Amid Sector Uncertainty, Sims Provides Capital for Repositioning
PA-LTC owns two skilled nursing facilities in Pennsylvania: Linwood Nursing and Rehabilitation Center (“Linwood”), a 102 licensed bed nursing facility located in Scranton, Lackawanna County and Edgehill Nursing and Rehabilitation Center (“Edgehill”), a 60-bed nursing facility located in Glenside, Montgomery County. Both communities are managed by Genesis Healthcare. PA-LTC is an affiliate of The Guardian Foundation (“Guardian”), a not-for-profit organization that owns and/or operates 36 non-profit senior living and healthcare facilities in five states with over 1,750 resident units/program participants. Sims has maintained a 15 year relationship with the Guardian, having completed multiple public bond and HUD financings for affiliate companies.
Since Guardian’s acquisition of the Linwood and Edgehill facilities in 1994, both had experienced strong and stable occupancy serving a predominately Medicaid-reimbursed resident mix. However, in more recent years, the age of the Linwood facility, particularly the 46-bed “west wing”, originally constructed in 1915 as a hospital for contagious diseases and converted to a skilled nursing facility in 1958, began to face increasing marketing challenges. Among the challenges were undersized resident rooms, lack of in-room bathrooms and limited accessibility to residents with mobility limitations, among other issues. As part of an extensive master planning process, PA-LTC considered undertaking major renovations of the west wing as well as demolition and full replacement; PA-LTC ultimately decided to pursue full replacement to achieve a complete facility modernization. Financing of the project in summer-fall 2017 coincided with optimum timing to refinance PA-LTC’s outstanding Series 2007 Bonds (with approximately $6.1 million total outstanding) which were currently callable in July 2017.
HJ Sims was engaged by PA-LTC in April 2017 to undertake an expedited assessment of financing options for the Linwood facility replacement project and refinancing of PA-LTC’s existing debt.
Sims considered multiple tax-exempt financing and structuring options including: (i) variable/fixed rate bank financing (and related interest rate hedging options); (ii) fixed rate HUD financing, via Sims’ affiliate Sims Mortgage Funding and (iii) fixed rate bond financing via a public offering.
Sims assessment of financing options included consideration of several financial metrics focused on PA-LTC’s debt capacity. These included debt service coverage, days cash on hand and loan-to-value. Given the economics of the project, particularly the significant required capital investment, coupled with limited incremental net revenue to be generated from what was a replacement (vs. expansion) project, there were questions about the ability to achieve the maximum loan-to-value metrics required under bank and HUD financing. Ultimately, PA-LTC elected to pursue fixed rate bond financing, which had no loan-to-value requirements and would provide the greatest flexibility in structuring other elements of the financing as well as financial/operating covenants.
While loan-to-value was not factor in bond issuance, PA-LTC’s debt capacity was bounded by debt service coverage and liquidity (days cash on hand) thresholds. Sims worked with PA-LTC and feasibility consultant, Baker Tilly, through several iterations of financial forecasting. Beyond normal financial modeling and scenario analysis, this included assessing the impact of a reduced west wing census (lowering the number of licensed beds from 102 to 90) to allow for demolition to be followed by the construction and fill-up of the replacement facility and beds.
An additional challenge was presented by the planned transition in Medicaid reimbursement in Pennsylvania, from fee-for-service to managed care, and what was anticipated to be a Medicaid rates set based at current levels coupled with no increase for the first three years of the new reimbursement program. Based on these factors, PA-LTC committed to provide a significant amount of equity ($4 million) to supplement the proposed bond financing. This was further supplemented by a Guardian’s commitment to provide $1 million of subordinate debt to round-out the capital structure.
Total financing, combining funding for the Linwood project and refinancing, was ultimately comprised of $12.5 million of fixed rate bonds supplemented by $4 million of PA-LTC equity and $1 million of subordinate debt from Guardian. Proceeds were used for (i) the current refunding of the outstanding Series 2007 debt; (ii) the demolition of one wing of the Linwood Facility and the construction, equipping and furnishing of a new 2-story, 46-bed replacement wing; (iii) the funding of a debt service reserve fund for the Series 2017 Bonds and capitalized interest on the Series 2017 Bonds; and (iv) the payment of certain costs of issuing the Series 2017 Bonds.
Sims structured the bonds primarily with term bond maturities and fixed rates with a 30 year amortization and final maturity. The bonds carry a 7-year call at 103% premium declining to par in 10 years. Additionally, at the request of PA-LTC, Sims incorporated a $500,000 serial bond maturity with a 3-year optional call at a 101% premium. This special call provision was structured to enable PA-LTC to repay a portion of the issue (up to $500,000) with unused construction proceeds, if available.
The small size of the issue and the stand-alone skilled nursing profile of PA-LTC reduced the amount of institutional investor interest in the offering. Accordingly, Sims focused its bond marketing efforts on a subset of institutional investors, one of which was the single holder of the Series 2007 Bonds being refunded, combined with retail investors. Retail investor demand for the bonds was strong and balanced what might otherwise have been demand dominated by a single or small number of institutions and upward pressure on interest rates. Ultimately, Sims sold 62% of the issue institutionally and 38% of the issue to retail investors – the participation of retail investors ultimately yielded a reduction in average interest rate of .25 – .375% relative to a fully institutional sale.
With the assistance of Sims and the financing working group, PA-LTC was successful in completing the financing in November 2017 – allowing completion of the demolition process followed by commencement of construction. It secured committed long-term fixed rate financing, for its new capital needs along with refinancing, at an attractive average interest rate of 5.25%.
Sims served as Underwriter for the 2017 financing. For more information, please contact: