Just months after Erickson Retirement Communities filed for bankruptcy, the company's new owners say they are poised for expansion with the same business model that seized up along with the housing and credit markets last year.
Local entrepreneur Jim Davis, whose Redwood Capital Investments LLC bought Erickson for $365 million this month, said the Catonsville-based company is more financially sound than ever after wiping out most of its debt through the bankruptcy. That will enable Erickson to move forward in the next year with new housing at about a dozen of its existing communities that are not fully developed, he said.
Davis acknowledged that the company must reverse negative perceptions stemming from the financial collapse, especially among seniors who pay $400,000 or more to live in the retirement campuses. He must also continue to contend with an economy and real estate market that haven't fully recovered.
Erickson's emergence from bankruptcy represents a quick turnaround. It's also a new venture for Davis, whose success story started with the founding of Aerotek in 1983 with his cousin, Baltimore Ravens owner Steve Bisciotti. That company grew into Hanover-based Allegis Group, a $5.6 billion company that bills itself as one of the biggest staffing firms in the world.
In one of his first interviews since the Erickson sale was completed, Davis said last week that he intends to adhere to the vision that propelled the company for nearly three decades before the housing crisis halted rapid expansion of its neighborhood-style communities and forced it into bankruptcy.
"It has been through some difficult times but has come through remarkably well," said Davis, who will serve as chief executive at Erickson. "I'm very optimistic about the long-term growth potential of the industry and this company. … This company is more strongly positioned than any other in the industry."
Experts say that even though real estate development sparked Erickson's financial troubles, the company is healthy enough to take on new projects. Erickson has a competitive advantage to fill pent-up demand, and there's a growing need for senior housing that offers a range of medical care and living options as baby boomers reach retirement, experts said.
"There are incredible development opportunities at all those [Erickson] sites," said Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry. He said a number of additional units could be built that had been planned in phases or been halted when the economy tanked.
"With the expectation of very little new supply coming out in the industry overall — because there's just no construction financing — they have an opportunity," Kramer added.
Davis said his investment firm Redwood Capital didn't use debt financing to purchase Erickson, and post-bankruptcy the company is in an "an extraordinarily strong position financially."
Long-term demographic trends also bode well for the company. Company officials point out that the population of seniors age 65 and older is projected to grow 60 percent, to 63.9 million people, in the next 15 years, when that segment of older Americans will make up nearly 18 percent of the population.
Davis has traveled to all 19 Erickson communities across the country in recent months, speaking with employees and residents and taking a look at facilities. Ruth Pundt had one burning question for the new owner when he stopped by Oak Crest Village in Parkville.
As a resident for 14 years of the independent-living portion of Oak Crest, a 90-acre campus that Erickson developed and manages, Pundt said she felt secure about her investment even during the bankruptcy but she wondered about Davis' commitment to providing the services and amenities she has come to expect.
Oak Crest is made up of brick apartment complexes clustered around clubhouses set on manicured lawns. Residents can move to assisted or nursing care if needed. Pundt's lifestyle means filling her days with clubs and activities, managing the community's thrift store, hosting TV shows for an Oak Crest channel and dining out on site every night. Many of her friends work out in the gym, tend garden plots or enroll in classes.
She said Davis reassured her when he met with members of the community's resident advisory council. "We feel Mr. Davis is going to maintain the same quality of care we're receiving," said Pundt, 74.
Erickson was founded 26 years ago by John Erickson, who is credited with pioneering the large, campus-style continuing care communities where residents pay a refundable entrance fee. Its Maryland communities — Charlestown in Catonsville, Oak Crest and Riderwood in Silver Spring — have been completely built out and purchased by independent not-for-profits set up by Erickson.
Erickson has since taken its model to other states. The company provides management services to the not-for-profits, which in turn can purchase the facilities from Erickson. The structure gives them access to tax-exempt financing. Davis said he would continue that model.
Davis said he hopes to re-energize the company, which he said "stalled a little bit" during the bankruptcy.
"The number of new seniors moving in started to tail off," Davis said. "It's not just seniors. People throughout the world have hunkered down to a large degree, and this company certainly felt the effects of that. We expect … we'll be able to turn that around even in a difficult economic environment."
The challenges for any new development will be to persuade investors that the team can complete a development, to line up financing and pick the strongest markets, Davis said. And it could be tough to avoid the pitfalls of a fickle housing market. Erickson had failed to meet some move-in targets required by construction loans at some of its communities because seniors who were having difficulty selling homes put off moving.
"Part of the risk of the Erickson model is the size, and clearly they got caught when… recession caused a slowdown in the housing market," Kramer said.
For senior housing communities that target empty-nesters, the risk is that "people who own homes now have lost a lot of equity," said Celia Chen, a senior director of Moody's Analytics. Chen said she expects that home prices may fall a little more nationally before stabilizing and that a number of people are waiting to build equity again.
"They've lost a lot since 2005 and are not moving until they make some of that up," she said.
Davis said the company will most likely learn from past mistakes and take a more conservative approach to new development. The company has embarked on a 90-day review of all sites to assess development potential, where to build, how much and when.
"We'll make sure we don't get too far ahead of ourselves," Davis said. "It's really quite that simple. We'll make sure demand is there as we're building new communities. And we believe the demand is there."
Building and managing retirement communities is a new business for Davis, an entrepreneur who over 27 years has made his mark in the world of specialized staffing. Davis and Bisciotti started the business in Annapolis in the basement of a rented townhouse with two clients, two desks from Goodwill and weekly salaries of $100. Aerotek, Allegis Group's predecessor, placed engineers in temporary positions.
The company posted $1.5 million in sales after a year. Now Allegis places professionals in temporary and permanent placements in technical, professional, industrial, IT, managerial and accounting positions and includes divisions Aerotek, TEKsystems and Stephen James.
Davis said he never had business dealings with John Erickson but knew him from working with him on local not-for-profit initiatives and through mutual friends in "the small town of Baltimore."
A couple of years ago, when Erickson was seeking investors, "I expressed an immediate interest because I thought so highly of the company," Davis said. "Then it became apparent there were some issues that needed to be worked out, with the steep economic decline, but we remained interested throughout the process."
When Erickson filed for Chapter 11 protection last October, it also announced that Redwood would purchase the company. In an 18-hour auction in December, Erickson chose Redwood over a New York team led by private equity firm Kohlberg Kravis Roberts & Co.
"The bidding price battle with KKR illustrates the fact that investors saw great value in the company," Kramer said. "The Erickson model is indeed a proven model. Consumers have responded to it incredibly well."
Erickson resident Cliff Parks, 84, said Oak Crest has offered him new challenges since he moved in with his wife after selling their home in Loch Raven Village more than a year ago. In addition to the lump-sum, up-front cost, the average $1,700 month fee includes one meal a day, utilities, basic cable TV, shuttle service and access to the clubhouse.
Parks works in the community's TV studio as a cameraman. "A year ago, I'd never been in a TV studio," he said. "I've started a new career."