Sunday, June 15, 2014

Sears Methodist Retirement Files for Chapter 11 Reorganization in Texas

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.

Health Care/Long Term Care, Housing, Property Management, Retirement | Permalink

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Bob Rosenberg of Abilene, Texas has shared a report from a local paper, as follows:
“Sears Methodist Retirement Systems have voluntarily filed for Chapter 11 bankruptcy.
“According to a statement released by the company, although they have filed for bankruptcy, nothing will change and all centers will remain open.
“The decision to file bankruptcy was made to reduce debt, restructure their financial dealings and better serve their patients.
“Sears Methodist offers retirement housing for about 1,500 seniors in all 11 locations across Texas.”
The report sounds like a press release put out by the executives. It seems a little disingenuous to assert that “nothing will change” after the organization has drifted into bankruptcy.

A couple of things stand out.

(1) they expect the debt holders to take the hit even though they have a senior claim;

(2) they refer to their residents, including active independent residents, as "patients",

(3) the existing managers appear to want to continue in control of the ownership interest of the organization even though the entrance fee investments of the residents are the at risk capital, and

(4) there is no mention of what will happen to people promised entrance fee refunds contingent of successor residents when the bankruptcy is likely to make getting new people to pay in at risk entrance fees problematic.

If the executives in charge have everything under control, as the article seems to indicate, how did the bankruptcy occur in the first place? Shouldn’t the residents have a voice in the reorganization since they are the ones who are most impacted?

Posted by: Jack Cumming | Jun 15, 2014 10:36:21 AM

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