Owner/Operator/Developer Buys and Renames Bankrupt Community

On May 30, ACTS Retirement-Life Communities closed on a $27.25 million acquisition in Huntsville, Alabama — its 19th CCRC, its third acquisition, and its first property in Alabama. “This was a different kind of acquisition for us,” noted Jerry Grant, Executive Vice President and CFO. “We have never acquired a community that was formerly in bankruptcy.”
ACTS is the nation’s largest not-for-profit owner, operator, and developer of CCRCs. (Some organizations may appear larger in terms of the size or number of communities they operate but, unlike ACTS, they do not own all of their communities.) Its new acquisition — formerly known as Carlton Cove and renamed Magnolia Trace coincident with the closing — is on 43 acres in South Huntsville and includes 162 independent living units and cottages and 105 skilled nursing beds. The community opened in 2003 and, at the time of closing, had about 180 residents (115 in independent living) — about half its capacity — and 175 employees. Huntsville is a growing area with a booming economy. It’s a geographic area into which ACTS had never ventured before; but, after investigating the potential of Carlton Cove, its similarity to other ACTS communities, and the growth potential of the senior market in Huntsville, it became an opportunity. Until now, ACTS has operated communities on its home turf of Pennsylvania (8), as well as in Florida (6), North Carolina (2), South Carolina (1) and Georgia (1).
“The infrastructure of the Huntsville property is in good shape,” noted Michael Smith, Corporate Director of Public Relations for ACTS. “It’s a gorgeous community in a gorgeous area. We’re looking forward to bringing our tradition and our reputation into that market.”
Carlton Cove was built using a 2001 construction bond issue set up through a City of Huntsville authority. As part of its original bond agreement, Carlton Cove needed about 200 residents to cover the approximately $8 million in annual operating costs, $7 million in non-operating costs and $5 million in annual debt service. When the owners filed for bankruptcy in August 2006, the financial report indicated that the organization had 109 residents, total assets of $53 million (cash, property, and equipment) and $74 million in long-term debt. The community had always been able to meet its operating expenses, but the debt burden was too high. And, in a kind of Catch-22 situation, the community wasn’t filling up because the negative financial situation discouraged future residents.
It was a bid-and-auction process in which ACTS successfully won the bid for Carlton Cove’s assets. Effective with the closing of that transaction, those assets transferred over to ACTS, which then installed them into a newly formed entity called Magnolia Trace that now acts as a subsidiary of the ACTS organization. Allen McMurtry of CLW Health Care Services Group advised the seller in the transaction.
Because of the auction process, the deal was an outright buyout. “Whoever bids the highest amount is awarded the asset,” Grant explained, “and the proceeds are used to redeem the entire outstanding debt. The loss falls to the existing bondholders.”
ACTS is still working out the financing for the Huntsville property with Ziegler’s Chicago office. Right now, interim financing is in place that ACTS funded itself through its own line of credit, attained by virtue of the organization’s financial strength — indicated by its nearly $1 billion in assets. Those interim funds must be repaid within 90 days, when permanent financing will be installed within the Magnolia Trace entity. “We expect to complete a transaction in early- to mid-August to permanently finance those assets,” said Grant. “It will be in the form of both tax-exempt and taxable bonds.”
A different product, a new tradition
The ACTS Signature Experience is a common thread among all the ACTS properties and, it seems, a key to the organization’s success. A person-directed residential approach to care and services, the ACTS Signature Experience represents a culture change that contrasts significantly with the traditional medical model. The program creates a more homelike environment by, for example, giving the residents the freedom to decide what time to go to bed and get up in the morning, flexibility with regard to meal times and dining venues, and a choice of activities that promote all aspects of wellness.
The ACTS Signature Experience has been “incorporated into the fabric of all 18 of our communities,” noted Elsie Norton, Senior Vice President of Quality Care, “and soon will be introduced into Magnolia Trace, as well.”
Taking care not to cast aspersions on any previous parties involved in operating Carlton Cove, Grant targeted consistent management and leadership at the community as attributes that ACTS will — “first and foremost” — bring to the table. “ACTS is also bringing a slightly different product to the market,” he noted. “Our Life Care contract that we sell to our seniors is different from what was offered previously.”
The residents of Carlton Cove, who had been seeking a total revitalization of the community since the bankruptcy process began last fall, have welcomed the new owners with open arms. As stipulations of the deal, all bidders were required to have had experience in operating such a facility and also to honor the contracts of current residents.
The apartments and cottages at Carlton Cove were about 47% occupied at the time of the sale, so ACTS has 53% yet to sell. “We’re anxious to get started,” said Grant, “and pretty optimistic. We believe that our Life Care offering will be a good incentive to draw buyers in. It’s a product that is not available elsewhere in the immediate area. And through our analysis of the local marketplace — the Huntsville area and general vicinity — we are very comfortable with the current senior demographics and the projected trends with regard to the marketplace having an appropriate amount of age- and income-qualified seniors. Those are statistics that we would look for in any market.”
Most importantly, Grant added, ACTS takes some comfort in knowing that the amount of debt that will become the permanent obligation on the residents in the community is now at a more reasonable level than was previously the case.
Buy vs. build
In recent years, ACTS has leaned toward acquisitions — Magnolia Trace being the organization’s third since 2003 — vs. 16 communities built earlier as new developments. One of the plusses of acquiring a community is the ability to get it up and going quickly. Building from the ground up can take three to five years for the community to become operational.
That said, ACTS is still very heavily involved in planning from the ground up, investigating building sites for new communities in locations throughout the East Coast. In fact, the organization already has a site in North Carolina and is looking at another one in Pennsylvania.
ACTS’ first acquisition was Azalea Trace in Pensacola, Florida, in 2003. The second was Park Pointe Village near Rock Hill, South Carolina, in 2005. Carlton Cove, the third, came up rather quickly. It came to ACTS’ attention in late 2007. And after completing due diligence, testing the market, determining that it was a good fit and placing a bid, ACTS signed an acquisition agreement in April and closed the deal a month later.
“Because of our reputation in the industry and our track record over 35 years, we’re frequently approached to acquire communities,” said Smith. “And nowadays, people are interested in who owns and manages the community as well as the lifestyle and the quality of services that it offers.”
While the current real estate market is certainly a challenge, demand for the CCRC lifestyle has never been greater, according to Smith. “We believe that the CCRC model is going to continue to attract [residents] as the baby boomers venture into retirement,” he added. “ACTS has a strong waiting list of more than 2,900 households (more than 4,000 individuals) throughout our family of communities. Our occupancy traditionally averages above 94%, so there’s definitely a demand.”
June 1, 2008