The Devonshire At PGA National Can’t Refinance Loan
Just when you thought the auction of one of the highest quality CCRCs in the country would be the end of it, the buyers who looked at The Clare at Water Tower in Chicago may get another chance.  That particular CCRC was built and opened with the worst timing one could imagine, and with $229 million of construction debt, everything had to work within the timeframe expected in order to succeed.  That didn’t happen.  The units never filled, prospective residents canceled their residency agreements and the community defaulted on its debt.
In Florida, we expect another high-end CCRC to hit the auction block late this year (or possibly early next year), but it had a different story than The Clare.  The Devonshire at PGA National, located in Palm Beach Gardens, Florida, was built in 1999 and sold to an affiliate of SHP Senior Living Investments in 2007 for approximately $165 million, or $390,000 per unit/bed.  The sale still ranks as the highest-priced (total dollars), single asset seniors housing sale in the market.  But it was also one of the nicest properties to ever sell as well.  Occupancy at the time of sale was close to 97% and entrance fees ranged from $222,000 to $687,000, much of which were non-refundable after a certain amount of time.  A significant amount of the CCRC’s annual cash flow was derived from these entrance fees (between $8.0 million and $12.0 million).  At the time of the sale, we had estimated the cap rate to be between 7% and 8%.  The former Merrill Lynch Healthcare Finance (MLHF) provided a total of $181.2 million in financing for the acquisition, which consisted of a $155.2 million senior term loan (interest only) with a five-year maturity, a $6.4 million senior revolver and a $19.6 million mezzanine loan. 
The term loan is now owned by GE Business Financial Services after it acquired most of the assets of MLHF several years ago.  In our July 2011 issue we reported on the legal battle between GE and SHP and its controlling shareholder, Craig Anderson, with regard to quarterly distributions the CCRC was making to SHP and Mr. Anderson, which GE wanted to stop to preserve sufficient liquidity at the property.  The loan came due this past April 30 and on May 7 the lender issued a notice of default.  With no apparent ability to repay it, and little interest by GE to “pretend and extend,” the Florida Department of Financial Services has stepped in and we expect foreclosure proceedings to begin soon.
The outstanding debt on the community is currently about $158 million, or close to $355,000 per unit/bed.  Unfortunately, and this may have been what concerned GE last summer, occupancy has plunged to 77% according to recent state filings.  Total revenues in 2011 were $31.1 million, and while GAAP EBITDA was nearly $5.6 million, cash flow (which includes net entrance fees received but not earned) was closer to $9.2 million.  Obviously, despite the occupancy loss, this community still earns a healthy income, just not healthy enough to refinance $158 million of debt.  While the economy and the soft Florida housing market surely influenced that occupancy decline, we don’t know of many high-end CCRCs that suffered a 2,000 basis point decline in census.  That was usually reserved for older, more middle-market communities………..Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today