Trustee Dan Lain is trying to recoup more than $ million from several members of the Erickson family and former officers and directors of Baltimore County-based Erickson Retirement . In recent weeks, Erickson Retirement Communities, which manages 19 continuing-care retirement communities in 11 states, declared bankruptcy. Sunrise Senior Living Inc. posted a quarterly loss of. Nov 10, · But there is a story, and on October 19, Erickson Retirement Communities filed for Chapter 11 bankruptcy protection, claiming more than $ billion in both assets and liabilities, representing the largest retirement housing bankruptcy filing ever. Unfortunately, it .
It filed the bankruptcy in Dallas, Texas. Company officials said the value of Erickson's existing stock depends on the reorganization plan approved by the court. But in a filing with the U. Securities and Exchange Commission, Erickson said it "expects that its currently outstanding stock has no value.
The company announced last week that Quinn Morgan, its former chairman and controlling shareholder, had quit the board. Private equity companies controlled by Morgan bought Erickson in and took the company public in After Morgan's investment firm took control, Erickson moved its executive staff out of Medford in favor of Portland. It's resulting struggles under a heavy debt load offers an eerie parallel to Harry and David, the mail-order gift company best known for its fruit baskets.
Wall Street investor Wasserstein Co. Just like Erickson, Harry and David struggled under the debt load and filed for bankruptcy in As for Erickson, the bankruptcy was not the only bad news it revealed Wednesday. It also divulged that its and financial statements are inaccurate.
As is typical in cases like this, the lenders do not want to negotiate until they have to which is now , and no one really knows what they will accept because we have heard they have rejected any potential restructuring plan that has been put forward to date prior to the bankruptcy filing. We are hard pressed to come up with even five names that meet the above criteria, and it may really be one or two.
No one knows the motivations of the stalking horse bidder, but apparently he took a good look two years ago when Erickson was trying to raise equity capital, and he must have liked what he saw. So, how did this premier developer and operator of CCRCs get into this kind of financial trouble? The obvious answer is too much development in the past five years, in too many markets, with many of the new campuses opening up just as the housing market came crashing down in the worst economic environment in 70 years and one of the most illiquid capital markets ever.
Simply put, it was the perfect storm of CCRC development, but on a massive scale. Way back when it all started, the model was fairly conservative: build units, fill them up, build another units, and fill them up and continue until you hit the maximum that both the market could take and that the land site could hold, usually 1, units on 80 to acres.
Founder John Erickson became something of a folk hero in the industry, even though some people were still scratching their heads wondering how it all really worked.
While we are not sure how it originated, sometime in the late s someone came up with the idea of selling the completed and stabilized campuses to a not-for-profit that could raise the necessary funds in the tax-exempt bond market. This seemed like a reasonable way to cash out of the development but continue to manage the properties on behalf of the NFPs.
This was not complicated and it was nothing new. Each of the campuses where this has happened is owned by a separate not-for-profit entity, but they are now all under sort of an umbrella arrangement with National Senior Campuses NSC. NSC, we are told, is happy with Erickson and their approach to the business and caring for the elderly, and does not want to see many changes.
At some point, the financing model began to change, whereby a not-for-profit was set up very early in the process of a new campus development. Now, the NFP enters into a lease with an Erickson subsidiary, and prior to when construction on the first neighborhood begins, the NFP is the entity that takes the reservation deposits.
When the first neighborhood is completed, the NFP then takes the initial entrance fees, which are then loaned to the Erickson subsidiary that owns the site which in turn uses the funds to pay down the initial construction debt and to start the next neighborhood phase of units.
At some point during the process, the NFP enters into a purchase option with the Erickson subsidiary, and raises the funds for the option by issuing municipal bonds, usually tax-exempt. The proceeds from this purchase option deposit are then used by the Erickson subsidiary to also pay off construction debt and for new construction and fees to Erickson the parent.
With a few of the later developments, in particular two in Illinois and one in Massachusetts, a large bond financing was completed prior to the completion of the campus.
As an example of some of the problems, the Lincolnshire, Illinois campus, known as Sedgebrook, commenced operations in and when finished was supposed to have 1, independent living units, 96 assisted living units and skilled nursing beds for a total of 1,, the basic Erickson prototype.
As of August , IL units were open with sold, for a It is quite likely that the other two campuses mentioned above are experiencing similar problems, which is one of the reasons why we believe all three have been left out of the sale of the Erickson assets. Since the money has been spent, no buyer wants to enter into the situation with that exposure. In addition, Erickson is apparently on the hook to provide working capital financing, and that is not going to happen either.
For these three campuses, their separate boards of directors have hired restructuring consultants and financial advisors to advise them on how to proceed.
One of the things they have to discuss is whether to keep Erickson as the manager, especially given the conflicts of interest over financing and who owes what to whom. Right now, there appears to be a strong preference to stay with Erickson. And this was not the plan. Both companies were essentially development companies with a large management arm. But Sunrise did many acquisitions, some of which were disastrous, and expanded outside the country, with horrible results in Germany.
What is similar between the two companies is that the development arm fed the beast, so to speak, and when development was forced to stop, it exposed a weakness in the model that was not sustainable. Sunrise obviously had a wider range of problems to deal with than Erickson, which basically has the unfinished campuses and limited financing options. Houlihan, Lokey is in active discussions with the buyers who have the highest probability of topping the stalking horse bid, as well as with the lenders who obviously have an important say in the ultimate outcome.
Anyone coming in is going to either need deep pockets to deal with contingencies, or redesign operations for smaller scale campuses. The sale process will become quite active later in November, and if other offers come in, there may be an auction. One risk that we are not sure how buyers will handle is the timing and ability of any one of the not-for-profit entities to cancel its management agreement with Erickson or its successor entity.
Right now, that seems to be where the cash flow is until development can be resumed at a profitable rate. Those initial entrance fees, however, were loaned to the Erickson subsidiary at the campus level and used to pay off debt or fund new construction. The ability to refund those entrance fees rests entirely on the shell not-for-profit and its ability to resell those units at the same price, something that unfortunately is no longer a given in this market, and not just for Erickson.