Market Commentary: Location, Location, Location

by Gayl Mileszko

Location, Location, Location

There are three things that matter in real estate: location, location, location. Such is the cliché that has been used by property sellers for nearly a hundred years. It was first attributed to Lord Harold Samuel, a British surveyor and developer but has taken on new meaning over time. Locations determine not only land value but quality of life. Where you live has a major impact on how you live and the time you have available to meet your needs and pursue your interests safely and enjoyably with easy access to shopping and recreation, convenient distances to school and work, proximity to family and friends, and favorable economic, political and weather climates.   Location is important in siting our weddings and vacations, and it has a major impact on local and national economies for places selected to host major national and international events. This year, the SuperBowl will be played in Las Vegas. The Democratic National Convention will be held in Chicago, the Republican National Convention in Milwaukee. The 50th G7 summit will take place in Fasano, Italy. And seven years ago, the International Olympic Committee awarded Paris the Olympic Games to take place in Paris and environs this coming July and August.

Executing on The Vision

We at HJ Sims understand that those with a vision for educating young minds or caring for older Americans must take great care in scoping out the best locations to carry out their missions for charter schools and senior living communities.  We often help with the process of commissioning feasibility studies, preparing financial projections, engaging environmental and property assessors, applying for certificates, charters, and permits with local and state regulators, monitoring construction progress, recruiting board members, managers and staff, and obtaining commitments from a sufficient number of students and families or prospective residents. We are acutely aware that it often takes years to put a shovel in the ground or get to the point of signing a lease before feeling the excitement of opening the doors for the first time.

Keeping the Records

Last year, we saw a number of nonprofit senior living providers and charter school operators come to the bond market to help finance their start-ups, or fund or refinance their expansions and repositioning’s. There is no official recordkeeper of these kinds of deals, although the trade press and our trade organizations do a pretty good job of reporting on the larger and most innovative projects. We collect our data from Bloomberg, which categorizes each maturity of publicly offered and privately placed bonds with CUSIPs and sector codes, to compile summaries during the course of the year. In most cases, we are able to refine or extract additional data using Refinitiv’s Municipal Market Monitor and the Electronic Municipal Market Access (EMMA) platform of the Municipal Securities Rulemaking Board. We are pleased to share a summary of this data with you today.

Senior Living Financings Last Year

In 2023, excluding all bank debt, the senior living fixed rate bond sector saw an estimated 32 financings with par value of $1.88 billion along with about 28 reported drawdowns totaling $136.7 million for a combined par value of $2.017 billion. Non-rated deals comprised 75% by number, and 40% by par. S&P rated 5 transactions totaling $215.7 million; Fitch rated 10 credits with total par of $989.6 million. Without weighting by size, the average final bond maturity was 2041, the average coupon was 6.195% and the average yield was 6.208%.  Issuers came from 19 states and there were 11 underwriters and placement agents guiding borrowers. The largest transaction of the year was a $423.4 million Virginia Beach Development Authority financing sold for BB+ rated Westminster Canterbury on Chesapeake, and among the smaller-sized issues was a $9.9 million non-rated financing for Orange City Area Health System in Iowa.. HJ Sims was pleased to assist Clark Lindsey Village in Urbana with a non-rated Illinois Finance Authority drawdown issue structured with advances of up to $45 million and interest only through 2032. We also brought $111.7 million of BBB rated improvement and refunding bonds for Lifespace Communities. In addition, $75.5 million of non-rated forward delivery bonds that we sold for the Cary, North Carolina Searstone Retirement Community in October of 2021 settled as planned 498 days later on March 3, 2023 — the longest forward period for a non-rated organization to date in the senior living sector. Searstone realized substantial benefits by pricing the 2023 bonds in the lower interest rate environment that prevailed in 2021. In addition, the investment of the defeasance escrow into state and local government securities (SLGS) generated over $900,000 of investment earnings that were not anticipated at the time of the original financing.

Charter School Financings in 2023

The municipal market saw $783.4 million of pooled certificate and revolving fund charter school financings by the Public Finance Authority and the Arizona Industrial Development Authority in 2023. Excluding these three pools, there were an estimated 96 financings for standalone and network schools with total par of $2.12 billion, including 10 drawdowns. 56 deals were non-rated and comprised 56% of total par. 19 transactions were rated BB and constituted 17% of combined par.  S&P rated 23 of these charter schools and Moody’s rated 18. The average final maturity (not weighted by size) was 2052, the average coupon was 6.343% and the average yield was 6.522%.  Issuers came from 21 states. The largest transaction was a $141.5 million non-rated sale for a system of Pre-K-12 schools in Arizona, North Carolina and South Carolina; the smallest was a $2.4 million BB+ rated revenue bond issue in Texas. Twelve underwriters were active in this space last year, including HJ Sims. We were one of a handful that underwrote or placed more than 10 bond issues and (excluding drawdowns) and we are proud to have had the largest number of non-rated charter school bonds last year (11). In total, HJ Sims assisted 12 charter schools in obtaining market access last year; one had the AAA rating derived from the state Permanent School Fund Corporation’s guarantee. It was a privilege for us to help obtain $265 million of financing to support the proud missions of Renaissance Charter School, The Florida Charter Educational Foundation, Northwest Classical Academy, Pathways to College, the Southwest Charter Foundation, Lakewood Ranch Preparatory Academy, Corvian Community School, Scintilla Charter Academy, Orenda Education, Capital College and Career Academy, Northeast Ohio Classical Academy and Southeast Ohio Classical Academy.

Market Movers

The municipal bond calendar for this week and next has four charter school financings and three senior living drawdowns on tap. Unlike, the corporate bond market, which has seen more than $106 billion of sales, new muni issues are off to a rather slow start this year. Two weeks into 2024, we have only seen $11 billion of public offerings, down 93% from this point in 2023. Granted, there has been a lot to distract borrowers, investors and traders since the holiday season ended. We are returning from our travels, paying bills, getting back to our school and work routines, and taking in the official start to the 2024 campaign season, starting with the Iowa caucuses. Fourth quarter corporate earnings reports are just beginning to be released. We are closely following the economic data coming out on inflation, jobs, sales, manufacturing, and mortgage rates, and listening to all the remarks being made by central bankers regarding their individual thought processes and rate expectations, but it is pretty much impossible to follow what our high-level U.S. corporate and governmental folks are discussing in Davos where roughly 2,800 gather for the 54th World Economic Forum from January 15-19.  New developments in crypto regulation and artificial intelligence make us uneasy while offering seemingly unlimited opportunities.  Financial markets do not mind an unproductive Congress or divided government, but we do not like the brinksmanship and paralysis that imperils our sovereign ratings and delights our enemies. We remain concerned that obscure rules permit small but vicious groups of elected officials in Washington to keep the majority from coming to agreement on short term funding solutions never mind long-term fixes to our deficit and debt and national border security situations. We are wary of our growing involvement in events overseas, particularly in the Red Sea, Israel, Taiwan, and Ukraine—and we are alarmed by Iran, which is now directly launching missile attacks. We have yet to digest the implications of new reports that Chinese scientists are experimenting with a mutant Covid strain affecting the brain that is 100% lethal. So much is highly unsettling.

Market Data

Amid all the uncertainties, bond market volatility as reflected in the MOVE index has fallen seven percent, while stock market volatility as reflected in the VIX index is up 2% since the start of the year. Performances across asset classes are mixed as of the close on Friday, January 12. Going into the Monday holiday, the S&P 500 index was up 0.3% and Bitcoin prices increased 4.5%. The Dow and Nasdaq were down 0.3% and the Russell 2000 fell 3.8%. Oil prices climbed 1.4% to $72.68 a barrel while gold prices fell by 0.7% and silver prices sank 2.5%. In the bond market, only the 2-year Treasury had rallied with yields falling by 10 basis points to 4.14%. The 10-year Treasury yield at .93% was up 6 basis points year-to-date, and the 30-year was 15 basis points higher at 4.17%. The 10-year BAA corporate benchmark yield at 5.87% increased 8 basis points since December 31.  On the tax-exempt side, the 2-year AAA muni general obligation bond benchmark yield rose 10 basis points while the 10-year at 2.28% was flat and the 30-year yield at 3.45% was 3 basis points higher.  Our analysts, traders and bankers closely track all the weekly flows into and out of mutual funds, exchange traded bond funds, and money market funds. So far this year, at least through the week ended January 10, money market funds have taken in $61.3 billion and now boast an astonishing $5.9 trillion of assets, all available for re-allocation as investors become more comfortable with the direction of rates, prospects for income and returns. Equity mutual funds have seen outflows for 100 straight weeks, while municipal bond funds have seen the biggest inflows ($978 million) in 23 weeks. So far this year, high yield muni funds have taken in a net of $181 million and taxable bond ETFs have added a total of $10.43 billion.

The Importance of Being in the Right Place with the Right Adviser

At HJ Sims, our bankers, advisers and brokers are on top of current market issuance and pricing trends, and we endeavor to keep you posted on the performance of all the asset classes. As you continue to hone your financing and investment strategies for this new year, we invite you to reach out to your HJ Sims representative for guidance on market access as well as for our recommendations on suitable opportunities for higher income and returns. The current environment is, once again, one of uncertainty. Many of us are dealing with arctic blasts and below freezing temperatures, and we encourage you to stay warm and get in touch so that we can help refine your strategies for this first quarter, the coming year, and beyond.  Ray Kroc, the chief executive responsible for turning McDonald’s into the most successful food corporation in the world by revenue at one point was sometimes referred to as the “Henry Ford of the fast food industry”. He left us with what has been described from outside fans as a management style featuring “HOPE”:  Honesty, Organizational skill, Positive thinking, and Enthusiasm. He also shared with billions a great message about how location is key to success: “The two most important requirements for major success are: first, being in the right place at the right time, and second, doing something about it.”  We at HJ Sims look forward to helping you find the right time and the right place for your successful market moves in 2024 and helping you to execute on your goals.