LifeSpire and Sims Partner Again, Creatively Persevere and Pivot through Volatile Market to Finance Key Growth Initiatives
“We began these projects in an economic environment with significant uncertainties. The H.J. Sims team did an extraordinary job helping us navigate through that environment on this financing. Tom and David from H.J. Sims worked with the LifeSpire team, our developer, feasibility consultant (Clifton Larson Allen) and other partners to put together a capital structure that would create certainty of execution for the financing, and thus for our projects. Once we ensured project financing was secured, they looked to optimize the debt structure to maximize our return metrics on the projects. They communicated closely with FitchRatings, resulting in our BBB rating being affirmed despite the increase in leverage. We were pleased to have the expertise, guidance and customized process Sims brought to our unique situation, and the outcomes were very advantageous for our future growth plans.”
– Jonathan R. Cook, President & Chief Executive Officer
Partnered Right®
LifeSpire of Virginia (“LifeSpire”) consists of five owned and operated life plan communities across the Commonwealth of Virginia: The Chesapeake (Newport News, VA), The Culpeper (Culpeper, VA), The Glebe (Daleville, VA), Lakewood (Richmond, VA), and The Summit (Lynchburg, VA). All communities, except The Summit, provide the full continuum of care to its residents, from independent living to skilled nursing. The Summit provides independent living and assisted living to its residents.
Sims assisted with LifeSpire’s acquisition of The Summit in 2021. Sims developed a creative finance plan for the acquisition and given the attractive borrowing environment, also allowed LifeSpire to refinance its bank debt, removing put risk and achieving robust debt service savings. The bond component featured a 6-year call feature and a yield on the 30-year maturity of 1.95%.
Shortly after the acquisition, LifeSpire began master planning efforts at The Summit to add cottages, hybrid homes, memory support, and amenity spaces. Simultaneously, LifeSpire was moving forward with a cottage development at The Glebe.
The efforts were launched in a very capital constrained environment. The rapid pace of Federal Reserve Rate increases caused bank participation in the market to drop to paltry levels, while the same phenomenon led to significant outflows from bond mutual funds.
Nonetheless, LifeSpire’s management team was determined to move forward with the projects. Given the volatility in both the commercial bank market and the fixed rate bond market, LifeSpire requested proposals from several financing sources. LifeSpire received a proposal from an institutional investor that offered a unique and attractive financing structure and most importantly, had capital to deploy at a time where more traditional sources (banks and mutual funds) did not. LifeSpire selected HJ Sims to represent them and lead efforts to review, structure, and optimize the financing package. LifeSpire and Sims collaborated with a “roll up your sleeves” approach to guarantee financing certainty.
Structured Right®
In the fall of 2023, Sims began reviewing the institutional investor’s proposal to determine if there were ways to optimize the structure for LifeSpire’s upcoming projects. The financing structure included a commitment to fund all of the upcoming master planned projects through a series of fixed-rate bonds that could be drawn over time to reduce interest expense. The structure was valuable to LifeSpire, as it ensured that its projects could be funded in a volatile market. The structure also included a short call feature, which meant that the debt could be refinanced in three to five years in a less volatile market. However, the main tradeoff with the structure was that it came with a higher cost of capital, stricter covenants than LifeSpire’s current master trust indenture (MTI), and a higher level of up-front fees. Sims ran several plan of finance scenarios to determine if this structure provided a large enough benefit to forgo using the typical funding sources for not-for-profit senior living expansions: fixed rate bonds and bank debt. The analyses showed that there was a benefit to using the draw-down structure, however, it may not be large enough to utilize for all of the organization’s future projects. Sims worked with LifeSpire to negotiate the terms of the financing to lower the cost of capital and upfront fees, and improve the covenant structure to conform more to LifeSpire’s MTI. The institutional investor agreed to many of the changes, which led LifeSpire’s Board to approve using the structure for a portion or all of the upcoming projects. Nevertheless, the Board also wanted to solicit commercial banking proposals as a complementary source of funding for the projects, as the previous analyses showed a benefit to incorporating bank debt alongside the institutional capital based on market conditions at the time.
In the spring of 2024, Sims launched a bank solicitation package to fund the projects at The Summit and The Glebe, requesting approximately $105 million in financing. Despite the turbulent bank market, LifeSpire received seven strong proposals, with some banks committing upwards of $50 to $75 million without requiring a full banking relationship or loan-to-value thresholds.
