The financial health of Edgemere, one of Dallas’ premier retirement communities, is being threatened by falling occupancy levels and an expired deal with its landlord and bondholders that allowed it to delay making monthly payments since October.
Edgemere’s own financial disclosures, along with independent examinations by an investment firm hired by the landlord and a major credit rating agency, document the luxury senior living community’s dire cash position.
The company that operates the community — where independent living residents pay entrance fees of as much as $1.4 million — recently alerted bond investors that it had fallen far below a requirement to keep 150 days of cash on hand, according to a filing with Electronic Municipal Market Access. EMMA is a service of the Municipal Securities Rulemaking Board, which protects investors, state and local governments and the public interest.
As of Dec. 31, Edgemere said it had only 62 days’ worth of cash — or enough to stretch through March 3.
Compounding the risk is an expired forbearance agreement with Dallas-based Intercity Investment Properties Inc., which owns the 16 acres of North Dallas land wedged between Preston Hollow and University Park where Edgemere opened its doors in 2001. That agreement allowed Edgemere to delay payments of monthly rent, as well as interest and principal on its $109 million of outstanding debt, according to Edgemere’s 2021 financial report.
“It’s unfair and unjust for Edgemere to continue to take deposits from future residents under current circumstances,” said Coe Schlicher, CEO of Kong Capital, an Austin-based real estate private equity firm that specializes in strategic investments in senior housing.
Intercity Investment hired Schlicher’s firm to help it find a solution, considering that a financial failure of Edgemere could affect the living situation and health of hundreds of seniors, he said. The 1.55-million-square-foot facility contains 304 independent living apartments, 113 assisted living suites and 87 nursing beds.
“I fear the residents are on a sinking ship and some of them may not even know it,” Schlicher said.
Rachel Chesley, senior managing director of Washington, D.C.-based FTI Consulting, responded to questions from The Dallas Morning News on behalf of Edgemere. Chesley said Edgemere has had “productive discussions” with Intercity Investment over the delayed rent payments as it seeks to conserve Edgemere’s cash.
“Unfortunately, despite our full compliance with the terms of the forbearance agreement and productive discussions, the landlord failed to extend the forbearance agreement and has sought to terminate the lease, contrary to its prior representations,” Chesley said.
Edgemere hasn’t decided how it will move forward, but “any path forward will allow Edgemere to continue operations uninterrupted, maintaining the health and lifestyle of our residents,” Chesley said. To protect the entrance deposits of residents who have signed agreements since Sept. 29, she said Edgemere created an escrow account “to ensure they are not at risk.”
Edgemere is holding more than $124 million in total deposits from current residents, as well as from residents who moved out, according to its latest financial report on Feb. 14.
Chesley criticized Intercity Investment for “its interference with Edgemere’s relationship with its bondholders, regulators, and residents” and insisted the discussions will have “no impact to our current residents.”
In response to Edgemere’s claims, Intercity Investment said through Schlicher: “Years of operating losses, mountains of debt, and an upside-down balance sheet are Edgemere’s responsibility.”
On Thursday, bondholders led by UMB Bank said they are no longer waiting and will seek immediate payment from Edgemere of its outstanding debt.
Called the ‘Ritz-Carlton of senior living’
Edgemere’s occupancy decline during COVID-19 was seen broadly across the senior housing industry, which was “hammered,” according to an annual report by research firm Integra Realty Resources. It sees demand surging in the next 12 months as seniors who were waiting to move into retirement communities begin to sign agreements.
But while COVID-19 certainly weighed down Edgemere’s finances, its troubles began earlier.
When Edgemere first opened, it “immediately set a new standard for luxury senior living,” according to the not-for-profit organization’s website. Schlicher described the Mediterranean-styled community as the “Ritz-Carlton of senior living.”
But Edgemere is facing increasing competition from newer luxury senior living communities in Dallas.
The Tradition-Prestonwood opened in 2010, followed by a Lovers Lane location in 2015; Belmont Village Turtle Creek opened in 2013; Preston of the Park Cities opened in 2018; and the $140 million Ventana high-rise opened in 2019.
In recent years, Edgemere’s average occupancy in its independent living units has been steadily dropping — from 93.3% in 2018 to 74% last year, according to its 2021 financial report.
Lifespace Communities bought Edgemere and two other Texas properties in 2019 shortly before the pandemic hit, which may have hampered its turnaround plans for Edgemere. Iowa-based Lifespace ranks as the nation’s fifth-largest not-for-profit multisite senior living organization with 15 communities, according to a 2021 report from LeadingAge and Ziegler.
Edgemere’s unrestricted cash position fell from about $37 million at the end of 2019 to less than $7 million at the end of 2021, according to its 2020 and 2021 financial reports.
Edgemere is classified as a continuing care retirement community, an alternative to conventional assisted living facilities and nursing homes that allows residents to age into different levels of care without having to move into a new facility.
The communities start with a massive cash reserve from residents’ deposits but if they lose money each year, the reserve eventually runs dry, Schlicher said.
Many continuing care communities can borrow money in perpetuity to keep operations running, Schlicher said. But that’s not possible for Edgemere.
