| California-Nevada Methodist Homes |
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“Sims did more for us than just fund our Project. They listened to our concerns and goals and took those factors into account in planning the financing. They identified and explained different financing options and took the time to educate Management and the Board and to answer our questions. Sims’ approach towards organizing and leading the financing process really helped us organize the development process and successfully kept everyone moving towards our goals. Sims leadership was the key to the successful development and financing of our Project.”
Robert Hubbard challenge Founded more than fifty years ago, California Nevada Methodist Homes (CNMH) is a nonprofit public benefit corporation based on Oakland, California. CNMH operates two CCRCs, Forest Hill Manor (FHM) in Pacific Grove and Lake Part Retirement Residence (LPRR) in Oakland. Herbert J. Sims & Co., Inc. began informally working with the executive team at CNMH in 1999 calculating financial ratios and benchmarking the results against investment grade medians, explaining and evaluating various financing choices and discussing the development and financing process. In 2003 Sims was formally hired as the investment banker for the proposed financing of an expansion project at Forest Hill Manor and refinancing of an expansion project at Lake Park Retirement Residence. forest hill manor - description
 Additionally, during the 1970’s CNMH acquired a 51-bed nursing home within a mile of Forest Hill Manor and began providing nursing care for its life care residents in the standalone nursing facility. The nursing facility operated successfully until the 1990’s. Then operating costs, declining private pay census and inadequate government reimbursement made it difficult to even break even. forest hill manor - solution The goals for the Forest Hill Manor Project are to improve the economies of scale by adding independent living units and to offer the full continuum of services, including skilled nursing care on campus. The Project includes the construction of a 4-story building which will contain 24 independent living apartments, 18 assisted living rooms and 26 skilled nursing beds and construction of 2 2-story buildings containing 8 additional independent living cottages. Once the Project is completed FHM will consist of 8 independent living cottages, 90 independent living apartments, 18 assisted living rooms and 26 skilled nursing beds and resident amenities. lake park - description Similarly Lake Park Retirement Residence was built in the mid 1960’s. Located in downtown Oakland, Lake Park Retirement Residence offers individuals independent living, assisted living and skilled nursing services in a 13-story high-rise. The resident population at LPRR is as diverse and active as the vibrant urban neighborhood in which it is located. LPRR is financial strong. In 2002, CNMH determined that it needed to add skilled nursing beds at LPRR in order to serve the needs of the residents. A $4.6 million nursing center expansion project was completed in June 2004 and was funded with donor contributions, existing cash reserves and draws on a line of credit. lake park - solution After evaluating historical and projected financial and operational results and summarizing the qualitative and quantitative characteristics of the Organization and the Project it was determined that the preferred plan of finance would be tax-exempt, variable rate bonds enhanced with a letter-of-credit. This plan of finance would allow CNMH to access a low cost of capital during construction and fill-up and provide flexibility for a refinancing within a few years of project completion. It would also permit CNMH to prepay the principal on the bonds without penalty. However, it also exposed the Organization to certain risks (specifically letter-of-credit renewal risk, interest rate risk). As the development of the project moved forward, Sims and CNMH pursued this structure. implementation During the course of development the project experienced a number of delays related to local and state zoning permits and approvals. With these delays Sims continued to monitor the capital markets and the financial analysis of the Organization and Project. When Sims was hired in 2003 and throughout the development process until June 2005, the general market expectation was that long-term rates would rise before the Project was ready to be financed. The expectation that long-term fixed rates would not be favorable at the time of financing was one of the primary reasons why the initial plan of finance was determined to be variable rate. However, in June 2005, Sims reevaluated the assumptions regarding current and projected interest rates and determined that long-term fixed rates were still very favorable. After discussions and evaluation of financial data CNMH decided to pursue a long-term fixed rate financing enhanced with bond insurance from Cal-Mortgage (a division of the California Office of Statewide Health Planning and Development). Sims approached Cal-Mortgage regarding the transaction in July 2005 and in September 2005 (less than 60 days) had received approval to provide bond insurance for the transaction. Not only did Sims complete this process with Cal-Mortgage in record time, but successfully negotiated modifications to the standard Cal-Mortgage terms − specifically, funding the debt service reserve fund with corporate cash rather than bond proceeds, 30-year maturity vs. 25-year maturity, 5-year intermediate term bond with 3-year call provision to be repaid with entrance fee proceeds, and more flexible investment contract terms. Sims then secured a private credit rating for the transaction from FitchRatings which resulted in a net savings on the insurance premium of more than $200,000. result The Project was unexpectedly delayed again, and construction costs jumped dramatically from the budgeted amount. These changes resulted in a substantial increase in the project budget and the par value of the financing. Sims worked with management and the project team to evaluate the financial impact of the increase in construction costs and the delays in the project schedule. This information was presented to the board, who reaffirmed its decision to proceed with the Project. Sims then secured an increase in the Cal-Mortgage and CHFFA approval limits. Consistent with Sims’ comprehensive approach to structuring a transaction, the Company explained various investment options for the trustee-held bond proceeds. The board determined that a guaranteed investment contract with full flexibility would be the most appropriate way to invest the trustee-held bond proceeds. Sims developed the bid form, secured Cal-Mortgage approval of the proposed terms of the investment contract and conducted a competitive bidding process for the investment contract. The result of the bidding was a guaranteed investment contract rate that is only 0.03% less than the arbitrage limit on the bonds. The final transaction consisted of $42,280,000 tax-exempt, long-term fixed rate bonds with an average interest rate of 4.93%. The bonds were sold to institutional and retail investors and were nearly 6 times oversubscribed, a clear reflection of the strength of the transaction, financing structure and interest rate. CNMH now has a stable capital structure, no future interest rate risk and a true interest cost of 4.88%. This will provide a firm foundation upon which the Organization can continue to prosper and provide services, programs and security for its residents for many years. |
