HJ Sims Partners with Mease Life to Successfully Complete Turnaround Financing
“We are grateful to HJ Sims for the incredible support, guidance and results provided in our recent 2021 Tax-Exempt Bond Refinancing. This effort was led by Tom Bowden, David Saustad and Melissa Messina and a coordinated team in order to close within a compressed timeline on December 23, 2021. This refinancing gave us the working capital and debt structure necessary for Mease Life to continue being an independent single-site Life Plan Community with plans for growth in the near future. Our residents, staff and board members are grateful for all the hard work and dedication of your remarkable team.”
– Robert T. Kelly, Vice President of Finance, Mease Life Inc.
Mease Life (the “Community”) is a Life Plan community located in Dunedin, Florida. It offers both rental and Type C contracts, and consists of 185 independent living units, 104 assisted living units, 32 memory care units, and 62 skilled nursing beds. HJ Sims was originally hired in mid-2020 to finance a planned expansion project. At the time, the community had over 200 days cash on hand and a 3.0x debt service coverage ratio. However, as the pandemic continued throughout 2020, the Community’s occupancy declined significantly across most levels of care. In addition, the Community was built in the early 1960s and required several renovations and capital improvements to keep it competitive.
To boost occupancy, the Community developed a new marketing program coupled with significant renovations to its independent living units. However, the renovation costs exceeded the entrance fees for each renovated unit, causing further depletions in cash. By mid-2021 the Community’s cash level and debt service coverage ratio were below covenant levels with its existing lender. The lender indicated they would not be waiving the covenants and required the Community to repay its loans by December 2021.
Beginning in late August 2021, HJ Sims began to identify a new lender for the Community to not only refinance its existing loans but to also finance its renovations.
HJ Sims solicited interest from several institutional bond funds to replace the Community’s existing lender. Ultimately, the Community received three competitive term sheets and selected a new lending partner that offered the lowest cost of capital, the ability to provide reimbursement funds for previous capital improvements and finance future renovations, and the greatest covenant flexibility.
Upon selecting the new lender, HJ Sims worked to negotiate a covenant package that would limit event of default scenarios and provide operating flexibility while the Community began to stabilize. During the stabilization period, missing the debt service coverage ratio covenant would not cause an event of default. Further, the days cash on hand and occupancy covenants did not contain any event of default scenarios as long as the Community retains a consultant and follows their recommendations. However, the cash loss covenant contained an event of default scenario during stabilization. The risk of an event of default is mitigated by using the trustee-held Construction Fund to pay for capital improvements. In short, any capital improvements that are funded from the Construction Fund are not counted in the cash loss covenant.
In addition to the covenant structure, HJ Sims worked with the new lender to include three years of interest only, a 35-year maturity, and a call feature that began in 2022 at 108% (down to par in 2030). The interest only period provided a bridge to stabilized occupancy to improve cash flow, while the 35-year maturity lowered maximum annual debt service. The early call feature allows the Community the opportunity to refinance this debt upon reaching stabilized occupancy to improve covenants and achieve a market interest rate. This structure, in short, would act as a bridge to the Community’s upcoming independent living expansion, which is anticipated to be accretive.
The new lender was selected in early October, leaving only a few months to close the bond financing and meet the existing lender’s deadline of December 2021. HJ Sims quickly organized a working group and assisted the Community in meeting key issuer deadlines. Despite the significantly accelerated timeline, documents were finalized and all issuer meetings were met in time by mid-December. HJ Sims was able to print the Preliminary Limited Offering Memorandum (“PLOM”), sign the Bond Purchase Agreement, and print the Limited Offering Memorandum within three business days, ensuring a fast and efficient closing five days after printing the PLOM.
On December 23, 2021, HJ Sims closed the $21,005,000 Series 2021 Bonds. The bonds were structured to include one term bond at a 7.00% interest rate. Despite the high interest rate, the Community is projected to maintain a debt service coverage ratio of greater than 2.00x over the next four years. The early call feature will also allow the Community to refinance this debt with a lower interest rate and improved covenants upon reaching stabilization. Since the financing, the Community has experienced additional gains in occupancy and is continuing its independent living renovation program as it works towards its larger independent living expansion.
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