That’s because Edgemere doesn’t have an unlimited amount of time to pay back its debtors. Northwest Senior Housing Corp., doing business as Edgemere, signed a 55-year ground lease in 1999 with Intercity Investment, according to a copy of the lease filed in Dallas County.
After the 55 years are up or if Edgemere can’t pay its rent, then Intercity Investment has no obligation to keep the senior living facility running, Schlicher said. Edgemere is 22 years into its lease, meaning it has 33 years to pay back its debts in full.
What happens to the entrance fees?
Edgemere has an agreement in which residents or their estate receive up to 90% of their entrance fees back when they move out or die, according to Edgemere’s website. The money is returned once Edgemere has received a deposit from a new resident taking over the unit.
The fees for residents range from $346,000 to $1.45 million, depending on apartment size, according to a disclosure statement Edgemere provides to new residents. Most people finance entrance fees to continuing care retirement communities by selling their homes, according to Kiplinger.
In addition, Edgemere residents pay monthly service fees of $4,176 to $8,933, according to its disclosure document. Those in assisted living or memory care units are charged monthly fees of $7,033 to $10,486.
Entrance fees or deposits are first used to issue refunds to prior residents and then can be used for operating expenses, capital improvements and debt repayment, said Edgemere spokeswoman Chesley.
Residents risk losing some of their deposits in the event of a bankruptcy filing, Schlicher said.
“Based on the publicly filed quarterly financial reports, Edgemere does not appear to have the current assets necessary to pay in full its landlord, its bondholders, its resident refunds and other creditors,” he said.
Edgemere’s annual losses have accelerated in recent years, from $12 million in red ink in 2018 to about $30 million last year, according to its 2018 and 2021 financial reports.
Bondholders await payment, too
In total, Edgemere has issued four municipal bond sales totaling $317 million — with $109 million in outstanding debt, according to Electronic Municipal Market Access.
EMMA data shows Edgemere’s bonds were trading at 80 cents on the dollar on Jan. 26. The next day, they were trading at about 22 cents on the dollar after 22.7% of Edgemere’s bonds were sold, a loss of more than 72%. As of Feb. 24, Bloomberg data valued the bonds at 30 cents on the dollar.
Fitch Ratings, one of the big three credit rating agencies that examine organizations’ ability to repay debt on time and in full, downgraded Edgemere’s bonds in November to a “D,” which stands for default, according to Fitch’s website.
“Once an organization gets to a D, there’s not a lot of surveillance left that we can do because that’s the worst-case scenario,” said Kevin Holloran, a Fitch senior director and sector leader of its not-for-profit health care group.
Fitch rates 160 similar retirement communities, and Edgemere is the only one with the low D rating, Holloran said. Edgemere was previously downgraded in March 2021 to below investment grade to “CC,” which meant default was likely, according to Fitch.
“This was a long decline,” said Fitch associate director Rebecca Greive, noting that her team conducted an extensive review of Edgemere.
Edgemere’s downfall is tied to its occupancy decline, Greive said.
“The Dallas market is highly competitive,” she said. “Once occupancy dips and doesn’t recover, it can be very difficult, especially when you have a heavy debt burden like Edgemere.”
How much do residents know?
Thomas Murphy, CEO of financial planning firm Murphy & Sylvest in Dallas, said he visits his mother-in-law regularly at Edgemere and has noticed a marked decrease in occupancy.
“There are significantly less people than two or three years ago,” Murphy said. “It’s just my observation, but I’d say there are less than 50% of the residents there used to be.”
Murphy said he wasn’t aware Edgemere hadn’t paid rent since October, though he recalled that residents were invited to community meetings in December to discuss finances.
Murphy, who described Edgemere as coming “through the pandemic with flying colors” in terms of care provided to residents, said he didn’t attend the meetings.
Edgemere spokeswoman Chesley said incoming residents receive a disclosure statement detailing its financial position. The disclosure notes that Intercity, once the Edgemere ground lease ends or a default occurs, can either continue residency agreements and life care contracts or cancel them.
She also said Edgemere staff keeps a residents’ council and residents’ families informed and provided emails sent in September and December about forbearance discussions with the landlord and bondholders.
Murphy said he also wasn’t aware Intercity Investment could bring in a new tenant if Edgemere can’t pay its rent.
“That would be a big ordeal,” Murphy said.
In Texas, the state insurance department regulates the financial condition of licensed continuing care retirement communities like Edgemere. That includes reviewing disclosures provided to current and potential residents, said department spokesman Ben Gonzales.
Gonzales declined to comment on whether the state is examining Edgemere’s disclosures.
Dr. Paul Radman, a former endodontist and president of the Edgemere Resident Association, said Lifespace’s chief executive told the resident association about the forbearance agreement in late 2021. He said he has full confidence in Edgemere management.
“I’m not worried,” he said. “I’m assuming, and realistically I think, that Edgemere will survive.”
COVID-19 is “no doubt the worst thing that could’ve happened” to Edgemere, he said, and is likely the major cause of its financial troubles.
“We all feel that we’re at the best facility in Dallas,” said Radman, who has lived at Edgemere for five years. “Maybe we’re not as worried as we should be, but we’re just not.”
