HJ Sims Completes $264.6 Million Expansion and Forward Refundings of Four and Nearly Seventeen Months with Long-Time Client, Searstone, Using Fixed-Rate Bonds and Entrance Fee Principal Redemption Bonds
Samaritan Housing Foundation, Inc., dba “Searstone” is a life plan community located in Cary, NC that opened in 2013. The Community currently consists of 131 independent living apartments, 38 independent living estate homes, 14 assisted living units, and 25 skilled nursing units. HJ Sims provided the start-up financing for Searstone in 2012, along with three subsequent financings leading up to financing The Highview at Searstone expansion project (the “Expansion Project”). In 2016, HJ Sims financed $8.0 million of tax-exempt fixed-rate bonds to expand the health center by 15 beds and to acquire and control land for the Expansion Project. The 2017 financing advance refunded the original Series 2012 Bonds and provided pre-development capital for the Expansion Project. And finally, the Series 2020 Bonds provided the remaining necessary seed capital for the Expansion Project to reach permanent financing.
The Expansion Project will fulfill the original vision of Searstone as a larger campus that was downsized due to economic and market conditions following the Great Recession, approximately doubling the number of units at Searstone, with 152 independent living apartments, 29 assisted living units, including 14 specialized memory support units, and 24 skilled nursing units. It will also provide new dining venues, a multi-purpose room with capacity for up to 350 people, several outdoor spaces, and renovations to the existing common areas.
The large scope of the Expansion Project has been supported by robust demand within its existing independent living units, which have consistently been near-fully occupied the last several years, as well as a strong pre-sales campaign for the Expansion Project to date, including over 80% reservations at the time of financing after approximately one year of marketing the new units.
In addition to the Expansion Project, Searstone’s financing addressed all other outstanding bonds of the organization. The 2020A and 2020B Bonds were subject to an extraordinary redemption provision allowing Searstone to redeem the bonds at par using proceeds from the Expansion Project. Additionally, the Series 2016 and Series 2017 Bonds will be refinanced at their earliest call dates in 2022 and 2023, respectively, using forward delivery refundings, which locks in interest rates of the refunding bonds that become effective upon delivery. The length of the forward delivery period to delivery of the bonds for the 2022 Bonds was approximately 4 months and the length for the 2023 bonds was approaching 17 months – the longest forward period for a non-rated credit to date in the senior living industry.
Leading up to the financing, HJ Sims assisted Searstone in engaging existing bondholders to consent to a number of changes to existing bond documents intended to provide on-market terms with respect to covenant calculation measurement and other items given the size and scope of the Expansion Project. Additionally, the inclusion of the forward delivery bonds provided an opportunity for Searstone to make further favorable changes to its Master Trust Indenture that will become effective upon delivery of the Series 2023 Bonds.
Through this financing, Searstone is also able to address its outstanding subordinated obligations that predate the original financing and have not yet been repaid. The entrance fee waterfall for the Expansion Project that describes uses of the initial entrance fees is structured to use up to the final $7 million of first generation proceeds to redeem these obligations, with anticipated financial performance post-stabilization to generate capacity for additional payments.
HJ Sims priced $264,605,000 of fixed-rate bonds in October 2021, including $180,055,000 related to the Expansion Project, $9,000,000 of forward refunding bonds to be delivered in March 2022, and $75,550,000 of forward refunding bonds to be delivered in March 2023. Despite a turbulent market leading up to and including the pricing date that saw several other healthcare bonds unable to successfully price, HJ Sims was able to achieve an average coupon rate of 4.14%. With respect to the forward delivery series, the Series 2022 and 2023 Bonds priced at a premium to the currently delivered bonds of 3-4 basis points per month, substantially less than the 5-7 basis point monthly premium for other recent financings, including several rated borrowers.
Stemming from the pre-sales velocity, HJ Sims was able to achieve attractive pricing for the Entrance Fee Principal Redemption Bonds (“EFPRBs”), with a coupon rate for the tranche redeemed at approximately 85% occupancy of 3.00%, issued at par. The other series of EFPRBs priced through that rate, with the taxable EFPRBs pricing at 2.75% to yield 2.875% and the tax-exempt EFPRBs to be redeemed at approximately 50% occupancy pricing at 2.25% to yield 2.375%. In addition, Sims was able to secure a six-year call feature at a 103% premium, declining to a par call after nine years. Collectively, the growth and refundings accomplished with the financing will position Searstone for future sustained financial success.
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