Four-Year Forecast for CCRCs: Cloudy With a Chance of Financial Distress

A few high-profile bankruptcies by continuing care retirement communities have made waves in the senior housing industry, and there’s more drama to come—for at least four more years, says a New York-based owner-developer of CCRCs who specializes in acquiring distressed assets.

During Senior Housing News’ inaugural Senior Housing Summit, held last Thursday in Chicago, Ill., a panel of three senior living executives weighed in on the financial outlook for CCRCs, including a forecast for additional bankruptcies.

Hint: financial distress isn’t over yet.

“I think there are more [bankruptcies] to come for many years,” said David Reis, the CEO of Senior Care Development and buyer of Chicago’s Clare at Water Tower.

He said his company is currently tracking about three dozen projects. They’re not quite at the Clare’s caliber, he said, but he predicts that “a couple dozen” more CCRCs will end up changing hands in the next couple of years.

He’s not the only one who’s monitoring the situation.

“We’re keeping an eye on opportunities like that, as a subset that could be a good fit with our [portfolio of ten entrance-fee] CCRCs,” said panelist Gary Smith, the CFO of retirement community developer, owner, and manager Vi.

The driver leading to these distressed opportunities is the debt, Smith added, because they had taken on too much debt and couldn’t withstand the real estate market crash and lowered home values that hindered people’s ability to move into independent living.

Reis also questioned the financing model that he said many nonprofit sponsors use. It’s not surprising some are now finding themselves in distress after contributing little-to-no equity and taking on enormous amounts of debt, he said.

“How can you exist with so much leverage, when everyone’s taking out of the pot?” Reis asked, indirectly addressing fellow panelist Glenn Brichacek, CEO of another Chicago-area CCRC, The Admiral at the Lake.

“It’s too many fees going out [to financial and management partners or various other obligations] and not much equity coming in,” he added.

It was an open secret that Reis has had his eye on the Admiral, which he alluded to several times during the panel. His company, in partnership with management company Life Care Services, jumped at the opportunity to buy the Clare out of bankruptcy, but Reis views his competition to the north in stark contrast.

Since 2007, The Admiral has been in the process of building a new CCRC on the site of the original community, founded in 1858. But during the economic recession, financing for new construction largely dried up, and the nonprofit ended up entering into a partnership with The Kendal Corporation.

“If you’re a nonprofit, you need to think very carefully before building a large-scale CCRC” through the commonly used, no-skin-in-the-game financing structure, Reis said, pointing out that the Admiral—Chicago’s oldest nonprofit organization dedicated to providing senior living—is now affiliated with The Kendal Corporation.

However, Brichacek said his community is looking for certain key indicators for success going forward, and despite a longer development process than perhaps initially expected, the signs, so far, are favorable.

One of those key indicators is the retention rate. The community is already 80% pre-sold, he said, and the people that have committed to moving in have largely stuck with the community throughout the delayed construction timeline.

“That gives us confidence moving forward,” Brichacek said.

Ultimately, Reis said he appreciates not having to “deal with” any bankers or lenders for the communities he has bought out of bankruptcy that are now debt free.

While banks will often work through distress situations with communities, they don’t always fix the problem and instead apply an ineffective band-aid that just brings more pain when it gets ripped off.

“There’s still a ways to go,” said Reis regarding when distressed situations would subside. “If someone said four [more] years [of financial distress], that would not untenable.”