Planning for the Future: Hospital Financing Case Studies

It’s no secret that hospitals and health systems have seen their ups and downs over the past five years. In 2015, a positive trend paved the way for higher-rated providers, while 2016 saw the trend reversed as median ratios deteriorated for all rating categories. Currently, hospitals and health systems are tackling an increase of pharmaceutical, supply and labor costs, as well as a challenging payer environment. Many patients are steering towards urgent-care centers, in turn causing some hospitals to see flat volumes and expense growth that outperforms revenue growth.

Regardless of the fluctuating environment, there are financing structures that a hospital can utilize to improve its fiscal outlook and better serve its patients. Below, we present three examples of hospitals planning for the future and completing transactions that will benefit both the hospitals and their communities for years to come.

Persistence Pays Off

Fulton County Health Center (FCHC) is a private, nonprofit independent hospital located in Wauseon, Ohio. It’s a 25-bed general acute care and 10-bed psychiatric critical access hospital (CAH) facility that provides inpatient, outpatient, emergency care and psychiatric services. Beginning in 1973 as a full-service hospital, FCHC grew through the years to include a wide variety of programs and services that greatly benefit the residents of Fulton County.

Management at the hospital sought to build a medical office building (MOB) on its campus to accommodate the growing need for physician office space. The hospital had a strong credit profile, but its existing lender was not in a position to extend further credit. FCHC and its investment bank then considered using the U.S. Department of Agriculture (USDA) Community Facilities (CF) loan program. The parties worked together and determined that rolling all of the hospital’s existing debt into the transaction was the best way to meet the USDA CF program requirements. Although this was a great opportunity for the hospital, it did create several time-consuming challenges.

The main obstacle centered on a ground lease where FCHC leased property from the county. Persistence paid off, however, and the hospital and its investment bank eventually developed a solution that was ideal for all parties involved. The investment bank used its long-term relationship with the hospital, as well as its experience and relationships with USDA, to help guide the project to a successful conclusion.

Despite several road blocks and hurdles throughout the process, the hospital ultimately secured a USDA commitment for a permanent loan that funded the construction of a new 60,000 square foot MOB, replacement of an existing underground storage tank with an above-ground system, and financed miscellaneous capital improvements to better serve Fulton County’s residents.

“We were simply out of space for our doctors,” says Patti Finn, FCHC CEO. “Not only do new specialists want to come here, but some of our current physicians in our North Medical Office Building would like to have more office and exam room space. This new facility will solve both problems and offer our patients more opportunities to see medical specialists right here in town.”

Expansion and Modernization

FCHC wasn’t the only hospital that used the USDA CF program with expansion and renovation goals in mind. A few states away, Humboldt County Memorial Hospital, a 21-bed CAH located in Humboldt, Iowa utilized the CF program and took advantage of low-rate terms that maximized its debt service coverage ratio (DSCR) for the future.

The hospital worked with USDA to secure a 40-year, fixed-rate loan in order to support a massive expansion and renovation initiative. Construction for the new space began in April. Michelle Sleiter, CEO said, “We were seeing significant growth that was outpacing our current space, which led us to moving a little bit faster than we had originally anticipated in regard to a building project such as this.”

Along with supporting the construction of the expansion, the financing structure will also fund the interest payable on the hospital’s loan, as well as pay certain transaction costs and expenses.

Acquisition Financing

Different from the expansion and renovation transactions mentioned above, Putnam County Hospital recently closed a successful $6 million acquisition financing of an 84-bed skilled nursing facility (SNF). Putnam County Hospital is a 25-bed critical access hospital located in Greencastle, Indiana. Management saw the acquisition as an ideal fit for their future strategic growth plans and as a high-return opportunity.

Putnam’s finance company provided the acquisition financing through its subsidiary, while simultaneously underwriting the loan application to the U.S. Department of Housing and Urban Development (HUD). The bridge loan allowed for the timely acquisition of the facility and was structured to allow for an immediate refinance through the HUD 223(f) program. The 223(f) application was submitted within one week of the bridge loan closing, with the goal being to refinance the bridge loan through HUD to provide a permanent financing solution at a low, fixed interest rate. In a rising interest rate environment, the immediate submission of the HUD application reduces exposure to interest rate risk by reducing the time from bridge closing to HUD refinance.

Looking Ahead

As the hospital and health systems sector continues to evolve, it’s important for management to consider the future when planning their next projects. In an effort to remain competitive, more and more hospitals are planning projects that aim to modernize and expand their facilities. Effective and efficient financing structures are a key aspect of these initiatives, which highly benefit both the hospitals and their communities for years to come.

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About The Authors

Chris Blanda
Senior Vice President
65 E. State St.
16th Floor
Columbus, OH 43215
(614) 224-8800

Chris Blanda

Senior Vice President

Chris Blanda is a senior vice president with Lancaster Pollard, a financial services firm based in Columbus, Ohio, that specializes in providing capital funding to the senior living and health care sectors. In addition to underwriting tax-exempt bond offerings, Lancaster Pollard provides organizations a complete range of funding options through its Fannie Mae/FHA/GNMA/USDA-approved, mortgage lender subsidiary. Mr. Blanda is in charge of the firm’s efforts in Indiana and Kentucky with responsibility for all details involved in the structuring, underwriting and closing processes.

Chris is in charge of the firm’s healthcare deal origination efforts in Indiana, Kentucky, and Missouri across Lancaster Pollard’s entire capital platform, including but not limited to agency (FHA/HUD, FNMA, USDA) mortgages, taxable and tax-exempt bonds, bridge loans, equity investments, and M&A advisory services. Since joining Lancaster Pollard in 2009, Chris has been instrumental in bringing to market a wide variety of financing structures totaling over $1 billion. He was named the firm’s Top Health Care Banker and received the firm’s “Deal of the Year” award (judged not on size, but creativity and outcome) in 2014.

