Creative Restructuring Achieves Funding of $62.6 Million Start-Up CCRC in Texas

description

Sears Methodist Retirement System, Inc. is a Texas not-for-profit 501(c)(3) exempt organization and is the parent or controlling member of an affiliated group of corporations comprising the Sears Methodist Retirement System ("SMRS"). SMRS has over 1,700 employees and is the largest Methodist senior care not-for-profit organization in Texas. SMRS and its affiliates own and operate 12 campuses including 1,798 units in various Texas markets. SMRS, through an affiliate corporation, also manages three nursing facilities for the Veterans Land Board of State of Texas. Certain SMRS affiliates are members of an obligated group while other affiliates are operated outside of the SMRS obligated group.

Meadow Lake - Tyler, TX

SMRS initiated development of its newest Continuing Care Retirement Community located on 95 acres in Tyler, Texas in September 2005 ("Meadow Lake"). The new community was structured to be developed within a new affiliate entity located outside of the SMRS obligated group. The first phase of the community will consist of 80 independent living apartments, 41 executive homes, 54 assisted living units (including 34 memory support) and 30 nursing beds among other indoor and outdoor commons and recreational areas.

challenges

The planned cost of the community was greater than $73 million. Pre-finance capital requirements had been funded through a $2.7 million bond anticipation note issue that was accreting at a rate of 13%. Pre-sales requirements were achieved in September of 2008 and construction was initiated.

When the original plan of finance failed, construction of the community had to be halted until a viable alternative could be identified. The remaining BANs proceeds required to maintain community development activities were frozen and SMRS was no longer allowed access to these funds – however interest continued to accrue. Ongoing development costs were straining the financial capacity of the obligated group and SMRS was out of compliance with its bond covenants. The original underwriter was unable to successfully restructure the transaction. SMRS was now at a decision point: Abandon the project and its sunk costs and ultimately fail to repay its investors? Or proceed in the hopes of achieving its original mission driven purpose? SMRS contacted Sims.

solution

Sims worked to restructure the transaction, reduce the overall financing and development costs and successfully fund the new start-up CCRC. Overall costs were reduced from $73 million to $62.6 million. A flexible lower cost structure that enables the build-out of additional executive homes as demand merits was implemented.

The new structure consisted of $43,950,000 of tax-exempt revenue bonds combined with a revolving line-of-credit. Additional financial support which increased liquidity and enhanced the project’s ability to weather a slower move-in environment was defined and provided through an affiliated entity that was not a member of the SMRS obligated group. A subordinate note structure was defined to preserve the ability for SMRS to obtain repayment plus interest for its investment in the new campus upon achieving certain performance milestones.

The series 2009 bonds consisted of $36,100,000 of fixed rate bonds having 20 year and 35 year maturities plus $7,850,000 of fixed-rate Entrance Fee Principal Redemption Bonds (“EFPRBs”) having a 10 year maturity but with earlier planned redemptions from entrance fees as move-ins occur. The EFPRBs are planned to be fully repaid at approximately 80% occupancy. The revolving line of credit is planned to have cumulative draws of approximately $11.5 million without having an aggregate balance greater than $4 million at any one time.

Sims successfully priced the bond issue 50 basis points lower than another non-rated Texas senior living bond issue priced on the exact same day by another underwriter. The project is now under construction.