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March 2007 issue
What’s Happening With Cap Rates?
What are the nuances of cap rates, what factors influence them and how do
they affect the playing field?
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Novel Renovation, Novel Financing
Good Samaritan Home restructured its existing debt, financed a unique new
project, and saved money, too.
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Q&A With Stan Thurston
The former CEO of Life Care Services comments on his early days in the
industry, the Return of Capital™ plan, and changes he’s observed over the
years.
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SNF Beds Hit Record,
IL Price/Unit Strong
SNF price per bed hit a record in 2006, and IL price per unit as strong as
2005.
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NFP Financing Parity
Bill Sims comments on the new age of financing for not-for-profit providers
and the senior living sector overall.
...
Not-for-Profit
Acquisitions in 2006
Who acquired what facility, where, for how much, and more.
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Articles Archive
Steve's BLOG on Senior Care
Companies Mentioned in this issue:
March 2007
American Seniors Housing Association p2
Cain Brothers p4
HealthTrust, LLC p1
Lancaster Pollard & Co. p1
Life Care Services LLC p2
Sunrise Senior Living p5
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Novel Renovation, Novel Financing - Home
Restructures Debt, Finances a Project, and Saves Money
Email Editor
You’ve heard of the Main Street Concept,
a design and decor that makes a facility appear to be a little community
with streets and houses. The Good Samaritan Home in Evansville, Indiana,
has gone a step further, personalizing the concept to Evansville in the
1940s — the hometown and the heyday of most of its residents. “Evansville
folks are dyed-in-the-wool Midwesterners,” says Tom Slaubaugh,
administrator. “They don’t retire to Florida. They stay in Evansville and
are part of the town’s history.”
Besides simply refurbishing an old
building, the goal of the “Recollections Project,” as it is called, is to
create mental stimulation for the residents as they recall memories of the
past in their own hometown. The hope is that the memories will encourage
conversations and discussions about “the good old days” to help the
residents stay connected.
The design isn’t the only novel approach. Lancaster Pollard & Co.
devised a financing package for Good Samaritan Home that restructured its
existing debt, covers capital improvements, and also provides net cost
savings on annual debt service.
The project evolves...
More than 25 years ago, Slaubaugh worked with a fellow who owned a small
nursing home and who enjoyed woodworking in his offtime. In a garage
workshop, he would build architecturally interesting facades and affix
them to the walls around the doors of rooms in the nursing home. Each
facade was different. He put up mailboxes and porch lights, little roofs
and awnings. “Essentially,” says Slaubaugh, “he converted the hallway to a
street, a community, a little town.”
When the inspectors came for their annual survey, they took issue with the
nonexistent fire ratings on the materials used for the facades and the
fact that the lights and awnings ate into the required eight-foot hallway
widths. While his intentions were good, the amateur woodworker had to rip
out the entire project – a year’s worth of work.
Slaubaugh found the concept intriguing and thought Good Samaritan could do
something similar by just complying with the code and regulations. “ I
talked with interior designers and architects,” he says, “and they agreed.
Over the course of time, we thought about how to do it, what materials to
use, and then drew up plans.”
Enter Lancaster Pollard...
In early 2006, Slaubaugh and others at Good Samaritan approached Lancaster
Pollard & Co. about financing some capital improvements and restructuring
the home’s existing debt through a tax-exempt bond issue.
“We recommended a tax-exempt revenue bond issue enhanced by a bank letter
of credit for the financing structure,” says Steve Kennedy, vice president
at Lancaster Pollard, “which is very beneficial for a not-for-profit
organization that does not have a stand-alone investment-grade rating. If
that organization looks to borrow capital on its own credit strength, it
probably could not access investment-grade rated debt.”
The letter of credit is an agreement between the borrower and the bank
that states that the borrower will pay the bank an annual fee for the
right to use its credit strength – for example, the bank’s AA rating –
when the borrower issues bonds. The letter of credit fee amounts to a
fraction of the total interest expense if the borrower with a low credit
rating negotiated financing on its own.
Without a letter of credit, the bond issue would be priced based on the
perceived credit strength of the not-for-profit senior living provider.
The ratios are less strong when the provider has a smaller revenue base —
even though it is a very clean, well-run operation. Therefore, the
interest rate or coupon would be higher than for a provider with an
investment-grade rating.
The financing package provided an opportunity for Good Samaritan Home to
borrow at a cost of capital based on the credit strength of an AA-rated
bank. Good Samaritan also had some existing debt on its books — a direct,
taxable bank loan. By refinancing the existing debt along with the new
capital at a low, tax-exempt cost and by ensuring that the bond issue had
a long term (a 25-year amortization), Good Samaritan Home was able to
borrow a lot more money and, at the end of the day, have a more favorable
annual debt service payment.
“Our existing debt was actually a conventional loan with a conventional
interest rate,” says Slaubaugh. “By going to a tax-exempt bond, we reduced
our monthly outlay substantially and can put the savings toward the new
project.” Successful publicity and fundraising campaigns brought in enough
donations to start the project.
