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A $100 Million Repositioning in Seattle with Customized Financing Originally opened in 1954 and expanded throughout the 1960’s and 1970’s, Horizon House in Seattle, Washington consists of approximately 300 independent living apartments, 50 residential care and assisted living apartments and 56 skilled nursing beds. In the late 1990s the Board of Directors decided to expand and renovate the campus. The project includes the addition of 100 new independent living apartments, new kitchen and dining facilities, new fitness and wellness center, replacement of existing nursing beds and assisted living units with new state-of-the-art supported living apartments and renovation of all other resident common areas and amenities.
Beginning in June 2004, Sims participated in bi-weekly project team calls primarily focused on design, permitting, and marketing activities. Horizon House was working with a highly regarded local contractor. After the local firm was acquired by a large, international construction company, Sims advised Horizon House that the contractor would now be unacceptable to a number of letter of credit banks. letter-of-credit In early 2005, Sims began assembling the information to solicit letters-of-credit to enhance approximately $100 million in tax-exempt variable rate bonds. Twelve banks participated in site visits, and Horizon House received five agent bank proposals. After a thorough analysis, Horizon House selected the proposal submitted by Key Bank. The end result was a substantial savings to the project of m illions of dollars over the course of the financing. construction loan In addition, Sims began structured the financing to include a construction loan with a revolving feature for the short-term debt and tax-exempt bonds for the long-term debt. This structure generated an additional $2 million savings because it minimized the upfront commitment fees and created a more e fficient flow of funds and favorable costs of capital. 2-step closing Sims also structured the transaction to close in 2 phases: phase 1, the construction loan was scheduled to close August 2005 and phase 2, the tax-exempt bonds was scheduled to close in October 2005. This 2 step process allowed funding for project costs as needed through the construction loan and preserved the a dvance refunding for the Series 1995 Bonds. additional debt waiver The keys to the 2-step closing were:
Sims successfully secured the necessary agreements from the respective parties. interest rate risk management Sims extensively analyzed Horizon House’s needs to develop an interest rate hedging strategy to mitigate the interest rate risk associated with the variable rate bonds. After several months of education with the Finance Committee and evaluation of numerous options, Horizon House selected an interest rate hedging strategy that includes: $17 million natural hedge with investment portfolio, $28 million 10 year unsecured interest rate swap and $12 million 5 year interest rate cap. One of the key factors in selecting a 5 year period for the interest rate cap was the anticipated cash flow from the initial entrance fees from the project which are projected to increase unrestricted cash and investments by approximately $12 within 5 years. Thus at the end of 5 years Horizon House should have approximately $29 million in investments that provide a natural hedge against interest rate risk. Sims conducted a competitive bidding process to select the counterparty for both the interest rate swap and the interest rate cap. As a result of the competitive process, Horizon House achieved significant savings over the general market pricing for both of these contracts. Finally, Sims assisted Horizon House in evaluating investment options for the Trustee-held bond proceeds. These investment options included unsecured investment contract, repurchase agreement and laddered portfolio of government and agency securities. Sims conducted a competitive bidding process on behalf of Horizon House, and Horizon House then selected an unsecured investment contract based on two reasons: the full draw flexibility that the investment contract offered and the higher yield. As a result of this decision, the investment yield on the Trustee-held bond proceeds was significantly higher, and the financing produced more savings for Horizon House. |
In May 2004, Horizon House contacted Herbert J. Sims & Co. to replace its existing investment banker, who was skeptical at the project’s feasibility. Sims reviewed the historical and projected information and was confident that not only was the project feasible but a very strong and attractive investment opportunity. Sims worked with Horizon House to determine that a $100 million letter of credit finance plan was the best option.
