Last week, the court-appointed receiver and chief restructuring officer (CRO) overseeing the reorganization of senior living provider Sunwest Management (“Sunwest”) Tuesday filed a distribution plan with the U.S. District Court in Eugene, Ore. A product of financial, legal and business analysis and summer-long mediations involving numerous stakeholders – including investors, creditors, Sunwest insiders and secured lenders – the proposed plan consists of two key elements: 1) a process for enhancing the value of Sunwest assets, and 2) a methodology for equitably distributing that value to stakeholders owed as much as $2 billion. The plan does not affect the company’s senior living operations or quality of care, which will continue uninterrupted during the reorganization.
To increase the value of existing assets and create a viable business and investment vehicle, the receiver and CRO have proposed to unite core Sunwest assets under the umbrella of a single real estate investment trust (REIT) with an affiliated master limited partnership (MLP). Over time, the new structure – with future operations under professional leadership to be selected by a new board of directors – should maximize the value of the reorganized company through economies of scale, favorable financing, and significantly greater business flexibility. The enterprise will issue securities to provide returns and liquidity to creditors and investors. At some point in the future, a merger, public offering, or other transaction is expected to provide additional value.
To implement the reorganization, the plan filed last Tuesday proposes to utilize a brief Chapter 11 process as a tool to modify loan terms and issue securities. Together, the receivership and Chapter 11 plans seek to place Sunwest on sound financial footing and position it to provide quality care and service to its residents well into the future. For some key elements of the proposed plan:
- Approximately 150 core senior living and certain other revenue-generating properties conveyed into a REIT structure with an affiliated MLP.
- The REIT/MLP combination greatly simplifies Sunwest’s existing ownership structure, bringing hundreds of separate legal entities under a single corporate umbrella.
- The new enterprise is expected to maximize value to stakeholders through restructured, stable financing on favorable terms; economies of scale; significantly improved business flexibility; and a likelihood of future merger, public offering, or other transaction to provide additional liquidity.
- The new structure offers several options to investors for holding and cashing out on their investments, including continued tax deferral options for tenant-in-common investors.
- A brief, carefully planned pre-packaged Chapter 11 process will be utilized to implement the plan. The bankruptcy will not disrupt service to residents or payments to employees and vendors.
- An independent board of prominent professionals with expertise in finance, audits, healthcare, management and REITs will govern the REIT/MLP.
- Sunwest as a management company will be reorganized and will contract to manage the senior living properties held by the REIT/MLP.
- The reorganized management company will have an independent board of qualified industry professionals, which will hire a new CEO.
- Former CEO Jon Harder, COO Darryl Fisher and general counsel Wally Gutzler will contribute all of their Sunwest-affiliated assets to effect the reorganization. Collectively the three principals may participate in 5% to 25% ownership of the new enterprise, but only after investors and creditors have received $500 million to $1 billion in distributions of cash or marketable shares.
- Approximately 100 senior living, commercial and land properties that will not be retained in the core business structure will be sold or turned back to lenders. Cash from sales will be distributed to creditors and investors.
- The receiver will pursue third parties who received ill-gotten gains or were complicit in the losses suffered by investors and creditors and distribute any recoveries or settlements to creditors and investors.
“It would be impossible to reach 100 percent backing given the disparity of interests in the Sunwest proceedings,” said the receiver, Michael Grassmueck. “However, the level of cooperation and agreement among the various stakeholders is remarkable considering the emotions this case has spurred and the potential for conflict. Generally, the plan is fair and equitable given this disparity of interests.”