Leading up to and during the bank solicitation, the fixed rate bond market improved significantly in part due to expectations around Federal Reserve rate cuts following lower inflation readings. With the bank proposals in hand and an improved fixed-rate bond market, Sims updated the plan of finance analyses generated previously to determine the most cost effective and flexible structure for LifeSpire. Ultimately, the analyses showed that the bond market’s improvement eliminated many of the benefits of using the draw-down fixed rate bond structure. Further, the benefit of using bank debt was diminished, as short-term rates remained high and long-term swap rates were not significantly lower than fixed-rate bond rates for investment grade credits like LifeSpire. The organization also had its Series 2014A Bonds outstanding that were callable at 6% interest rate. Based on current interest rates, refinancing this debt would generate significant savings using fixed-rate bonds. However, these savings would not be realized under the draw-down fixed rate bond structure due to the higher cost of capital.
Given the changes in the markets, LifeSpire went back to the institutional investor and asked if any improvements could be made to the original terms. The investor was able to make some changes to improve the terms for LifeSpire, however, the cost of capital was higher than the bond market at the time. LifeSpire decided to move forward with an all fixed-rate bond structure to fund the projects at The Summit and The Glebe, as well as refinancing its outstanding Series 2014A Bonds.
Given the size of the overall financing, LifeSpire was cognizant of the potential impact to its BBB (Fitch) credit rating. To determine the potential effect on the credit rating, LifeSpire worked with Fitch to utilize their Rating Assessment Services (RAS) tool, which allowed the organization to present up to three plan of finance scenarios that Fitch would rate. The main concern with the large debt issuance was the impact to LifeSpire’s cash to debt ratio, which would decline following the issuance of debt. LifeSpire also had potential projects at The Summit and Lakewood communities that might further pressure the rating in the future. LifeSpire presented three scenarios: 1) a base case, 2) a plan of finance that included additional reimbursement for previous capital improvements to improve its cash to debt position, and 3) a scenario that included funding additional projects at The Summit and Lakewood in two to three years. The results of the RAS showed that there would not be a large impact to the credit rating under the scenarios, which provided additional confidence in LifeSpire’s selection of an all fixed-rate bond plan of finance.
Executed Right®
With the plan of finance selected, Sims worked with LifeSpire to pull together the working group to finalize legal documents and the issuer approval process. Heading into the fall, Sims and LifeSpire recognized the potential impact the upcoming Presidential election could have on the capital markets. Sims targeted entering the market by the last week of September to ensure the bonds would be priced well ahead of the election. LifeSpire and the working group met this timeline precisely on schedule and printed the preliminary official statement (POS) on October 4th for the $166 million BBB-rated financing.
In the weeks following printing the POS, the ten year treasury rate increased significantly. Initially, the fixed-rate bond market did not follow the direction of the treasury markets. However, municipal bond interest rates eventually rose, with the MMD curve increasing between 40 and 45 bps over a four-week period. While interest rates were rising, some institutional investors also began to request certain changes to the structure of the financing. The main requested change was the inclusion of a debt service reserve fund, despite LifeSpire’s BBB credit rating. Further, LifeSpire’s previous BBB rated financing in 2021 did not include a debt service reserve fund. Sims pushed back on this change and moved forward with pricing the bonds without a debt service reserve fund. In the three days leading up to pricing, the municipal index rose 6, 7, and 15 basis points, respectively. However, the election loomed posing further uncertainty. Sims underwriting team looked out into the market on the morning of Thursday, October 24th and saw a more positive tone than the prior three days. Much the way the transaction started 15 months prior, Sims and LifeSpire, along with co-manager Davenport & Company, took a strategic approach to build the book of business with accounts to ensure financing for these critical projects. LifeSpire’s Bonds were incredibly well received and garnered orders from 33 institutional accounts, including over 12 new buyers. Sims was able to make downward adjustments in yield in certain maturities due to the bonds being oversubscribed.
Financed Right®
On November 7, LifeSpire closed on $168,825,000 of Series 2024 Bonds. The long-terms bonds were sold with a 7-year call feature at a 102% premium, as well as a 4.95% true interest cost. LifeSpire also received $550k in annual savings on the refinancing, which represented 17.5% in net present value savings as a percentage of the refunded bonds.
For more information, please contact:
Tom Bowden
804.613.3280
David Saustad
240.207.1202