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Smith's Research & Gradings
Volume: 
XXIX
Issue: 
18
Author: 
November 8, 2021

Smith's Research & Gradings

Senior Living — Only the Strong Survive

Senior Living — Only the Strong Survive

Smith's hosted the High Yield Municipal Bond Conference on October 20-22 at the Greenwich Hyatt Regency Hotel. A Senior Living Panel on Thursday afternoon featured an All-Star Studded line-up, headlined by none other than First Team All-Star Mary Jane Minier, CPA, Senior Analyst, Head of Opportunistic Credit Strategy at Invesco Ltd.

She shared the stage with the Rock Star of High Yield, Ron Mintz, CFA, Principal and Senior Investment Analyst , The Vanguard Group.

The Legal Eagle was Dan Bleck, Member Mintz. He provided insights from the Boston-based firm that were worth the price of admission to the conference.

Naomi O'Dell, Director at RBC Capital Markets gave insights from the front-lines of public finance banking.

Virginia Housum, Senior Vice President/Workout Specialist at UMB Bank, graced the podium.  She received Smith's High-Yield Lifetime Achievement Award at the conference. And, her presentation showed everyone why.

Here is an excerpt from the conversation and what people missed by failing to attend this event.

Mary Jane Minier:

Those of you who have been fortunate enough to be at this conference over the past couple of years know that prior to the pandemic, we talked about how CCRCs had to evolve and adapt in order to survive. This was really in response to the demographic shift known as the aging of the Baby Boomers, right?

We talked about how the CCRCs had to tailor their communities to the needs and preference of that Baby Boomer generation. We talked about the campus footprint. We talked about unit mix. We talked about all of the amenities that the silver tsunami was going to demand as they got into those new communities. We also talked about the need for communities to adapt to new regulations.

We talked about what was going on in Florida with the oversight regs being imposed by the Florida OIR. Then the pandemic hit. And last year, when we were on the Zoom camera, we were all worried, as Terry Smith pointed out, about how this sector was going to survive. How could it possibly survive this kind of a pandemic? We talked about coping mechanisms, the marketing initiatives that each of these communities was putting into place in order to cope with what was hitting them.

I like to refer to it as 'T&T,' the testimonials and the technology. On the technology side, retirement communities had drones flying over, so these older people could pick out the units they wanted. They used Zoom marketing calls in order to sell units.

The use of testimonials was an extremely important marketing mechanism to cope through the pandemic. Relatives spoke of their peace of mind having their loved ones in these communities, well-cared for, as opposed to isolated in their own homes. That they didn't have to worry about medical delivery or grocery delivery was really monumental in helping the CCRCs get past the pandemic. We have also talked about the important distinction between the nursing home sector and the CCRC sector, because it was just painted under one broad moniker of senior living.

That, unfortunately, tied the CCRCs to the nursing home sector and all of those really horrific media headlines about those very, very tragic deaths that occurred early on in the pandemic. In the end, as Terry said, I really felt confident that the sector would show incredible resiliency and overall was not going to shrivel up and die, but be a survivor. I did have one important caveat to that, and that was that those communities already in a weakened state heading into the pandemic would likely be stretched beyond their breaking point and, hence, that's the title of our panel, 'Only The Strong Will Survive.'

I want to point out one thing: It's essentially misleading to say that the pandemic took these communities down. I think more appropriately, the pandemic was the straw that broke the camel's back. Today, we're going to discuss three of these and I'll put in quotes, 'pandemic fallen' CCRCs. As we go through the case studies, I want you to focus on two terms that you're going to hear consistently spoken about: refund queue and liquidity.

Those two terms, you're going to hear a lot about. While you're going to hear those central themes in each one of these three case studies, each one has a little bit of a different twist to it, which made each one of these workouts a very unique workout.

Let's start with the first case study, which is Henry Ford Village. The ultimate workout here was the sale of a community but with a twist. The bondholders ended up getting power on this, but the community was sold to a buyer that converted this entrance fee community to a rental community. That can sometimes pose a sticky situation for the trustee because, as you know, the trustee is the front for the bondholder group to the public. I'll let Ginny walk through Henry Ford village.