“Good Samaritan Home has a very committed, prudent, and diligent board,
which is important,” notes Kennedy. “They assessed several different
financing options and ultimately picked one that will allow them to build
financial strength for the organization so that they can fund their
mission in perpetuity.”
Of course, the Recollection Project design is much more expensive than a
traditional design. “We’ll put a good $1.5 million into this project,”
says Slaubaugh. “I could certainly refurbish the place a lot cheaper than
that. But the financing will cover the cost of the project and, from a
marketing perspective, the popularity of the new design will definitely
influence the census in a positive way.”
Slaubaugh expects the financing package to preclude the need to raise fees
to offset the remodeling costs. “Donors seem to be responding to this
concept,” he says. He also expects to support any construction cost
overage with the reduction in monthly interest expense that the financing
creates.
The design unfolds...
The Recollection Project involves the home’s original building that opened
in January 1962 and was renovated in 1980...“and it looked it,” says
Slaubaugh, “with carpet on the walls below the handrails and colors from
that era. Everything was worn and faded and torn.”
“Paint and powder” would dress up the building quicker and more
economically; but since most residents suffer from cognitive impairments,
quickly changing the decor with different colors and patterns would create
even more confusion. Residents wouldn’t recognize their new surroundings
and become agitated. They might have to be medicated to prevent wandering
off, and that would increase the risk of falls — all in all, not a good
scenario. The Recollection Project, on the other hand, incorporates the
familiar in order to trigger the memory.
Each wing of the renovated building will be renamed after a local street
with appropriate street signs. The entrances to rooms, offices, and common
areas will resemble buildings on that street in the 1940s. To create the
“look,” digital photographs were taken of office buildings with
interesting architectural elements, and archived black-and-white photos
from the 1945-1965 period were digitally colorized. The digital images
were then superimposed onto floor-to-ceiling wall coverings. The flooring
on “Main Street,” Evansville’s historic downtown area, will simulate
cobblestones, sidewalks, and grassy areas. The handrail along the hallway
will have spindles to resemble a fence. And between the doorways, walls
will have digital images of pathways, gardens, and streams. “Storefronts”
will have mannequins in the windows, dressed in 1940s style clothing.
Nurse’s stations will be located in gazebos or on simulated verandahs.
Entering the lobby, people will see a river scene circa 1957. The Ohio
River is a prominent feature of Evansville, and the scene is a huge image
of the Delta Queen riverboat disembarking passengers. On the street in
front of the riverboat is a 1957 two-tone Chevy — with lots of chrome!
The timeline...
The Recollection Project began in fall 2006. The first phase, which
involves the wall coverings and nurse’s stations, should be finished in
June 2007. The second phase, which will complete the hallways, should take
four additional months. And the third phase, which involves the dining
room, day rooms, and activity rooms, should be another six or eight
months. In total, the project will probably take at least 18 months to
complete.
“But that’s a good thing,” says Slaubaugh, “because a gradual change is
less confusing for the residents than, say, having everything look
completely different in a brief two-month period.”
Importantly, no one will be displaced during the renovations and
refurbishing. “We aren’t shutting anything down while we’re doing this
project,” says Slaubaugh, “and the residents will be involved, which is
also stimulating for them. We talk to them about it and get feedback and
try to incorporate some of their ideas, so it’s a very positive experience
for everyone.”
...and the bottom line
A not-for-profit organization has the inherent ability to issue debt at
tax-exempt rates, and that’s a comparative advantage that can result in
very favorable savings. “We’ve underwritten projects like this throughout
the country, ” says Kennedy. “The financing structure aligned very well
with what Good Samaritan Home was trying to accomplish and with its
overall credit profile — and it could absolutely work for others.”
Before any not-for-profit senior-living organization undertakes such a
project, though, Kennedy suggests they first evaluate the existing debt on
their balance sheet and then carefully evaluate the most cost-effective
and term-favorable way to fund the project.
Going into this project Good Samaritan Home did have some cash investments
on its balance sheet, but its liquidity ratios (specifically the “days of
cash on hand” ratio), were lower than those of its investment-grade
senior-living peers. “As part of this process,” Kennedy explains, “we were
able to both fund the project and decrease annual interest expense, making
more cash flow available on the balance sheet. Now, over the long term,
Good Samaritan can accumulate cash and strengthen its balance sheet.
Ultimately, that will put the home in a stronger position when the time
comes to borrow again.”
Building up liquidity on the balance sheet has become more and more
important for not-for-profit organizations, according to Kennedy. The
investing community wants to see more cash on the balance sheet —
especially for senior living providers that are exposed to so many factors
that are beyond their control, e.g. Medicare and Medicaid reimbursements.
Having a balance sheet with a good amount of cash allows those
organizations to weather the storm of relatively volatile cash flows.
“We’re having a lot of fun with this project,” says Slaubaugh, “although
it’s much like a 10,000-piece jigsaw puzzle. The individual pieces don’t
look like much until they begin to come together and form a picture.
Lancaster Pollard did an excellent job for us. I would definitely
recommend that any not-for-profit provider that is seeking financing
and/or restructuring existing debt to look at the tax-exempt bond market.”
And a letter of credit, if that applies!
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