Big CCRC Plans to Affiliate With Two Smaller Centers

Pennsylvania-based ACTS Retirement-Life Communities Inc., the largest nonprofit continuing care retirement community provider in the U.S., will affiliate with two smaller East Coast senior-living centers, a move that may boost debt-service coverage for one.

Peninsula United Methodist Homes Inc. and Heron Point of Chestertown will become affiliates of ACTS. That agreement will become effective May 1 after the final closing of the deal on April 30. As the involved parties are not-for-profit corporations, the agreement is considered an affiliation as opposed to a merger or acquisition, according to Gerald Grant, ACTS’ chief financial officer and executive vice president.

“At the end of the day, those communities do become part of ACTS,” Grant said. “They are in essence owned by ACTS as much as you can own another not-for-profit organization.”

ACTS is located just outside of Philadelphia and has 19 CCRCs in six states including Alabama, Florida, Georgia, North Carolina, South Carolina, Pennsylvania. PUMH owns and operates three CCRCs in Delaware. While Heron Point and PUMH are two independent entities, PUMH founded and manages Heron Point, a senior living complex located in Chestertown, Md.

ACTS has $385 million of consolidated tax-exempt debt outstanding. PUMH and Heron Point have $70 million and $30 million of outstanding tax-­exempt debt, respectively.

A tough real-estate market has made it difficult for seniors to sell their homes in order to buy into CCRCs. Both PUMH’s and Heron Point’s revenue declined last year. In addition, Heron Point’s debt-service coverage ratio of 0.79 times, as of Jan. 31, falls below bond covenant requirements of 1.1 times, according to board financial statements dated Jan. 31. To date, Heron Point has paid bondholders as required.

ACTS plans to supply Heron Point with a line of credit to help it regain its financial footing. The goal is to bring Heron Point’s debt-coverage levels in line with bond agreements within one year for the ­organization’s April 2011 audit, Grant said.

“Heron Point’s had some technical defaults in terms of certain covenants within their bond documents, mainly debt-service coverage has been violated in the past two years,” Grant said. “Attaching themselves to ACTS or an affiliation like this will provide for them some needed support. A line of credit is being established between the two organizations. It provides financial stability for a community that has shown signs of being financial troubled. It’s a real enhancement for their bondholders to see them affiliated with ACTS.”

PUMH and Heron Point would also benefit from operating efficiencies such as ACTS’ volume purchasing and relationships with vendors.

Still, Heron Point has its challenges. Total year-to-date occupancy levels are down by 4.6% with a 77.2% total occupancy rate in comparison to the budgeted rate of 81.8%, according to the Jan. 31 report. New entry fees dropped to $1.1 million in fiscal 2009 from $2.4 million in fiscal 2008, according to Heron Point’s last audited statement for the fiscal year ending April 30, 2009.

“Obviously as ACTS would look at this, their brand would be important to Heron Point,” Steve Jeffrey, director at Ziegler Capital Markets, said during a March 2 investor conference call regarding Heron Point. “They understand the need to restore occupancy and help in that area and obviously with the ratios that we see in terms of coverage at 0.79 and days cash at 53 days, there’s work to be done to reposition Heron Point.”

Ziegler is a major underwriter of senior-living, tax-exempt debt and was an underwriter for the bonds for Heron Point. It will hold another conference call for bondholders of Heron Point debt on June 1 at 2 p.m.

Due to the recession and tight real-estate market, ACTS has reduced its workforce and cut discretionary spending to offset declining revenues. Grant said ACTS has maintained a more modest business approach than other CCRC developers, in particular for-profit developers.

Fitch Ratings rates ACTS A-minus. The credit rating agency revised its outlook to stable from positive in April 2009. Standard & Poor’s rates the credit BBB-plus. The outlook is stable.

PUMH and Heron Point do not carry underlying credit ratings.

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