Despite several recent reports of Chapter 11 bankruptcy filings among continuing care retirement communities (CCRCs) in the past week, there is no cause to raise the alarm for a sector-wide concern, according to Fitch Ratings.
The former, River Terrace Estates in Bluffton, Ind., opened in 2003. In 2008, non-profit corporation Continuums Foundation obtained leadership of the 501(c)(3) not-for-profit. Despite ongoing efforts to stabilize the CCRC, Continuum Foundations opted for the Ch. 11 filing to help meet is $14 million outstanding debt obligations.
The latter, The Amsterdam at Harborside in Port Washington, N.Y., is more reflective of the continued challenges faced by both start-ups and large-scale CCRC expansions that were financed and opened during the challenging 2006-2010 economic environment, according to Fitch.
“Several newer CCRCs funded during this period remain challenged due to slower than anticipated fill-ups and lower than projected entrance fee receipts, which in turn were caused by discounting attributable to the sharp decline in housing prices,” Fitch states. “Those lowered revenues impacted operations and the CCRCs’ ability to pay down temporary debt structures, which has driven some into bankruptcy.”
Opened in August 2010, The Amsterdam last week filed a pre-negotiated Ch. 11 petition to restructure an estimated $220 million in debt. Prior to the filing, the CCRC raised about $296 million in original financing, but had only paid down $75 million, leaving the roughly $220 million in outstanding debt.
While many newer CCRCs have been more prone to increased financial pressures in the years during and following the economic downturn, Fitch notes many of the “mature” non-profit CCRCs it rated were better posited to weather the challenges experienced during the Recession.
“They also benefited from good locations, successful operating histories and were generally able to maintain entrance fee prices consistent with local area housing prices even in markets that saw material drops in housing prices,” Fitch states. “And, their management teams provide adept at controlling expenses and developing creative marketing strategies to generate move-ins.”
Looking ahead for the remainder of 2014, Fitch expects mature CCRCs to continue to benefit from improving economic fundamentals and the continued rise in residential home prices.
As for the newer products, increasing Ch. 11 activity will likely level out over the course of a year or so, said Bobby Guy, an attorney with Nashville-based Frost Brown Todd Law Firm, to SHN.
“The bottom line is that CCRCs continue to struggle, which is a result of heavy bond debt and a continuing soft housing market,” Guy said. “With that said, CCRCs are a very important product in the senior housing market and they will continue to have significant appeal.”
The model is also likely to shift with the market to become more stable, he added, including making the transition at a number of communities to a rental model.
“Overall, the CCRC market continues to present distressed acquisition opportunities, and it is likely to for some time,” Guy said.
Written by Jason Oliva