From Financial Recovery to Investment Grade
“Herbert J. Sims was a valuable asset to Lenbrook. They provided timely market knowledge and adhered to a tight time schedule allowing Lenbrook to structure, price and close the Series 2016 Bonds at a significant debt service savings to the organization.”
–Dan Dornblaser, V.P. of Finance and Chief Financial Officer, Lenbrook
Founded in 1980, Lenbrook Square Foundation, Inc. d/b/a Lenbrook (“Community” and “Borrower”) is a nationally accredited continuing care retirement community located in the affluent Buckhead neighborhood of Atlanta, Georgia. Lenbrook originally consisted of an 18-story building with independent living apartments, skilled nursing services and common areas. In December 2006, Sims underwrote $173 million of tax exempt bonds (“Series 2006 Bonds”) for the expansion of Lenbrook, adding a 25-story building connected to the existing apartment tower (Brookhaven Tower), substantial new common area space and a complete re-purposing and renovation of its existing common space. In addition to 134 new independent living residences plus eight unique garden court apartments, another new building (Lenox Tower) provided three new dining venues, fitness and wellness areas and landscaped outdoor areas for the residents to enjoy. Proceeds of the Series 2006 Bonds were also used to relocate 60 skilled nursing beds to a uniquely designed Health Care Center. Today, Lenbrook has 353 total independent living residences, 60 Medicare-certified skilled nursing beds and 16 Personal Care suites.
Lenbrook opened this major expansion in 2008, immediately prior to the Great Recession and collapse of the national real estate market, which reduced the average Atlanta home price by at least 25 percent. After reservations for all new residences had been received, 25% of Lenbrook’s deposits were cancelled within six months of opening. In addition, although Lenbrook historically had enjoyed high occupancy levels with a waiting list, its Brookhaven Tower experienced significant attrition and a reduction in occupancy.
Following the Great Recession, under leadership of a new CEO, CFO and marketing team, Lenbrook adopted a Management Action Plan and successfully achieved key measurable outcomes, including an increase in Community occupancy; reduction in outstanding debt; generation of operational savings; maintenance of a break-even operating margin ratio and generation of a positive Change in Net Assets; and increase in Days Cash on Hand. Moreover, in addition to these accomplishments, Lenbrook maintained excellent lender relations and earned tremendous support and confidence from bondholders. In 2016, with market conditions at historical lows, Sims assisted Lenbrook as sole underwriter for a current refunding of $85.8 million of outstanding Series 2006A Bonds and advance refunding of $7.9 million of outstanding Series 2006B Bonds (“Series 2016 Bonds”) issued through the Residential Care Facilities for the Elderly Authority of Fulton County to generate debt service savings.
Prior to kick-off of the Series 2016 Bond transaction, Sims coordinated a Fitch Verbal Feedback Review of Lenbrook that provided valuable insight about the Borrower’s credit profile, including an indication that an investment grade rating might be attainable. As such, Sims recommended that Lenbrook publish a Fitch underlying rating in connection with its issuance of Series 2016 Bonds. At this stage, the primary objectives identified for the upcoming bond refinancing included:
- Effectively communicating Lenbrook’s financial strengths to Fitch to secure an investment grade rating
- Developing the optimal redemption strategy for the Series 2006B Bonds, which were advance refundable and structured as a bullet maturity
- Providing financial flexibility to support the acquisition of additional property in furtherance of the Community’s long-term strategic expansion efforts.
To successfully achieve Lenbrook’s objectives for the Series 2016 Bonds, Sims worked closely with Management to develop a comprehensive presentation that communicated the organization’s financial stability and benefits associated with the anticipated refinancing. Upon completion of the presentation, Sims organized a rating agency site visit in which Management had the opportunity to meet Fitch analysts and answer important questions regarding its financial condition and key structural features of the refinancing. Lenbrook’s impressive financial recovery and existing credit strength resulted in the assignment of a BBB Fitch rating with a stable outlook, despite the organization’s plans to commit $5.3 million of cash on hand to purchase adjacent condominiums as part of its future expansion efforts.
Building upon the successful rating agency outreach strategy, Sims then developed a comprehensive marketing and distribution campaign for the Series 2016 Bonds expected to maximize investor participation by leveraging the newly-obtained BBB rating. In particular, Sims targeted many of the nation’s largest institutional investors, who are active buyers of senior living bonds, in addition to a broad base of retail investors encompassing the Sims Private Client network and existing Community residents. Similar to its presentation to Fitch, Sims worked with Management to conduct an institutional investor conference call, as well as retail investor presentations to Sims’ Private Client team and Lenbrook residents. With respect to bond structure, Sims employed several features that accommodated institutional and retail investor preferences, including premium bonds and serial and term bond maturities. Moreover, to reduce the annual debt burden created by the Series 2006B Bonds, which featured a bullet maturity in 2042, the refinancing of this series would be structured with a matched-maturity level-debt service amortization schedule which enabled Lenbrook to deleverage further.
Finally, in an effort to maximize debt service savings associated with the refinancing, an important consideration was the redemption strategy for the Series 2006B Bonds. Because an advance refunding of this series generated significant negative arbitrage, Sims contacted existing bondholders to determine whether it was more cost effective to tender these bonds. Although it was ultimately confirmed that a tender of the Series 2006B Bonds would be more expensive than an advance refunding, Sims’ analysis provided Management with valuable assurance that an advance refunding of the Series 2006 Bonds was the best redemption strategy in the prevailing market.
Sims and Lenbrook prepared to price the Series 2016 Bonds during the first week of October. Despite a record 53 consecutive weeks of bond fund inflows at the time, the tax-exempt market was pressured by a substantial increase in new issuance volume, which constrained investor liquidity. As such, the fixed income markets experienced a steady erosion in prices, with municipal bonds following Treasuries on a path to higher yields that was expected to continue for several weeks. Despite highly challenging market conditions, the effectiveness of Sims’ comprehensive marketing and distribution strategy resulted in a successful sale of the Series 2016 Bonds, with $6.3 million of debt placed with retail investors and $80 million placed with institutional investors. The Series 2016 Bonds generated approximately $14 million of NPV savings, or nearly 15% of bonds refunded; moreover, Sims maximized Lenbrook’s future refinancing flexibility by structuring the bonds with a first call date in seven years (2023) compared to the industry standard period of 10 years.
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