steve Monroe:
Banks are looking at that one-to-one ratio more now also.  Then, from an investment or investor perspective with a distressed property, what do you favor?  Do you like to buy the bonds or is it better for you to wait for the property to come on the market and actually buy the property?

David Reis:
Well, the worst you could have is a bankruptcy and, so, buying CCRCs at a bankruptcy is a totally different business because values have plummeted so far. Residents and prospects have gotten a negative vibe on the community.  I kind of liken the whole thing to a plane heading down; you have the secured creditors in first class, you've got the mezzanine people in business class and then you have all the equity in the back and coach.  But when the plane's going down, it really just doesn't matter where you're sitting on that plane.  So when a project is sliding into oblivion, into bankruptcy, you know, everything goes out the window and it's pretty much a fair game-you start at a much lower value.

What I like to see, and when I've been successful in buying, is buying either a controlling interest or a blocking interest on the bond side and then taking control and sometimes taking total control or helping the non-profit or the owner and their lenders restructure the deal, because maybe I've gotten a very good deal on the bonds.  So we could restructure the bonds and then, without every actually taking ownership, bring that value back up to par, or better, and still achieve the same goal.  Right now, I think that there's billions of dollars of non-profit senior debt where the control of those bonds is really going to be up for grabs between different people looking to be in different places in the capital stack; some wanting to get ownership, some wanting not to.  I think that's going to be where there will be a lot of business in the next year.

Steve Monroe:
Well, let's get into that.  You've bought, you've sold, you buy bonds.  What's in the cards for you in 2010?

David Reis:
In the last couple of years, believe it or not, I've been busy building a St. Regis hotel with my partners at Formation Capital, that just opened three weeks ago.  Ski in, ski out. 

We've pretty much paused our development sites because if you can't attract construction money, there's no sense in continuing to throw in pre-development money into them.  So right now  we are probably tracking 20 different CCRC projects - all high-end projects - across the country that are in some sort of financial difficulty.  Maybe they have too much debt.  Maybe their occupancy has gone way down and they don't have enough money to recover it.  Our goal is to pick up a couple of those buildings in 2010.  Unfortunately though, as you know, when a CCRC is in trouble, it's easy to hang on for awhile and it takes a long time for them to unwind.  Once they unwind though, then you've got a lot of trouble and then people are really in a world of hurt.  We are waiting patiently for those deals to mature.

Steve Monroe:
Well, very good.  Well, good luck this year and I hope you get some deals going.

David Reis:
Thank you, Steve.  I very much appreciate this opportunity.
 

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