Mr. Blanda earned his MBA from The Ohio State University Fisher College of Business with a concentration in corporate finance. He received a bachelor’s degree in finance from the University of Dayton. Before joining Lancaster Pollard, he was an associate at Citi Global Transaction Services, a division of Citi which provides financial services to the hedge-fund and private-equity industry. He also holds a General Securities Representative license, Series 7.

 

Quintin A. Harris
Senior Vice President
540 Lake Street
Excelsior, MN 55331
(952) 223-6286

Quintin A. Harris

Senior Vice President

Quintin A. Harris is a senior vice president for the Minneapolis office of Lancaster Pollard, a financial services firm based in Columbus, Ohio that specializes in providing capital funding to the senior living and health care sectors. In addition to underwriting tax-exempt bond offerings, Lancaster Pollard provides organizations with a complete range of funding alternatives through its HUD-FHA/GNMA/FNMA/ USDA-approved mortgage-lender subsidiary. It can also provide bridge-to-agency lending, private equity, balance sheet lending and investing, and M&A services. Mr. Harris is the lead investment banker for clients in Minnesota, Iowa and Nebraska and is responsible for all details involved in the underwriting and closing processes.

Mr. Harris has more than 15 years of project development and financing experience. He manages and structures complex transactions, including underwriting the firm’s health care “Deal of the Year” in 2011. Mr. Harris has been recognized in the industry for executing specialized financings in difficult capital-market conditions.

Mr. Harris led a distinguished career in international development working in South America and Central Asia prior to returning to the Midwest in 2003. He earned his MBA from the Tippie School of Management at the University of Iowa in Iowa City and holds a General Securities Representative license (Series 7). Mr. Harris regularly speaks on capital funding topics for health-care providers.

Brendan Healy
Senior Vice President
65 E. State St.
16th Floor
Columbus, OH 43215
(614) 224-8800

Brendan Healy

Senior Vice President

Brendan Healy is a senior vice president with Lancaster Pollard, a financial services firm based in Columbus, Ohio that specializes in providing capital funding to the senior living and health care sectors. In addition to underwriting tax-exempt bond offerings, Lancaster Pollard provides organizations with a complete range of funding alternatives through its HUD-FHA/GNMA/FNMA/USDA-approved, mortgage lender subsidiary. Mr. Healy is the lead investment banker for all Ohio- and Michigan-based clients and is responsible for all details involved in the underwriting and closing processes.

Prior to assuming his current role, Mr. Healy focused his efforts on the analysis of senior housing, long-term-care and acute-care organizations, providing support on a wide range of bond transactions and mortgage loans for rehabilitation, new construction and refinance projects totaling more than $500 million. He has a thorough understanding of the various financing structures available through conventional bond financing, HUD-FHA, Fannie Mae and USDA programs. Prior to joining Lancaster Pollard, Mr. Healy worked for a Columbus-based national commercial real-estate development firm.

Mr. Healy is an Ohio licensed attorney. He earned his Juris Doctorate from The Ohio State University Moritz College of Law and a bachelor’s degree in finance/ marketing from the University of Maryland. Mr. Healy was a three-time All-American lacrosse player at the University of Maryland and is a retired Major League Lacrosse player. He holds a General Securities Representative (Series 7) license.

Chris Mauger
Managing Director
65 East State St.
Ste. 1600
Columbus, OH 43215
(614) 224-8800

Chris Mauger

Managing Director

Chris Mauger is managing director of Lancaster Pollard Fund Manager, LLC and Lancaster Pollard Finance Co., LLC. Mr. Mauger’s responsibilities include leadership and oversight of the sourcing, structuring, underwriting, closing and management of investments in Lancaster Pollard’s proprietary private equity funds, Propero™ Seniors Housing Equity Fund I and II and for balance sheet loans from Lancaster Pollard Finance Co., LLC for acquisition and equity recapitalization. Lancaster Pollard is a financial services firm based in Columbus, Ohio, that specializes in providing capital funding to the health care and senior living sectors. In addition to underwriting tax-exempt and taxable bond offerings, Lancaster Pollard provides organizations a complete range of funding options through its Fannie Mae/FHA/GNMA/USDA-approved mortgage lender subsidiary. It can also provide bridge-to-agency lending, private equity, balance sheet lending and investing, and M&A services.

Mr. Mauger has been involved in seniors housing and health care fi nance for more than 17 years, specializing in Fannie Mae, Freddie Mac, FHA, interim/bridge and mezzanine debt structures. Prior to joining Lancaster Pollard, Mr. Mauger was a director of seniors housing originations for Berkeley Point Capital. Before that he was a senior managing director of Red Capital Partners and Red Mortgage Capital with production and management responsibilities for the fi rm’s seniors housing direct lending platform. During his 13-year tenure with the fi rm, he was directly involved in the origination, structuring, negotiation and closing of more than $2 billion in seniors housing debt. He also was a member of the fi rm’s credit approval, investment approval and risk committees. Previous experience includes seniors housing and multifamily investments for Banc One Capital Corporation and as a commercial lender at Bank One.

Mr. Mauger earned his Bachelor of Business Administration degree from Ohio University in Athens, Ohio, and his Master of Business Administration degree from The Ohio State University Fisher College of Business in Columbus. He holds an investment banking representative license (Series 79) as well as a municipal securities representative license (Series 52).

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