Retirement Chain Seeks Fresh Cash Infusion
By Anton Troianovski
The Wall Street Journal
October 5, 2009
One of the biggest developers of comprehensive retirement communities in the U.S. is seeking much-needed new capital.
The company, Erickson Retirement Communities, is struggling both with a heavy debt load taken on during its boom-time expansion and increasing numbers of retirees who can no longer afford to move into its facilities.
Erickson's chairman and founder, John C. Erickson, said in a letter to the company's 23,000 residents last week that he had signed a letter of intent with a prospective investor. Mr. Erickson said, however, that Erickson must restructure its debt before any deal can close. Last month, Erickson failed to make an interest payment on a $48 million junior corporate loan, according to a document reviewed by The Wall Street Journal. The company had about $244 million in corporate-level debt as of July.
"We frankly didn't foresee the magnitude or duration of the economic crisis that hit us and all of America," the letter said.
Erickson manages 19 "continuing-care retirement communities" around the country. The company helped pioneer these communities, which offer various levels of care -- such as independent living, assisted living and skilled nursing -- on the same campus. Many of Erickson's campuses, such as Seabrook Village in Tinton Falls, N.J., are home to more than 1,000 people.
Development of continuing-care retirement communities exploded during the credit boom -- more so than any other kind of senior housing as compared with existing supply, according to industry data. The National Investment Center for the Seniors Housing & Care Industry counted 330,000 continuing-care units at entrance-fee communities in the U.S. this year -- 32% more than the total three years ago.
While health-care real estate has fared better than other kinds of property in the recession, financial distress is mounting at some retirement communities as prospective residents find it harder to afford hefty entrance fees.
Since Erickson's founding in 1983, the company has refunded residents' entrance fees after they passed away or moved elsewhere. Residents sign a "residence and care agreement" when they move in specifying that their deposits are refundable. Erickson spokesman Mel Tansill said on Sunday that "we expect that they will continue to be [refundable] regardless of what happens."
Erickson's assurances notwithstanding, scattered bankruptcies and loan defaults in the industry have heightened concerns among some investors, policy makers and residents about whether customers have sufficient protections should their landlord go bust. The consumer deposits often run into the hundreds of thousands of dollars.
The Special Committee on Aging of the U.S. Senate has directed the Government Accountability Office to study the risks facing continuing-care residents and to assess whether the developments are sufficiently regulated.
"Seniors who have signed contracts for housing and care for the rest of their lives will suffer tremendous hardships if a [continuing-care facility] closes or cannot provide the promised level of services," Sen. Herb Kohl, a Wisconsin Democrat and the committee's chairman, said in a statement. "We're very concerned about their long-term financial stability, and are looking into whether adequate oversight and consumer protections are in place."
In July, Erickson lost a Hilliard, Ohio, development to foreclosure. Erickson promptly returned residents' deposits when banks foreclosed on the Hilliard community, and people in the industry say they can't think of a single case in which residents lost money because of financial distress at their continuing-care community.
Continuing-care complexes are often sponsored by nonprofits, giving projects access to cheap, tax-exempt municipal-bond financing. Erickson develops retirement communities and leases them to not-for-profit corporations, which enter into a management contract with Erickson and raise bonds to purchase the real estate from the company.
In June, two of Erickson's Chicago-area communities, Sedgebrook and Monarch Landing, warned bondholders that they may seek Chapter 11 bankruptcy protection because of fewer-than-expected move-ins and because Erickson was no longer providing funding to the communities.
Ted Repsholdt, the chairman of the residents' advisory council at Sedgebrook, said he expected Erickson to stick to the agreement that it will refund residents' entrance fees. "They have a great track record of promises made and promises kept," he said.
Many retirees say they are attracted to the communities because they will be able to get all the care they need in one place.
"I guess I really don't want to move again," said Verie Sandborg, 72 years old, a former environmental, health and safety manager for drug maker Baxter International Inc. who lives in Erickson's Sedgebrook community, which is in the Chicago suburb of Lincolnshire, Ill. Ms. Sandborg's two-bedroom apartment overlooks a lake, and she says that the refundable entrance fee and the range of care offered at Sedgebrook helps assure her that she won't become a burden on her children. Ms. Sandborg paid an entrance fee of $262,500 before moving into Sedgebrook in August 2008, and she pays a service fee of $1,740 a month.
Erickson's communities that were built years ago are generally on sounder financial footing. Its biggest challenges are newer projects that are filling up more slowly than projected.
In his letter to residents, Mr. Erickson didn't disclose the identity of the new investor, saying the company was still receiving interest from other possible bidders.
Private-equity companies including Carlyle Group and Fortress Investment Group LLC have invested in other senior-housing companies, and Erickson's competitors in developing retirement communities include Brookdale Senior Living Inc., Classic Residence by Hyatt, and Health Care REIT Inc.
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