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Thursday, February 29, 2024

Consistent losses, failed expansions create uncertain future for Charlotte’s Aldersgate retirement community

In November 2022, the former CEO of one of North Carolina’s oldest retirement communities sent a letter to early depositors on a major expansion project. Suzanne Hodge Pugh, the veteran leader of the 231-acre Aldersgate United Methodist Retirement Community, wrote, “While there is no less of a desire to develop the Generations project, the harsh reality is that it is no longer economically viable for [ALPS] to be the sponsor.”

Aldersgate’s parent organization, Aldersgate Life Plan Services, had pulled the plug on Generations, a development with 125 independent-living apartments and 16 memory-care suites. In the works since 2018, it was planned for the Shalom Park Jewish community property in affluent south Charlotte, about eight miles from Aldersgate’s east Queen City base.

The project had jumped lots of financial and regulatory hurdles, including spending $7.5 million in bond funding for pre-construction activities. Records from September 2022 show 49 depositors reserved 52 units and agreed to pay 10% of the entrance fees, which ranged from about $500,000 to $730,000.

Suzanne Pugh

In her letter, Pugh cited rising construction costs, interest rates and other inflationary issues. Worse, sales had launched two months before the pandemic’s onset, just as fears
about living in senior centers mounted. Truist Bank was authorized to return funds to depositors, without penalty for early termination.

Unfortunately, there wasn’t enough money to offset expenses from planning the project. In subsequent months, financial obligations climbed. Aldersgate owed about $2 million in entrance-fee refunds to former residents and $4 million in overdue bills to vendors.   

Those delays exposed serious financial concerns at the 78-year-old institution, highlighted by a record operating loss of $11 million in 2022 ­— its ninth straight annual loss.  Aldersgate had a negative fund balance of $45 million, nearly double the amount from a year earlier. It had about $20 million to meet its liquidity needs, down from $33.8 million.

In sum, the operation had $193 million in liabilities, including $103 million of long-term debt tied to four revenue bonds issued through the N.C. Medical Care Commission. Assets totaled $148 million.

Kathlene Hendrick

Amid ongoing accounting and cash flow problems, Aldersgate failed to report its quarterly financial condition to bondholders in late 2022. That flagged the attention of insurance regulators who oversee the state’s 66 licensed continuing care retirement communities (CCRCs), housing more than 22,000 residents. In January 2023, two months after the Generations project’s demise, the N.C. Department of Insurance deemed Aldersgate “in imminent danger of becoming insolvent and in a hazardous financial condition.”

The department cited delayed bill paying, the absence of a chief financial officer and inexperienced staffing for accounting and billing. Officials required Aldersgate to create a formal correction plan.

Last week on Jan. 24, Aldersgate announced that Pugh was no longer CEO. She was replaced on an interim basis by Kathlene Hendrick, a 24-year Aldersgate employee and most recently chief operating officer and chief human resources officer.

Historic heritage

The insurance department’s notice received scant public attention, perhaps because the not-for-profit has been a bedrock part of Charlotte for generations. It was formed as The Methodist Home in 1945 to serve retired preachers and widows.

Methodist pastors traditionally rotate to different churches every five years or so, typically living in church-owned parsonages rather than their own homes. Organizers of the Methodist Home, and peers such as Givens Estates in Asheville and Arbor Acres in Winston-Salem, viewed the centers as a dignified retirement spot for those pastors.

The Aldersgate complex includes the Hezekiah Alexander House, which dates to 1774 and is Mecklenburg County’s oldest home. It was donated to the Methodist Church in 1944 as Aldersgate was forming.

Today, Aldersgate’s revenue tops about $40 million annually, with 346 independent and assisted living residences, 125 skilled nursing beds, and 61 memory support units. Newcomers pay entrance fees ranging from about $103,400 to nearly $630,000, according to state filings. A recent Newsweek ranking pegged it the fifth-best continuing-care site in North Carolina, and its size makes it the 46th biggest nationally, according to the latest LeadingAge Ziegler 200 list. Pastors now make up a minority of residents.

Despite its history, Aldersgate wasn’t immune to a financial crisis. The corrective action report submitted last May outlined deep problems, including the lack of detailed financial reports dating back two years. The enterprise didn’t have a process to manage cash disbursements and its accounts receivable totaled $6.7 million, with half at least seven months past due. Related activities were recorded through intercompany accounts on Aldersgate’s books, including a $3.4 million write-off from ALPS to Aldersgate for the discontinued Generations venture.

In its report, Aldersgate blamed some issues on a former chief financial officer, who allegedly provided incomplete and inaccurate financial reporting through 2021-22. But the finance department was in disarray long before that, with six CFOs since 2014.

Only one of those officers stayed more than a year, according to a source familiar with the organization. The instability caused major turnover in the finance department “because it became clear the organization was looking for someone who hasn’t been there a long time to blame for problems dating back nearly 10 years,” the source says.

Last August, N.C. Insurance Commissioner Mike Causey turned up the heat with an unprecedented “Order of Supervision,” giving Aldersgate 150 days to repay $1.8 million in entrance fee refunds and $3.2 million in accounts payable. He also directed officials to resolve deficiencies within its financial operations.

The order was the first issued since the department started regulating CCRCs in 1989. On Jan. 12, Causey extended the deadline to complete the action plan and pay off all past-due entrance-fee refunds for another 150 days.

“The N.C. DOI’s involvement with Aldersgate is a singular event, owing as we understand it to some specific circumstances,” says Tom Akins, CEO of LeadingAge North Carolina, an association representing 69 senior living communities. “The CCRC system continues to be enjoyed by thousands of North Carolinians who appreciate this independent living option.”

Some communities in Florida have had financial problems, but Aldersgate is a first for North Carolina, says Skip Kingan, president of the N.C. Continuing Care Residents Association. His group lobbied the legislature in the 1980s to pass laws licensing and regulating CCRCs, including a push for residents to join each’s board of trustees.

Cherie Grisso, chief financial officer, and Brooks Shelley, chief branding & community engagement officer

“We wanted directors to understand they have a fiduciary responsibility to residents,” Kingan says. “That was one of the major problems at Aldersgate. The board wasn’t doing its due diligence and following up on responsibilities to oversee management. There’s a lot of good people there. We’re concerned about the residents and how Aldersgate plans to come out of this.”

About 570 residents live at Aldersgate. Entrance fees range from about $110,000 to $640,000 with monthly fees of about $2,500 to $6,500, comparable to other Mecklenburg senior living centers.

Passionate populace

Following Generations’ cancellation, residents were stunned to learn of Aldersgate’s troubled finances and worried negative press might turn away prospective residents. The resident finance committee sent a vote of no confidence to the board in November 2022. At a meeting a month later, several residents called for CEO Pugh’s resignation.

Aldersgate’s primary source of revenue is service fees, so many residents view themselves as stakeholders in its image and growth. The main campus, Aldersgate at Shamrock, has received high reviews for its quality and amenities, including a fitness center, a pool and spa, walking trails, and six dining venues. In December, Aldersgate won The Charlotte Observer’s “Best Of” competition, notes Brooks Shelley, the institution’s chief branding and community engagement director.

But many residents have expressed continued alarm over Aldersgate’s direction, according to hundreds of emails shared with leadership, regulators and other stakeholders. (The documents were reviewed after a public records request.)

“The residents are very savvy consumers, and they are not being treated as such in some ways,” says Ginny Hunt, whose 92-year-old father lives in an independent living cottage. “Transparency, full disclosure and hence trust are huge issues Aldersgate management [must] overcome.”

A key complaint of residents is their lack of input as Aldersgate transferred money to the Generations project. The residents’ association elects two people to sit on the ALPS board, which totals 11 members. “[ALPS] lost millions taken from Aldersgate residents’ fees to fund these ventures, even while failing to adequately cover current expenses,” notes a resident, who asked not to be identified.

The amount of overdue bills owed by the organization and deferred maintenance prompted some complaints. “The CEO said, ‘We’re OK,’” a resident told Jeff Trendel, the insurance department’s deputy commissioner, who is overseeing the situation. “Haven’t seen the renovation guys in weeks! Are the lawns/landscaping next?” Another line sums up the mood: “Promises of action are ignored so often that it has become a campus joke (‘We’re working on that’).”

Some residents and depositors also questioned whether their estates would be able to recoup the 50% and 90% entrance fee refunds pledged by Aldersgate after a residence ends.

The CEO’s role in Aldersgate’s problems is also a common topic. “Suzanne should resign… A CEO like that anywhere else would have been fired,” a resident wrote last February, calling for a 10% pay cut among leadership. Pugh received a salary of $273,086 in 2022 and $332,221 in 2021. In 2014, her salary was $189,247.

Pugh declined to be interviewed for this article. In a statement, she said, “I am encouraged by the positive movement over the past year and am very optimistic for continued improvement in 2024.”

In an email last February to Trendel, she described a particularly contentious meeting with residents. “While I was not invited to be there, several Shamrock staff there began texting me that I needed to come into the meeting as it was getting very intense. Picture me as Frankenstein’s monster and the villagers lighting their torches.”

Months later, at the semi-annual business meeting, an appeal by the residents’ association to remove Pugh received an extended standing ovation.

Pugh, a Charlotte native, had been CEO since 2011. She was recruited 27 years ago as a marketing director by Raymond Hall, a United Methodist pastor who was Aldersgate’s president from 1984 to 2008. She later became health services director, then chief operating officer.

Red Flags

Aldersgate’s financial position worsened in the 2010s, with nearly $38 million in operating losses over the past decade. The pandemic had an impact, causing staffing shortages that prompted the board to approve higher wages for frontline employees, raising labor costs.

Amid increasing problems at its flagship, Pugh and the organization’s board pursued projects to diversify the business, including adding home health offerings. A management agreement effective in 2019 allowed ALPS to provide overhead services in return for 5% of Aldersgate’s net revenue. But ALPS’s operations always required more funding, and no system was established to monitor and manage additional funds from Aldersgate. The action plan stated, “ALPS does not have any assets therefore Aldersgate has little remedy.”

Years of insufficient accounting also meant the consolidated  entity lacked audited financial statements, which “appears to have been an element leading to the current financial disarray,” according to the Baker Tilly consulting firm in September. Aldersgate isn’t achieving best practices for spending on direct-care staffing, dining services and maintenance, they noted.

Last July, ALPS hired a new CFO, Cherie Grisso, the former CEO of Richfield Living, a Salem, Virginia-based senior housing community. It was acquired last summer by another Roanoke-area institution after facing financial difficulties.

An interim financial statement shows that through October, Aldersgate primarily used entrance fee proceeds to reduce its accounts payable and liquidated $490,226 in investments to repay a portion of past-due entrance fees. According to regulators in January, the organization’s refund tab has risen from around $1.5 million to the $2 million-$2.5 million range due to recent resident attrition. The entire amount is due to former Aldersgate residents or their estates.

“They are projecting that by the end of March or April they will be within a 60-to-90-day window of repaying people,” an insurance department spokesman says. “They are not expecting to get within 30 days any time soon.”

Many steps in the corrective action plan remain incomplete. Crucially, management has failed to produce a full accounting of how the $7.5 million of revenue anticipation bonds and $3.4 million Aldersgate loan for the Generations project were spent. The state insurance department in September launched a “limited-scope examination” of all Generations expenditures and credit transactions between ALPS affiliates from 2020 to 2023. It’s expected to be completed early this year.

Aldersgate’s future

Despite its financial woes, Aldersgate has strengths that might attract a buyer or enable a financial rebound. Occupancy remains a healthy 92%, or 489 of 532 units, beating the 90.5% sector average estimated by Ziegler Investment Banking.

According to a report shared with bondholders, the $1.4 million operating loss during the third quarter was better than an expected $2.8 million loss. It helped that the organization raised its monthly service fees by 10% in 2023, which typically range from about $2,500 to $6,500. That didn’t please residents, many of whom contend that the service quality hasn’t improved.

“Resident response to the situation ranges from disappointment to anger to fear that these large increases in fees threaten their ability to stay here, but so far, no momentum seems to be building for move-outs,” says the resident who requested anonymity.

Meanwhile, other CCRCs are expanding as the overall population ages and North Carolina attracts more retirees. Projects are underway at more than a dozen North Carolina institutions, including Mecklenburg County’s Sharon at South Park, Windsor Run, and Matthews Glen, according to state filings. Aldersgate’s key growth plan is spending more than $3 million in 2024 and 2025 to add eight cottages on vacant lots, pre-sold and built with entrance fees. Shelley says  it’s also considering building independent living residences in infill sites near existing residential areas.

Last fall, Aldersgate sold some property to ALPS for $1.5 million for a mixed-income housing project on Shamrock Drive. Charlotte-based Laurel Street Residential is the project’s developer, backed by $16.5 million in housing revenue bonds approved by the Charlotte City Council. Construction is expected to start in the next few months.

Aldersgate’s 2024 budget indicates some corporate restructuring is underway. The board is ending the ALPS management agreement and transitioning its employees and $2.5 million in leftover expenses to the “obligated group.” Shelley says trustees will consider remaining a single-site CCRC or affiliating with another organization.

With the correction plan incomplete, the state will maintain supervision for the foreseeable future. Suspending Aldersgate’s license is unlikely. The department has said it prefers to work with the organization on fixes rather than issue fines, which would mostly serve to take money away from services for residents.

Leadership remains optimistic. “From my perspective, Aldersgate remains a sought-after, faith-based, not-for-profit, welcoming CCRC on a one-of-a-kind campus,” says Thomas Lawing Jr., a Charlotte real estate executive and long-time board member. “Our leadership is focused on learning from the events of the last 18-24 months for the benefit of our seniors.”

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