Debt Struggles and Elderly Living

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By TERRY PRISTIN, The New York Times

Published: November 25, 2008
The credit crisis is battering the two largest publicly traded operators of housing for the elderly. One of them, Sunrise Senior Living, is trying to stave off bankruptcy. The other, Brookdale Senior Living, is considered likely to resolve its short-term problems, but it faces a mountain of debt in the next few years.

Both companies, behemoths in a largely fragmented industry, say they are taking steps to reduce costs but have pledged to refrain from cuts that could impinge on the care they offer their residents. Brookdale manages 51,847 units of retirement and assisted-living housing, and Sunrise has 50,235 units.

Once the bellwether of the assisted-living industry, Sunrise Senior Living, based in McLean, Va., has violated certain covenants imposed by its lenders on leverage ratios and has a deadline of Jan. 31 to restructure its line of credit. One analyst, Jerry L. Doctrow, a managing director at Stifel Nicolaus & Company, said Sunrise might need to raise as much as $300 million next year.

Sunrise’s new chief executive, Mark S. Ordan, a former gourmet-grocery executive who specializes in trying to rescue troubled companies, said he did not expect to wait until Jan. 31 to work things out with the lenders. “We should have an arrangement with the banks long before that,” Mr. Ordan said.

Mr. Ordan’s predecessor, Paul J. Klaassen, who founded Sunrise in 1981 with his wife, Teresa, stepped down this month. The Klaassens, who are still heavily involved in Sunrise, are regarded as pioneers in assisted living, which provides frail elderly people with an alternative to the hospital-like setting of a nursing home. But the couple’s reputation was tarnished in recent years as Sunrise became mired in accounting problems and other governance matters that drew the attention of the Securities and Exchange Commission and forced the company to restate years’ worth of earnings.

The company also stumbled when it expanded into Germany and branched into new areas, including developing age-restricted condominiums and acquiring a hospice company that was later accused of fraud in billing Medicare. “They have made a number of ill-advised investments,” Mr. Doctrow said.

Sunrise recently suffered a blow when a real estate investment trust, Health Care REIT, backed out of a $643.5 million deal to acquire a 90 percent stake in 29 properties in which Sunrise has a minority stake, citing the stalemate in the capital markets. Sunrise was to realize at least $41 million from the deal.

On Nov. 28, 2007, Sunrise’s shares closed at $32.16. But since Nov. 12, it has been trading below $1, closing at 53 cents on Tuesday.

Founded in 1986, Brookdale grew rapidly at the height of the real estate cycle by acquiring rival companies, doubling the size of its portfolio. To finance these purchases, Brookdale, now based in Nashville, took on short-term mortgages secured by its existing assets, and has about $1.6 billion in debt due by the end of 2012, according to Green Street Advisors, a research company in Newport Beach, Calif.

Brookdale, the developer of the Hallmark at Battery Park City, a 14-story retirement and assisted-living home in Lower Manhattan, is expected to cut its dividend to meet near-term obligations. The company is also reducing corporate overhead costs, trying to sell some of its unencumbered real estate and increasing the availability of services like therapy and home health care, for which the company can charge fees not included in its basic rate.

Bill Sheriff, Brookdale’s chief executive, said that in recent weeks, residents had urged him to forgo renovations to keep the company from raising monthly fees, which can run as high as $10,000. “Do everything you can to control costs,” he quoted them as saying.

Brookdale’s shares, which traded for $35.16 on Dec. 10, closed at $3.76 on Tuesday.

Though the two companies are close in size and cater to the same upscale segment of the market, they have different business models. Brookdale owns or leases most of its homes, while Sunrise is primarily a management company that develops centers and then sells them to other companies while retaining a minority stake. The average monthly fee, including housing, meals and some services, at Sunrise-operated centers is $5,000.

Nearly three-quarters of Sunrise’s units are dedicated to assisted living, aimed at people who need help with daily activities. A majority of Brookdale’s units are either stand-alone retirement homes — where communal meals are available but the population is less frail — or so-called continuing-care retirement communities, where residents initially live independently but contract in advance for assisted living and nursing care on the premises.

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