HJ Sims Completes Rated Bond-Financed Campus Expansion & Replacement and Refinancing and Continues Multiple Decades of Client Collaboration
“Jim Bodine and his team, primarily David Saustad, were integral in guiding and leading Cross Keys Village through our first bond financing transaction in my tenure. Cross Keys Village in previous projects had self-funded many of the Residential Living units with excess investment reserves. With the sheer magnitude of this project, we knew we would need the expertise that the HJ Sims team was able to bring to the table. The HJ Sims team was able to help our Program/Finance Committee and Board navigate the many options that were available at the time in an efficient manner to keep us on track to meet our deadlines. We had an amazing experience with Jim and David and would recommend them for future endeavors.”
-Scott A. Sowers, Chief Financial Officer, Cross Keys Village
Partnered Right®
Cross Keys Village (“Cross Keys”) is a not-for-profit senior living organization located in New Oxford, Pennsylvania. Cross Keys is the largest not-for-profit single-site community in the Commonwealth with 590 independent living units, 91 personal care units, 32 memory care units, and 270 skilled nursing beds (being operated at 119 beds).
Over the past ten years, Cross Keys has implemented a master plan in multiple phases, increasing the number of independent living units while lowering the number of in-service skilled nursing beds. The latest stage of the master plan included the addition of 59 new independent living cottages with community building and replacement of its existing personal care building with a 100-unit stand-alone building.
Jim Bodine, representing HJ Sims and investment banks at which he worked previously, has worked with Cross Keys for more than 30 years on a variety of financings as well as supporting the organization’s pursuit of additional growth. Cross Keys selected Sims to assist with financing these latest master plan projects.
Structured Right®
In late 2023 and early 2024, Sims prepared potential plan of finance scenarios for the projects. These scenarios included bank debt, fixed rate bonds, and a hybrid approach. In late 2023, using bank debt for the project appeared to generate the lowest cost of capital. Cross Keys had outstanding debt with two banking partners (consisting of three tax-exempt bank loans). However, by the second quarter of 2024, the bond market had improved significantly, especially for investment grade borrowers (BBB- and above), such as Cross Keys (rated S&P “A-” prior to the planned project financing). Despite only having bank debt and no outstanding bonds, Cross Keys maintained a credit rating due to a requirement from one of its lenders.
In the spring of 2024, reflecting the merits of both bank and bond financing, Sims suggested soliciting banks to determine their appetite for the financing and as a basis for comparison relative to fixed rate bonds. Sims led a bank solicitation, seeking approximately $107 million in financing for the projects and refinancing of Cross Keys’ outstanding bank debt. The solicitation was well-received with Cross Keys receiving several loan proposals, reflecting strong bank interest even in the face of more challenging lending conditions. However, due to the amount of the request, including both refinancing and new capital, each bank’s proposal was for a portion, but not all, of the financing. Sims reviewed the possibility of a multi-bank financing but ultimately found that using bank debt for the full financing need did not generate meaningful interest savings compared to using fixed rate bonds. Further, the covenants required by the banks would have been stricter than the covenants typically obtained with bonds.
Prior to finalizing the plan of finance, Sims and Cross Keys wanted to confirm the anticipated credit rating for a bond issue which would be a significant factor in bond interest rate and cost. As mentioned, Cross Keys had an A- credit rating with S&P, with a negative outlook due to the planned project and financing. Sims assessed continuing with a S&P rating as well as seeking a new rating from Fitch Ratings that would be accompanied by a withdrawal of the existing S&P rating. Cross Keys opted to seek a new rating from Fitch, given Fitch’s extensive coverage of the senior living sector and large portfolio of rated, not-for-profit life plan communities. This review confirmed the assumption that the bonds would retain their investment grade status. Reflecting this anticipated rating and favorable tax-exempt interest rates, Cross Keys opted to undertake the entire financing, both project and refinancing, solely with fixed rate bonds. It opted to include refinancing of its existing bank debt as this debt carried upcoming put dates in three years, which would coincide with the fill period for the projects. Further, this debt was also secured by a master trust indenture (“MTI”) that had not been modernized in many years. Accordingly, refinancing the existing debt allowed Cross Keys to eliminate future loan renewal and interest rate risk and update its covenants and financing provisions via a new MTI.
