Sunday, June 15, 2014
According to news reports, on June 10 Sears Methodist Retirement System, Inc. filed a voluntary petition in bankruptcy court in Texas, seeking relief under Chapter 11. Apparently the private company, organized as a nonprofit that currently operates eleven senior living properties in Texas, including Contining Care Retirement Communities (CCRCs), Assisted Living facilities and Veterans homes, is seeking to reorganize some $160 million in debts. The multi-company operation provides housing and services to some 1,500 residents. A detailed early report by Peg Brickley at Daily Bankruptcy Reports explains the initial relief sought:
The Texas nonprofit organization is asking the U.S. Bankruptcy Court in Dallas to authorize it to quickly borrow $600,000 from existing bondholders, warning that it would be forced to cease operations without access to the funds.
"Such an abrupt cessation of the...businesses would have devastating effects on the residents at the senior living facilities such debtors own and/or operate, including leaving many residents without food, medical supplies, and the health and support services that they require," Chief Restructuring Officer Paul B. Rundell said in court papers.
"In fact, many residents may be forced to immediately relocate, causing extreme hardship and putting both their lives and health at risk," added Mr. Rundell, of Alvarez & Marsal's Healthcare Industry Group.
Sears Methodist blamed the declining property market for some of its troubles. Older people are having trouble selling their homes and liquidating their stock portfolios to raise the money for the upfront payment to get into the senior-living communities, according to court papers.
I would expect some of the SMRS properties to be financially stronger than others, and thus could be spun off or taken over by other senior living operators, perhaps those with expertise in the specific type of property. When CCRCs are involved, residents have often paid very large "entrance" fees and must continue to pay substantial monthly service fees. Even when their entrance fees are described as "refundable," CCRC residents are usually treated under bankruptcy law as "unsecured" creditors and thus become especially nervous during the proceedings.
Over the last several years, I've seen growing recognition that reassurance of existing residents, if possible, is critical to the continuation of the CCRC as a viable operation once it emerges from bankuptcy. Fortunately, despite continuing ups and downs (downs and ups?) in senior living markets since the 2008 financial crisis, the market has seen fairly strong players emerging. There is also better appreciation for appropriate -- and inappropriate -- levels of risk and the importance of maintaining resident confidence over the long-term.