HJ Sims Successfully Completes a $68 Million, 3-Tiered Acquisition Financing of Three Separate Senior Living Communities in East Texas at a 6.95% Capitalization Rate
“We have been working with HJ Sims on preferred equity and debt solutions for several years. We had a very complicated structure on a potential acquisition and were struggling with finding a solution. HJ Sims helped educate us on bond financing and how that might be a good fit. The team at HJ Sims dug in and helped us put together the necessary information to evaluate whether that was the right solution. The team then helped us enter the markets and were able to navigate the public markets and execute on exactly the deal they had presented to us months earlier. In almost 20 years of banking, investment banking and investing, this was the most complicated deal I have ever worked on. There would have been no way to get this deal closed without the expertise of HJ Sims and their associates. Their ability to assess the situation and navigate to close was impressive. I don’t believe there would have been another group that would have been able to execute on this deal. More importantly, my ability to trust that I was getting strong advice and transparent answers was paramount to us being able to continue the process. I don’t think other groups would have had the fortitude or the creativeness to get to the finish line. Although we already had a strong relationship with HJ Sims prior to this transaction, this only solidified that they will be our go to group for a long time. We no longer look at them as a transactional investment bank, but truly as our financial advisors and partners.”
– Jay Dempsey, Co-Founder/Co-Managing Partner, Civitas Senior Living
Quality Senior Housing Foundation of East Texas, Inc. (“QSHFET”) is a Texas 501(c)(3) corporation, formed on September 13, 1999 for the purpose of purchasing and developing assisted living, memory care, and other senior housing facilities. QSHFET served as the borrower and the acquirer of the three senior living assets described.
Civitas Senior Living (“Civitas”) is a Ft. Worth, Texas based for profit owner/operator of senior living communities in Texas, Florida, Oklahoma, New Mexico, and Arizona. Founded in 2012, Civitas has over 100 employees at its corporate office and manages over 30 senior living communities. In 2018, HJ Sims provided $5.85 million in preferred equity to Civitas for the development of a new community in Red Oak, Texas.
Since 2016, Civitas has managed three separate senior living communities across East Texas, including Arabella of Longview (“Longview”), Arabella of Athens (“Athens”), and Autumn Wind Assisted Living (“Winnsboro”) under a triple net lease with a real estate investment trust (“REIT”). The lease terms include an annual rent escalator. The three communities consist of a total of 380 units, including 182 independent living units, 155 assisted living units, and 43 memory care units. As of June 30, 2019, Longview was 98% occupied, Athens was 96% occupied, and Winnsboro was 98% occupied. The three communities have consistently had strong occupancy and are stabilized assets.
HJ Sims has actively marketed the Standard and Poor’s (“S&P”) affordable housing bond financing program as a financing method for non-profit senior living communities to acquire existing assets with tax-free bonds. The S&P program can often deliver capitalization rates that are competitive with conventional deals in secondary and tertiary markets. Furthermore, Texas statute allows for a property tax exemption for nonprofit senior living assets. Therefore, the property taxes can be added back to allow additional debt capacity. Due to these reasons, the three East Texas assets were an attractive candidate for this program. The principals of Civitas connected with QSHFET, who was interested in the assets and willing to allow Civitas to continue as the operator post-acquisition. Civitas presented this disposition option to the REIT and they accepted the offer and were willing to terminate the triple net lease.
During the course of the financing, HJ Sims facilitated all conversations with the S&P analysts and presented the strongest case to result in a favorable rating determination. The final structure was comprised of 100% financing and required no cash contribution from either the borrower or the operator at closing. QSHFET issued $72.320 million of all rated fixed rate bonds to acquire the three senior living assets, comprised of $41.455 million of first tier bonds rated BBB, $21.895 mm of second tier bonds rated BB+, and $9.980 mm of third tier bonds rated BB. Only the second tier and third tier bonds had debt service reserve funds sized for 50% of maximum annual debt service and 100% of maximum annual debt service, respectively.
The preliminary official statement (“POS”) posted on August 2, 2019. The anticipated pricing date was August 21, 2019. In between posting the POS and the planned pricing, however, S&P significantly downgraded six outstanding S&P Affordable Housing bond issues due to ongoing credit concerns. This created a significant and unanticipated distraction for the market, making it very challenging to sell this structure even to institutional investors who had previously invested in such bond issues.
Because of an outstanding marketing effort by the HJ Sims team, 13 institutional buyers for the bonds were found. Additionally, HJ Sims increased the breadth of distribution by securing $3.485 million orders to its Private Client Group. Despite the market challenges, the financing generated a purchase price of $68 million for the assets, which was a 6.95% capitalization rate.
With HJ Sims’ leadership in collaboration with the full QSHFET working group, the acquisition was successfully completed and resulted in the following results: 1) sale achieved very competitive capitalization rate in challenging market conditions; 2) triple net lease that included aggressive escalators was terminated; 3) Civitas can continue to operate the assets; and 4) ability to apply for property tax exemption to improve credit metrics.
For more information on how Quality Senior Housing Foundation of East Texas, Inc. was Financed Right® by HJ Sims, please contact: