Boca Raton Seniors to Frolic in House That Yield Built

May 14 (Bloomberg) -- Alan Krutt bought tax-free bonds last month that were sold to build a retirement community in Boca Raton, Florida. Then he made an even bigger investment: He purchased a unit there.

The 81-year-old retiree from nearby Boynton Beach faced stiff competition on both fronts. Octogenarians and high-yield bond investors alike clamored for a piece of the Sinai Residences of Boca Raton, which will feature rooftop gardens and a spa when it opens next year.

Future residents have snapped up 96 percent of 237 units available for seniors who live on their own. An agency of Palm Beach County was inundated with bids last month when it issued $214 million of unrated debt for the project, on Florida’s east coast 45 miles (72 kilometers) north of Miami.

“Boca Raton is a very upscale, very economically strong community -- the thing is a winner,” said Krutt, a former auto parts importer. Income from the bonds “will allow me to live at Sinai Residences.”

Issuance Rebound

Bonds for continuing-care retirement communities, one of the most speculative parts of the $3.7 trillion municipal market, are rebounding with housing prices while the nation’s aging population lifts demand.

Debt to finance the communities climbed to $3.3 billion last year, data compiled by Bloomberg show. While that’s up from $1.4 billion in 2009, it trails the peak of $7 billion in 2007. About 8 percent of defaulted munis are from retirement projects, making it one of the three riskiest categories, according to research firm Municipal Market Advisors.

The demographics of Boca Raton -- where the $70,000 median household income is almost 50 percent above the state average and one in five residents is at least 65 years old -- make it a prime location for a retirement community, said Mel Lowell, chief operating officer of the Jewish Federation of South Palm Beach County.

The nonprofit will use proceeds from the Palm Beach County Health Facilities Authority debt offering to build the community on its 100-acre campus. It already has offices, a fitness center and four day schools with more than 1,000 students, offering documents show.

Standout Debt

Even during a rally in high-yield munis, the securities for Sinai Residences stand out.

Debt maturing in June 2049 priced in April at 7.625 percent yield. Within about two weeks, as interest rates on benchmark munis fell to the lowest since June, yields on the new deal plunged to 6.21 percent. In dollar terms, it’s risen to 109 cents from an initial 98.5 cents.

“This was a deal I could not ignore,” said Jim Colby, who helps run Van Eck Securities Corp.’s $978 million high-yield muni exchange-traded fund and owns some of the 2049 securities. “The location couldn’t be more attractive.”

Colby said he got fewer bonds than he wanted.

Individuals have added money to high-yield muni funds for 18 straight weeks, Lipper US Fund Flows data show. The wave has helped the riskiest munis gain 8.4 percent this year, beating the broad market’s 5.5 percent advance, S&P Dow Jones Indices data show.

‘Extreme’ Trading

“Did we misprice the bonds? I don’t think we did,” said Bill Sims, managing principal at Fairfield, Connecticut-based Herbert J. Sims & Co., the underwriter on the debt sale. “We compared very favorably to our competitors. This trading is extreme and we truthfully don’t understand it.”

In comparison, the Collier County Industrial Development Authority on Florida’s west coast issued bonds in December with a similar maturity for a continuing-care community named The Arlington of Naples. The unrated debt priced to yield 8.375 percent, and last traded in February at 8.26 percent.

Aaron Rulnick, senior banker on the Sinai Residences bonds, declined to specify the amount of orders received. The company has an office in Boca Raton, and Krutt said it introduced him to the project.

He said he will pay about $3,500 a month to live at the residences, in addition to a $463,000 move-in fee. He plans to sell property in western Massachusetts and his current country-club apartment to afford the up-front cost.

Investment Risks

The model lets residents transfer from independent living to assisted living at the same cost, Lowell said. Monthly fees range from $3,000 to $5,000. By comparison, nursing care in Florida ranges from $10,000 to $14,000 per month, he said.

Bond offering documents present risks that could threaten repayment: Housing prices could fall and residents may live too long. The bonds aren’t backed by the county or the Jewish Federation.

The business model relies on a constant flow of entrance fees from new residents after previous ones die or leave their independent-living units. Revenue would fall below maximum annual debt service by 2020 if too many live longer than actuaries predict or if occupancy dips too far below projections of 95 percent, according to a feasibility study.

The risks didn’t stop Krutt. After visiting every continent except Antarctica and having bypass surgery last year, he said he’s ready to settle down.

“Considering that I don’t work for a living, I have to make my money work for me,” he said. The bonds’ performance “indicates what the market feels about this project.”

Salon Time

Amenities at Sinai Residences will also include a library and a pavilion with a pool, fitness center, salon and spa, offering documents show. The site is blocks from West Boca Medical Center.

Residents skew wealthier and older. The median age among those who have secured units is 83 and the median net worth is $2.4 million.

Having most of the apartments pre-sold enticed investors, said Michael Camarella, who helps oversee $28 billion of munis at OppenheimerFunds Inc. in New York. In 2007, facilities with 60 percent of units reserved were deemed attractive, he said.

OppenheimerFunds got “peanuts as far as an allocation because everyone in the world wanted it,” Camarella said. “There’s a yield grab going on.”

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net; Toluse Olorunnipa in Tallahassee, Florida at tolorunnipa@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein