Distress levels in healthcare, as measured by the number of bankruptcy filings, had another record-breaking quarter, led by the senior living and care sector, according to the latest Polsinelli-TrBK Distress Indices Report.
The Health Care Index reached the highest level of distress in the report’s history for the fifth consecutive quarter, according to the Second Quarter 2024 Chapter 11, Healthcare and Real Estate Distress Indices report. Data show that the current level of Chapter 11 filings is almost 50% higher than healthcare distress at the height of the Great Recession in 2008-2009.
Real estate distress also reached its highest level in 11 years.
“We are continuing to see significant turmoil across various sectors and are now really starting to see data similar to the Great Recession or higher,” said Jeremy R. Johnson, a restructuring attorney at Polsinelli and co-author of the report. “We are seeing unprecedented levels of distress across the board, and there are no signs that it is slowing down.”
Senior living and care industry in distress
For senior living and care settings — independent living, assisted living, memory care, continuing care retirement communities and nursing and skilled nursing facilities — Chapter 11 bankruptcy filings have comprised approximately half of the distress in the healthcare data set for the past several years, Johnson told McKnight’s Senior Living.
The problems in the senior living and care industry, he said, are extensive, particularly in CCRCs. Those large communities did not all recover from the COVID-19 pandemic, Johnson said. The biggest problems involve debt, with bond facilities outsized in comparison with the value and the cash flow generated by the underlying industry, as well as labor costs that are 30% to 40% higher than projected.
“There’s just a lot of distress in this particular space, more so than anywhere else, although the stress everywhere else is rising, too,” Johnson said.
Companies expanding too fast are at the heart of the problem in long-term care, he said. Some owners reacted to a profitable period by buying more communities or facilities, overextending themselves in the process of trying to make more money. A portfolio of 100 buildings can have various landlords with vastly differing operating results across settings, Johnson said.
“If they’re concerned about distress, be careful with expansion, because expansion can catch up with you in a hurry if the numbers don’t work out like the advisers tell you the numbers will work out,” he said. ”There’s this need to expand and grow, and it’s how you make more money, but that’s not always true. And in healthcare, it can be very, very untrue very quickly.”
The Distress Indices Report, he explained, is a snapshot of distress based on bankruptcy filings for the past four quarters, which are converted into a distress number. The past four quarters have shown high distress numbers, particularly for healthcare. And although Johnson doesn’t expect the number to remain at that high, he also said it is not going to go down substantially.
“It’s going to go down to where we were a year ago, which was still far more distressed than the general economy and real estate,” Johnson said. “There is more distress to come, but this number spiked far higher than I’ve seen in the 10-plus years we’ve been doing this.”
Johnson said that he has had active senior living and care bankruptcy clients for the past seven years, and he anticipates another 15 to 20 years of work in the distressed health area.
“It’s an enormous part of our economy right now, and a lot of changes are happening,” he said. “And all of those changes bring about great results, but they also bring about hard results that you’ve got to expect.”
A snapshot of distress
The Health Care Services Distress Index was 1241.67, a 328-point increase over the first year and a 653-point increase over the first quarter. Compared with the benchmark period of the fourth quarter of 2010, the index is up more than 1,141 points, the highest the healthcare index has registered since Polsinelli started tracking the data 13 years ago.
In the second quarter, the Southeast (73.42%) was the location of the most healthcare filings, followed by the state of Delaware (16.38%). The Northwest had no healthcare filings in the second quarter.
The Chapter 11 Distress Research Index was 91.87 for the second quarter, increasing more than seven points from the first quarter. Compared with the same period a year ago, the index increased more than 40 points, but this part of the index is down more than eight points from the fourth quarter of 2010.
The Southeast (34.29%) continued to outpace Delaware (18.51%) for percentage of Chapter 11 filings, and the Northeast (28.26%) was the busiest area by number of filings. Since the benchmark period in 2010, the Northeast has had the biggest increase in filings, at 18.70%.
The Real Estate Distress Research Index was 53.91 for the quarter, a six-point increase over the first quarter. Compared with a year ago, the index was more than 27 points higher but down more than 46 points for the benchmark fourth quarter of 2010.
Real estate filings were highest in the Northeast in the second quarter, at 36.71%, followed by the Southwest at 20.28% and the Southeast at 18.88%.
The Polsinelli-TrBK Distress Indices track the increase or decrease in all Chapter 11 filings with more than $1 million in assets since the fourth quarter of 2010, and it includes both public and private companies.
