The SeniorCare Investor, May 2011

More CCRCs For Sale--
Better To Act Quickly In Distressed CCRC Sales

When the Great Recession hit, with the subsequent decline in single family home values and sales, stock portfolios, and investment returns for the elderly in general, the impact on the CCRC market was greater than most people expected back in 2007 and 2008.  The development of new CCRCs was in high-gear, filling what many people thought was going to be a strong continuous demand through the aging of the baby-boomers.  As we now know, it didn’t go exactly as planned. 

One of the problems in the CCRC market is that there are several different “types” of communities, split basically between entrance-fee CCRCs and rental CCRCs, but within the entrance-fee category there are several different subdivisions.  And providers and developers seem to be splitting in terms of favoring one type compared with the other, and are having rather strong opinions about it as well.  One of the most important components of a successful CCRC is financial strength and trust, and we mean trust that the sponsor will still be there to make good on its life care contract, if one is in place.  Once there is a feeling that the refundability of those entrance fees is in jeopardy, a CCRC loses its best referral source—the current residents.      

The first blow to the industry’s reputation was the bankruptcy of the not-for-profit sponsored CCRC in western Pennsylvania a few years ago and subsequent cancellation of the entrance-fee refunds for existing residents as part of the agreement to sell it out of bankruptcy.  The press was so bad that it is unlikely to happen again, but you never know.  Then there was the Erickson Retirement Communities bankruptcy, and the discovery of what we might call unusual financial and financing relationships between the developer and the shell not-for-profits set up to purchase the communities by accessing the tax-exempt bond markets.  Just let it be said that there was a significant amount of disbelief in the market when these arrangements, and who benefited and by how much, were aired out in bankruptcy court.  While it never should have happened, it could happen again.

Although these two bankruptcies are fortunately a thing of the past, depending on who you talk with today there are as few as 20 and as many as 40 potential CCRC bankruptcies right now, most of which are stand-alone not-for-profit communities.  The high number probably includes all those that are experiencing financial problems but not near the bankruptcy stage, while the low number may be those that have already incurred some form of default on their debt, are actively looking for help (or a sale) or a partner to bail them out, and are inching at various speeds toward a bankruptcy filing.  The dilemma is what to do and when to do it to avoid a complete meltdown, and that, apparently, has been the biggest problem with troubled CCRCs.

The problem is that there is often a disconnect between the board of a CCRC and the creditors (bondholders), with neither side really wanting to force a bankruptcy filing, but with both sides talking with their eyes wide shut as to what is really happening, often ignoring the tell-tale signs, if they are talking at all.  And then when you throw in the professionals, which include the bankers, feasibility consultants, developers, marketing consultants and accountants, you create a situation where it is easier to pretend it all may work out because no one wants to take the blame, which is understandable.  But when they pretend for too long, bankruptcy becomes unavoidable because a potential partner sees too much liability, the board sees too much debt and the creditors just want as much money as they can get, and usually by this time the creditors are not the bond funds but the vulture funds which picked up the bonds at a sizable discount.  The residents, and their financial well-being, are not their primary concern, and usually not a concern at all (sorry, but there is a reason they are called vulture funds).

The earlier a board and its advisors can admit there is a problem and do something about it, the better off everyone will be.  And the longer the bondholders wait to get their pound of flesh, the more likely it is they will get half a pound, if that.  A case in point may be what is known as Fairview Village in Downers Grove, Illinois, which filed for bankruptcy protection last February (Fairview Ministries and VibrantLiving Communities are also the names used).  In 2008 Ziegler Capital Markets completed a refinancing for the community in the amount of $56 million, most of which went to pay off existing debt of more than $47 million as well as to purchase some nearby land for future development and to make some repairs and improvements to the existing campus.  The board was getting ready for the future, but it was not the one they expected.  Unfortunately for all concerned, the timing could not have been worse. 

The entrance-fee CCRC has 218 independent living apartment units plus 56 garden homes on the campus.  In addition, there are 160 skilled nursing beds and 72 sheltered care beds.  Our understanding is that the IL occupancy declined from about 95% in 2007 to below 83% toward the end of 2010.  The skilled beds were at 75% and the sheltered care beds were at 83% at the time of the filing, but that was closer to the norm.  With the drop in IL census, that is a lot of lost monthly income.  In addition, they are not seeing much in terms of new entrance fees, and these have ranged from about $140,000 to $385,000.  On top of that, we hear that 17 former residents were listed as “unsecured creditors” with entrance-fee refund claims totaling nearly $3.0 million.  Let’s see what happens to those with a potential buyer.      

We have heard that the board did seek out a potential partner to rescue it, as well as the possibility of a bank to lend it money to keep operations going.  But the bondholders at that point were probably not ready to commit to the necessary discount to get a third party interested, and banks, being the logical entities that they can be, realized that they would be much better protected in bankruptcy by being the debtor-in-possession lender rather than lending prior to bankruptcy and being thrown in with all the other creditors to claim what they could.  All you really had to do was watch the “days cash on hand” to determine the various stages towards bankruptcy.  Our guess is that if the bondholders, a third-party white knight and the board could have come to an agreement, the debt would have been renegotiated down to about 50 cents or 60 cents on the dollar.  After all, the CCRC’s performance could have been worse, and the census should increase with an improving economy.  But with the bankruptcy, and all the costs associated with it when all is said and done, the bond investors will be lucky to net 20 cents to 25 cents on the dollar (if not lower).  And that could have been avoided.            

The CCRC is being represented by the law firm Ungaretti & Harris, and they are doing everything they can to preserve the entrance fees for the residents and to find the best company to take over the operations.  The stalking horse bidder should have been picked by now, and one of the conditions apparently will be that the bidder has to assume the entrance-fee liabilities of the current residents.  No repeat of Pennsylvania on this one.  The auction will be held in mid-June, and we will see how close we come to our estimates.

Rumors on Vi.  Although the sale of the Vi portfolio (formerly Classic Residence by Hyatt) has been shrouded in secrecy, the only consistent rumors are that the entire entity will not be sold (at least not now), and that the 10 rental CCRCs will be sold separately, with the top contender now being Ventas (NYSE: VTR).  We had heard that Brookdale Senior Living (NYSE: BKD) was in the running, which makes sense, and that several serious bidders in the first round were left in the dark by Goldman Sachs, which has been handling the sale.  One weird aspect has been the attack by an entity called Unite Here, which is a union-sponsored group that we believe has a bigger ax to grind with the Hyatt Hotel chain and the Pritzker family than with Vi.  But the union group is attacking Vi through a specific web site set up to embarrass the company, or so it seems.  The only thing we agree with is the odd choice for the new company name.  It has been a difficult time for many CCRC operators in this economy, and it seems as if Unite Here wants to make it worse for those they don’t like.  Fortunately, most people will ignore their rants, as will we in the future.

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