As America Ages, Muni-Backed CCRCs Come Into Their Own

SAN FRANCISCO — Municipal industry sources predict that the graying of America’s baby boom generation will result in more continuing-care retirement communities being financed with tax-exempt bonds. Investment bankers at Chicago-based Ziegler Capital Markets Group earlier this year closed the largest CCRC financing transaction ever, a $183 million revenue bond deal for a facility in Hawaii. Ziegler has plans to bring three more such deals in the Far West to market by the end of the year.The first deal is tentatively scheduled for June, and the $40 million of proceeds will provide Redmond, Wash., with an upscale CCRC. A $60 million issue is slated to price in late summer or early fall to finance another facility in Tempe, Ariz., called the Terraces of Squaw Peak. Finally, there’s a $12 million to $18 million issue for an assisted-living center in Las Vegas expected to sell by the year-end.Mary Munoz, a director at Ziegler’s San Francisco office, said her firm specializes in financing for retirement and CCRC and handles 25% to 35% of such transactions nationwide.People are aging and getting sick, and need places to stay, she noted.“This [sector] is growing. At some point we will get on the other side of the bubble, but for now I see this lasting at least 30 years in the future. I think we have significant unmet demand and are seeing a lot of construction,” Munoz said.Roger Davis, chair of public finance at Orrick, Herrington & Sutcliffe, said that while there is a huge demand for such facilities, they are difficult projects from a financial feasibility point of view and most deals are not rated.Still, “the demand is huge and increasing, and the market receptivity to this kind of unrated specialized paper is also improving,” Davis said.The bonds typically offer high yields. A Hawaii Department of Budget and Finance issue earlier this year for Kahala Nui — a CCRC with 270 independent-living units, 63 assisted-living units, and 60 skilled-nursing beds — offered a top yield of 8.175% for bonds due in 2033. Much of the debt was offered to retail investors.The deal included a $142 million tax-exempt portion and a $41 million taxable portion.Those 65 and older already account for more than 13% of the U.S. population and number more than 35 million people, according to the 2000 U.S. census. In addition, Informed Eldercare Decisions has reported that more Americans, especially those with higher incomes, would likely use private services for the elderly.CCRCs are designed more for healthy seniors with independent lifestyles but can provide more medical services as needs arise, according to Joel Goldman, a partner at the law firm of Hanson, Bridgett, Marcus, Vlahos & Rudy. With the breakdown of the nuclear family, and the extended family as well, the centers are needed more than ever, he said.Because they provide more facilities, CCRCs are more expensive than nursing homes or assisted-living centers.“Assisted-living centers costs a fraction of CCRCs. Even with a slow market my guess is there are more assisted-living centers in California this year than there would be CCRCs in the entire country, but the difference is CCRC development is comprehensive with independent and assisted living and skilled nursing,” Goldman said.Kitchen units offer the residents privacy to prepare meals for themselves or they can choose to eat with others in a cafeteria-style setting. Laundry service is included. Also, social activities such as trips to the symphony and classes in art are the norm.If needed, skilled nursing is available on site.Such facilities typically come with a high price, often between $200,000 to $400,000 or more to purchase a unit in a CCRC, not including monthly fees. Most seniors sell their home to provide the capital.Also, presales of 65% to 70% must occur prior to construction for a CCRC. Assisted-living facilities are more modestly priced, between $75,000 to $100,000 to pay for care.Mark Otterstrom, a manager for a high-yield municipal bond fund at Waddell & Reed Advisors, said he is very comfortable with the sector even though the debt is not rated. He views it more as a housing sector than health care. When he started with the fund in 1987, such debt was fairly new, but as “the facilities mature and the market matures, people have accepted them a lot more as being viable entities and lifestyles,” Otterstrom said.Seniors must put up a 10% deposit for a CCRC, and it takes about two to three years to bring a the facility to market. Problems can result when units do not fill up quickly. Hospitals or religious groups often provide seed money and establish nonprofit corporations in order to sell tax-exempt debt. The Roman Catholic Church owns the land on which Kahala Nui is being built. It has entered into a 60-year ground lease with the nonprofit Kahala Senior Living Communities.“When you get through construction and initial fill up, that money, a big chunk of it, goes back to the debt. We have a lot of nonrated bonds that we consider investment grade,” Otterstrom said. “If they fill up to 80% to 90% over the year and a half, then the entrance fee pays down the debt and the cash flows improves tremendously.”Terry Goode, a director at Wells Capital Management, also agreed that the demand for these types of bond issues is going to be significant over the medium and long-term. He also saw challenges including lease risks or completion risks. The deals, if rated, often fall into the triple B category, he said.“You are actually starting out with a feasibility study and a concept,” Goode said. “So as an investor you really have to have significant confidence that in the future the facility will be completed on time, and there will be no unforeseen issues such as construction delays or occupancy delays.”He added that it’s very hard to get any type of investment-grade rating for these facilities.“The deals we look at for purchase already exist and have a track record of significant demand, a waiting list for the property, or typically, a fairly solid balance sheet,” Goode said. Susan Hill, a director at Standard & Poor’s, said one reason CCRCs are expensive is because they are lifestyle-based, as opposed to need-based.In an October report on “Senior Living Ratios and Ratings,” Standard & Poor’s noted that many downgrades and negative outlooks during the previous 12 months had resulted from operating pressures and softening of demand.Staffing costs, professional liability, and general medical inflation also are factored into the rating outlook. More facilities are attempting to sell debt.“We are seeing a lot of pressure in the near term, and in the immediate and long-term, there is still a lot to like about these facilities,” Hill said.The bulk of bond sales are about a decade away when more product is needed, she said.Hanson Bridgett’s Goldman says he presents clients with the facts about the differences between a CCRC and an assisted-living facility so they can determine which they want to develop. He said the cycle for assisted living is high demand followed by a shortage, then overbuilding, saturation, and a halt in construction, which ultimately results in a renewal of demand.The sector will continue to grow because aging is something that “affects all of us,” Goldman said.