Construction of Linden Ponds, an Erickson Retirement Communities development in the Boston area, will resume late next year, and investors in the project’s $156 million of tax-exempt bonds will be paid, Erickson executive staff told bondholders and market participants last week in an investor call.
Erickson halted construction of Linden Ponds, which is 50% complete, one month before the retirement development company filed for Chapter 11 bankruptcy on Oct. 19.
While Maryland-based Erickson is not the obligor of the $156 million of Series 2007A and Series 2007B bonds, the nonprofit borrower — Linden Ponds Inc. — does rely on Erickson funds to help meet operating costs.
Nonprofit Linden Ponds leases the continuing-care retirement community from Hingham Campus LLC and has hired Erickson to operate the facility. Hingham is a land-owning subsidiary of Erickson. Erickson also owns the general contractor that builds its facilities.
The Massachusetts Finance Development Agency sold $156 million of debt in 2007 on behalf of Linden Ponds to help finance the project, including fixed-rate Series 2007A bonds for $101.3 million, variable-rate Series 2007B bonds for $45 million, and taxable, variable-rate Series 2007C bonds for $10 million. The bonds are not in default and debt-service payments, to date, have been met.
The fixed-rate bonds do not carry a credit rating. Standard & Poor’s rates the variable-rate debt AA-plus, based on a letter of credit provided by Fifth Third Bank.
The national recession and housing crisis have cut into demand for Erickson housing as seniors are delaying or choosing not to sell their homes in order to relocate to CCRCs.
For example, the number of new units that Erickson has filled each month, sometimes called the monthly absorption rate, has historically been in the double digits, staff members said during the investor call.
The retirement developer now estimates future build-out of Linden Ponds will generate single-digit monthly absorption rates, including seven units per month in 2010, four per month in 2011, and increasing to 15 units per month in 2016, according to a Linden Ponds project pro forma document dated Nov. 16 and discussed during the conference call.
Tom Brod, executive vice president of finance at Erickson, said construction at Linden Ponds will resume by late next year as the entire project should receive sufficient demand. Erickson crafted the pro forma document with two assumptions — the housing market was healthy enough to support the development, and investors would be made whole.
“The first assumption was that there is a good market for Linden Ponds,” Brod said during the call. “Linden Ponds has experienced the same realities in the current economic market that many retirement communities have faced and many Erickson communities have faced, but we still believe that the Linden Ponds market overall is strong and that the project will have a market supporting a build-out or completion of all three neighborhoods. Our second assumption was that we would be able to pay debt service and keep bondholders current throughout the build-out process.”
Erickson anticipates that it will need to raise $20 million of additional capital by September 2015 to complete the project. Where those funds will come from has yet to be determined.
“We haven’t identified the source of that,” Brod said. “We’re first wanting to look at this projection to determine the amount that was needed in order to achieve the goal of keeping bondholders current and also completing the project so we have not yet gone to the step of identifying the source.”
The campus design includes a total of 1,978 units, with construction of a final residential building to be finished by July 2017, according to the pro forma.
The maximum annual debt service payment on the Series 2007 bonds is $9.93 million, the pro forma says. Erickson estimates debt service coverage at 2.2 times when taking into account resale revenue and 1.49 times absent resale revenue.
Brod stressed that the pro forma calculations are forward-looking estimates with a lot of uncertainty surrounding them. Erickson will begin construction again at Linden Ponds once it emerges from bankruptcy and the developer can better assess the local housing market and how the Chapter 11 filing may affect demand for Linden Pond units.
Current plans include Redwood Capital Investments LLC, a private investment company owned by Baltimore businessman Jim Davis, purchasing Erickson. That agreement requires court approval.
“We don’t want to start it until we come out of our Chapter 11 and everybody believes that we’re stabilized, including us,” Brod said during the call.
“I think we want to get through the next few months also in terms of marketing so that we can get a sense of the recovery in the market. Recovery from our Chapter 11 filing, but also to see what we’re all subscribing to as Boston’s real estate market being a little bit ahead of the rest of the country, to see evidence of that. And then we need to know that we have the capital available to not only start building, but to finish it.”
There is about $510 million of tax-exempt and taxable debt outstanding on various Erickson CCRCs, according to spokesman Mel Tansill.