Ginny Housum:

Mary Jane hit on the great irony of Henry Ford Village. It was a nonsurvivor in that the ownership went away, but the bonds were paid at par. Maybe you can call it a miracle community in that way.

It was owned by a nonprofit. It was a very large community. It had over 1,000 units in it. It was originally part of the Erickson empire. Looking at the factors that began its downfall, it went right back to where it was built. It was on the border between Detroit and Dearborn, Michigan. It was actually in Dearborn, but it was right across the street from Detroit in an area that was changing a lot. The demographics in that area were declining over the years. With the decline in the auto industry, the middle class had been gutted out of that part of the Metro area, which hurt a lot.

There were about $56 million worth of bonds outstanding. The facility was not configured particularly well or efficiently. What it had done, going back to 2014 or so, was they had begun offering rental units. They had an enormous number of vacancies. They ended up filing bankruptcy in 2021 and at the time, they had 60 rental units. It was a very interesting dynamic because the problem with rental units is the residents don't get a life care benefit, so it's a little bit cheaper for them.

That was appropriate for this facility, but there was a refund queue and they weren't collecting any entrance fees. The refund queue did not decline, so there was a big pool of unsecured refund claimants out there who were clamoring for their money. At the time of their filing, the occupancy in independent living was about 69%, about 54% in assisted living, and less in skilled nursing. It was very hard for the facility to carry all these vacant units and provide care with such a low occupancy.

The refund queue had about $7 million in refunds that were already owed to people for units that had been reoccupied, so the money was owed. It had $27 million where the units had been vacated, but there was no new occupant, and so the refund was provisionally owed. The residents and their families didn't take great heart in the fact that it wasn't owed yet. All they knew was they wanted their money back. Then it had a $78 million queue to current residents that would be coming due as their units were vacated.

There was a very significant event that triggered the bankruptcy filing. About a month before the filing, the trustee and the bondholders learned that the facility had been sued in a class-action lawsuit in 2014 for refunds that were owed at that time. Henry Ford Village had never disclosed this — it wasn't in any EMMA disclosure and they had never gone public with that information. We learned about it when they agreed to settle the class-action lawsuit. In September, they informed the trustee that they needed to make a payment of $800,000, which was about 25% of their capital and liquidity on hand to settle this class-action lawsuit. It was the first payment on this class-action lawsuit.

They didn't have much cash on hand. I hear they were going to spend 25% of it going to pay attorney's fees, basically, for these class action plaintiffs. With the approval of the majority bondholders, the trustee entered into the state court action that was going to enforce this class action settlement and tried to get it set aside, and the judge refused. As a result of that, the trustee accelerated the debt and set off. We took all the money in the trust to the state so that they wouldn't have any cash available to pay for this class action settlement, and that triggered their bankruptcy filing.

The property was sold. It was a very robust sale after we had five offers. We ended up with the stalking-horse bidder. Then, there was an overbid at an auction. Both the stalking-horse bidder and the overbidder were planning to convert the facility to a full rental market with no entrance fees. Basically, the residents, or their families, were going to be stiffed, if you will, for the refunds, which is appropriate. They were unsecured creditors, but to them, it might have been a lot of money and they really cared about that.

It looked like it was going to be very contentious. The bankruptcy judge who heard the case initially expressed a lot of sympathy for these families and he kept making off-the-cuff comments about "How can you possibly do this?" Ultimately, because with such a robust sales effort and because the two highest bids both didn't pay any of the entrance fee refunds, he accepted that had to be the market. That allowed the full recovery.

I should add that we were very fortunate and that the borrower had named a chief restructuring officer. It was Chad Shandler, who spoke earlier. He did an outstanding job. He guided the debtor when it had no idea what was going on. The fact that they were about to pay out 25% of their cash on hand to settle a class-action lawsuit to pay attorneys for the class action plaintiffs says it all, that they didn't understand their business model. They had no idea how to come out of the situation.

Clearly, if the refund claims had been required to be paid, it would have had a very chilling effect on the sale and there wouldn't have been a recovery.

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