Too much, too fast

Assisted-living facilities discovered growth thwarted by debt, competition
Balanced Care Corp. started financial restructuring in fall 2000 to hold off bankruptcy.
Like a few of its counterparts, the Mechanicsburg-based operator of 57 assisted-living facilities in six states had expanded too rapidly.
Its debt mounted.
Rosy projections in the mid-90s forecasted assisted living as the land of milk and money. Demographics showed an aging population that would support the service. Substantial capital and debt financing were readily available for companies to start projects. These combinations fueled aggressive development, and eventually, an oversupply in some markets.
Financial difficulty followed some assisted-living companies when buildings didn’t fill up with residents and market pressure from too much competition made investors pull out.
“The company was overextended financially and didn’t have the capital to wrap up projects when financers turned away from assisted living,” said Robert J. Sutton, senior vice president for Balanced Care.
In December 2000, Balanced Care began renegotiating with a number of real estate investment trusts (REITs) to lower rental payments on certain properties. REITs are high-end lenders that own the buildings until companies can buy them out. “The rental payments were excessive compared to the revenue stream,” Sutton said. “Revenue growth was falling short due to slower occupancy fill rates in certain markets.”
A year after Balanced Care went public in 1997, the company reached its peak on the American Stock Exchange, selling stock for about $10 per share. In 1999, the stock value plummeted to $2.50 and has steadily sunk ever since. As of April 10, Balanced Care stock was worth 10 cents per share.
Doug Brewer said no one is getting rich off the assisted-living industry because the market competition and financial pressures are too great. Brewer is chief executive officer of Generations Management Services, a Mechanicsburg-based senior-housing management company.
“Many operations are still struggling to fill up or become profitable,” he said. “Most are selling their product at a discount or are just limping along, trying to get to a point where they can cover their costs.”
For fiscal-year 2001, Balanced Care’s revenues were $58.6 million, compared with revenues in the prior fiscal year of $60.7 million. In a news release, company officials attributed the lower revenue to the sale of the company’s Missouri operations early in the third quarter of fiscal-year 2000.
The company’s net loss for fiscal-year 2001 increased to $46.1 million, from $21.6 million in the prior year. The news release attributed the loss to a write-down of assets, higher provisions for losses on shortfall funding agreements, higher depreciation and amortization attributable to real estate acquisitions, and financial restructuring expenses.
Balanced Care has reached agreement with four of six REITs, which include the return of 12 properties to lenders, Sutton said.
The company downsized its corporate office by reducing 56 positions during 2001 and 2002 and approved a recapitalization plan in May 2001 that included a $55 million sale of company stock to stockholders.
In addition to financial reconstruction, Balanced Care’s upper management has shifted. Brad Hollinger, co-founder and chief executive officer, resigned in November.
Richard Richardson was appointed interim CEO. Clint Fegan, the company’s chief financial officer, resigned in December. Fegan has since filed a lawsuit in Cumberland County against Balanced Care.
In the lawsuit, Fegan claims he is owed more than $500,000 severance pay that the company has refused to pay.
Sutton declined to comment on the pending litigation or why the former company executives resigned.
The supply/demand imbalance in the assisted-living industry is stabilizing in many markets, Sutton said. Balanced Care has 3,135 residents in facilities that have capacity for 3,995. The company is still completing the restructuring process, Sutton said. Future development is on hold. “We won’t be moving forward with new enterprises until we finish with the work at hand.”
Alan Rosenbloom, president of the Pennsylvania Healthcare Association, agreed the market is stabilizing.
“A number of companies are planning back, and stability is emerging for some of the larger companies,” he said.
However, the situation remains dynamic for the assisted-living industry in Pennsylvania. Proposed Pennsylvania Department of Public Welfare regulations and state legislation could be financially disastrous for some companies if they are passed, Rosenbloom said. He plans to release data regarding the regulations and legislation in the weeks to come.