Executed Right®
With the plan of finance finalized, in July 2024, Sims worked with Cross Keys to coordinate efforts of the financing working group. Key elements of the group’s work included preparing financing legal documents, and bond marketing documents, advancing the issuer approval process and finalizing the credit rating of the bonds with the goal of completing the financing by mid-October 2024. Sims and Cross Keys were cognizant of the uncertainty associated with the Presidential election, potentially impacting the financial markets, and sought to price the bonds well ahead of the election.
There were several important critical path items required to be completed prior to proceeding with financing and marketing the bonds, including 1) obtaining all required project permits and approvals, 2) converting priority depositors to formal pre-sales and 3) obtaining Guaranteed Maximum Price (GMP) contracts for both projects including performance and payment bonding. Among other approvals, the independent living portion of the expansion project required U.S. Army Corps of Engineers approval due to the inclusion of a water feature that was originally a quarry. Cross Keys had generated significant interest in the new independent living units over the months of project planning, both from its waiting list and new prospective residents. Demand for the new independent living units was formalized preliminarily through generation of “priority deposits” from prospective residents with the plan to convert them to executed residency agreements (and 15% generally non-refundable deposit) upon receipt of Army Corps approval.
In conjunction with the pre-sale conversion process, Cross Keys was also finalizing GMPs for the two projects. The GMP for the personal care project initially lagged behind the independent living project as Cross Keys sought to achieve a final round of cost savings. Ultimately the personal care project GMP (with conforming performance and payment bonding) was executed in time to meet the group’s internal deadline of pricing prior to the election. However, an issue arose related to securing bonding for the full amount of the independent living project. The general contractor, a residential homebuilder, had worked with Cross Keys for decades, but had not been required to obtain bonding for their projects in the past. Given the number of units being constructed for this project, a performance and payment bond was required for risk mitigation in the event that the general contractor would be delayed or unable to finish the project. Working collaboratively with Sims and Underwriter’s Counsel, Cross Keys and the contractor implemented an alternative approach – phasing the bonding amount as the units were built and occupied. This was the last requirement needed to finalize the independent living GMP.
As the GMPs were finalized and with the Army Corps project approval received, Cross Keys continued to convert independent living depositors from priority deposits to pre-sale deposits. Prior to commencing the conversion process, Cross Keys had roughly 70% of the units reserved with priority deposits. However, during the conversion process, some depositors opted to move into existing units at Cross Keys that became available through resident turnover. As a result, by the time the GMPs were executed, Cross Keys had just under 60% of the units reserved as pre-sales. Reflecting an original goal of having 70% of the units pre-sold prior to bond marketing, Sims and Cross Keys conferred and opted to proceed with financing at the lower pre-sales level. Their comfort in doing so was based on several factors: 1) the 15% deposits being generally non-refundable (compared to the typical 10% refundable deposits on most projects), 2) Cross Key’s existing high occupancy and large waitlist, and 3) what had been very strong priority deposit/pre-sales velocity throughout the unit marketing process.
Simultaneously with completing the above critical path items, Sims worked with Cross Keys to obtain its formal Fitch credit rating. Ultimately, Cross Keys received a BBB+ credit rating (with stable outlook), just one notch below its A- (negative outlook) S&P credit rating. With the formal credit rating in hand, the working group finalized all legal documents and mailed the preliminary official statement (POS) in mid-November shortly after the Presidential election, but before the Thanksgiving holiday.
Financed Right®
After mailing the POS, Sims began marketing the bonds and answering investor questions. In the weeks leading up to and directly after the election, the bond market softened considerably with interest rates generally rising. However, in the weeks just before and following Thanksgiving as Cross Keys bond pricing approached, the bond market improved with interest rates declining. As a result, Cross Keys entered the market in early December at an opportune time and ultimately priced the bonds in a stable rate environment and strong investor demand. The bonds were oversubscribed and ultimately purchased by 24 institutional investors. On December 19th, Cross Keys successfully closed on $108,490,000 of Series 2024 Bonds. The long-terms bonds were sold with a 7-year call feature at a 102% premium, and 4.69% true interest cost – a rate well below that included in the financial forecast.
Jim Bodine
215.694.0640
David Saustad
214.909.8588
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