The housing market crash along with the worst economic downturn since the Great Depression has reshaped the way continuing care retirement communities (CCRC) are conceived, developed and operated.
While the downturn proved too much for some projects to handle, the market has largely performed well over time, those active in the market say.
“The challenged communities happened to have the unfortunate situation of having to open either right before the crisis, during, or immediately after,” says Dan Hermann, head of investment banking at specialty investment banking firm Ziegler. “Those were the ones that were most at risk.”
CCRCs were hardly the only sector that experienced financial struggles and bankruptcies related to the economy, and comparatively speaking, they have fared much better than most other real estate sectors, according to LeadingAge, a trade group for not-for-profit senior living providers.
Of the approximately 1,900 CCRCs nationwide, about 80% of them are sponsored and operated by not-for-profit entities. There are around 400 for-profit CCRCs, according to Hermann, with Brookdale Senior Living as the largest operator.
Although the majority of bankruptcies and defaults have been on the nonprofit side, the common denominator has been the financial crisis, according to LeadingAge’s research, in a sector that has historically enjoyed success. In the past two decades, around two dozen CCRCs have filed for bankruptcy, representing only about 2% of the industry.
“The recession and financial meltdown we went through affected every type of real estate product in the country,” says Mike Lanahan, the co-chairman and founder of Greystone. “CCRCs weren’t exempt from that.”
If older homeowners felt they couldn’t sell their homes—at least not for the price they had hoped for—and then delayed making a decision to move into a community, Lanahan says, then the CCRCs that were just opening up felt the full brunt of that problem.
With many seniors backing out of agreements to buy into CCRCs, in some cases even abandoning nonrefundable deposits, a flaw in the financing structure became apparent.
“The recession highlighted one part of the process of developing a new CCRC: The fill-up schedule,” says Lanahan. “Historically, they have always filled up—it’s almost a truism.”
In the recession’s wake now, even in good markets, says Lanahan, the all-important question is, ‘How long does it take to break even and get to full occupancy?’
Lenders are specifically building in bigger cushions to allow for a longer fill-up, and nonprofits are being asked to put more equity into the capital structure to demonstrate that they have more capital behind the project, in case the lease-up takes longer than anticipated, says Lanahan.
The WindsorMeade of Williamsburg, an entrance fee CCRC project sponsored by not-for-profit Virginia United Methodist Homes, opened in 2008 and found itself struggling to lease up the new development.
As a result, it announced in February it would file for Chapter 11 bankruptcy to restructure the community’s debt. Originally structured with about $114 million in bonds, the restructuring reduces WindsorMeade’s total outstanding debt from $61.7 million to $38.5 million.
The community’s sponsors say the new financing structure will help them avoid losing residents’ entrance fee deposits and from having to sell WindsorMeade outright, but long-term bondholders are expected to lose anywhere from about $9 million to almost $20 million in the form of debt forgiveness and deeply subordinated debt.
Not all CCRCs have been able to restructure after defaulting on bond debt. The Franciscan Sisters of the Chicago Service Corp., the not-for-profit sponsors of a luxury, high-rise CCRC in Chicago, Il., ended up selling the Clare to a Senior Care Development affiliate for $53.5 million at a bankruptcy auction after the community defaulted on $229 million of municipal bonds. The CCRC had opened in 2008 with condo units priced up to $1.2 million.
“I believe the recession exposed some poor-performing, ill-conceived projects,” says David Ferguson, president of the American Baptist Homes of the West (ABHOW), although not in direct reference to any specific community. “Without the recession, they were headed for trouble anyway.”
What happened, he says, was that the recession stripped operators of the opportunity to implement a corrective plan because the situation went south too fast.
“Wrong pricing is largely [the issue],” Ferguson says. “Prices got way above the market, where people didn’t see value any more.”
Pricing Models Adjust
As a result of the downturn, some operators began using pricing incentives as a mechanism to help weather the storm.
“We changed in certain markets, and introduced “ladder” benefits where if [prospective residents] made a decision and moved in within a certain timeframe, they would get discounts,” says Ferguson of ABHOW communities. “The longer they wait, the less the benefit is.”
Not all markets were impacted by the recession. Santa Barbara, Calif., for example, was “largely immune,” he says, but other markets “became really tough.”
In select markets, ABHOW rolled back its prices “significantly”—as much as 40% for entrance fees on certain units, Ferguson says. Chicago Senior Care, the company that purchased the Clare in Chicago, also adjusted down the CCRC’s pricing by about 20% to better match market rates.
Price changes were rarely across-the-board for any given community for ABHOW, and Ferguson specified that his organization was just trying to follow market demand, rather than “advertise [units] as a fire sale.”
ABHOW’s efforts in 2010 and 2011, according to Ferguson, were successful and brought the organization back to pre-recession occupancy levels.
“We were able to move 165 new sales during a six-month program; it was very productive in increasing occupancy, and we didn’t have to do too much with adjusting the monthly fee,” he says.
Adjustment to market demands has been key. The CCRC business model has evolved in the past 40 years to reflect the economics of the country, and whatever region in which a project is located, Lanahan says.
“Communities are going to have to respond to economic realities to make sure they’re meeting the needs of the resident. That’s nothing new. That’s true of any business going forward: Deal with the realities of the markets as it changes.”
A decade and a half ago, Ferguson says, ABHOW didn’t offer refundable contracts. Once the organization educated the market about the rebatable pricing structure, it had to reset the price.
“We believe in the entrance fee CCRC model,” says Ferguson, but “that doesn’t mean it doesn’t have to be tweaked and changed.”
The Future of Financing
The organizations that will be successful, according to Lanahan, are the ones that are ‘looking over the dashboard’ to see what the future might be bringing—but either way, nothing happens overnight.
“It’s an evolution as opposed to a meltdown, which is totally different—no one can really predict it,” he says.
The whole business has become much more sophisticated since Lanahan started Greystone in 1982, he says, from the residents’ understanding of the product to a capital market that is “much more knowledgeable” about the structure, both operationally and financially.
With the capital markets adjusting to current economic conditions, most not-for-profit sponsors have been adjusting as well, especially when it comes to financing new development.
“Investment bankers set what’s happening by the underwriting standards they set in place,” says Ferguson. “As they ease up in standards, people can go forward with projects.”
After the recession, some forms of credit have been harder to find.
“Banks have almost completely shut down CCRC balance sheet lending and are out of the letter of credit business which helped fuel the cheap tax exempt bond boom for the sector,” says Curt Schaller, co-founder and principal of Focus Healthcare Partners.
Ziegler has financed 10 CCRC campuses since the crisis with three more projects underway in the coming year that will use bond financing and not bank financing, Hermann says.
“There’s a myth about capital not being available. The reason for the low activity is barriers to entry for CCRCs are high, even in a growth mode,” Hermann says. “It has always been a very time and cost intensive process.”
At this point, organizations are less willing to put capital to work, he says, and demand for third party seed capital remains diminished.
That could change as CCRC occupancy, currently at about 89%, continues to recover to historical rates in the 90s, says Hermann. And, he says,“for established folks, [access to financing is] not even an issue.”
Yet for the remainder of the market, financing is likely to remain tighter in response to the crisis and ongoing recovery.
“Although the fundamentals for the sector continue to improve, the debt market for CCRC’s—in particular new development—will likely stay fractured for years to come for everyone but top tier CCRC sponsors who have strong balance sheets,” says Schaller.
But as the recovery continues, many in the not-for-profit industry expect an eventual return to historical norms.
“This is a one-time event. We’re all crossing our fingers hoping we’re going to have stability in the housing markets and capital markets,” says Lanahan. “If that’s true, we’ll get back to the historical patterns of financing structures.”