PhillyDeals: Crozer sells realty for better balance sheet
By Joseph N. DiStefano
Crozer-Keystone Health System dominates the Delaware County medical business. It's a slow-growth market. Medical costs keep going up. But nobody - insurers, patients, the government, or donors - is offering to fund the increase.
With its narrow margins, Crozer is rated "BBB-," just above junk-bond status, by the Standard & Poor's credit-rating agency. S&P wants Crozer to raise cash and to boost its profits.
But with such a modest credit rating, it's tough to borrow the millions it would take to make Wall Street happy with Crozer. Especially these days, when banks have turned conservative amid massive loan losses.
Wachovia Bank, Crozer's lead creditor from its past expansion, has been unwilling to lend it more in recent years. Nor would TD Bank and other big lenders in the region.
What to do? Chief financial officer Philip J. Ryan says he started in 2007 to review the system's real estate holdings to see if it could turn them into cash without cutting operations.
He hired Health Realty Advisers, of Ambler, to "unlock built-up value in real estate holdings" and line up local investors and lenders willing to invest.
Last fall, the system raised $40 million to improve its balance sheet, by selling a group of buildings in Springfield, through a complex debt-and-equity transaction.
Crozer is leasing the buildings from the new owners. Patients won't know the difference; Crozer gets a cushion of cash and makes its creditors happy, in hopes of cutting future finance costs.
"A lot of people were concerned about the Obama health-care plan and its effect on Crozer," said Frank Seidman, president of $1-billion-asset Capital Solutions, the Blue Bell equity-investment firm that bought the buildings with $11 million in cash, the rest in loans.
"But we have confidence in Crozer. We know them well. In Delaware County, they're too important to fail."
"A lot of hospitals could do this," said Michael Goldenberg, president of Health Realty Advisors, who put the deal together. The broker was A Margolis Realty Co., of Philadelphia.
The Springfield properties Crozer sold include two office buildings, totaling 80,000 square feet, and the 176,500-square-foot Healthplex, a gym and a physical-therapy center run by Crozer.
To finance the purchases by Seidman's firm, Joseph L. Rago, commercial real estate chief at Tri-State Bank, made a $6 million loan, at 6 percent, to be refinanced in five years. Susquehanna Bank lent $22.5 million at a slightly higher rate, for 10 years. Both loans amortize over 25 years, Seidman said.
In a statement, Crozer's Ryan said the deal would "better position the system financially" while letting the hospital stay "committed to our mission."
With the extra cash, "we expect their credit rating will go up," enabling Crozer to borrow for less, Seidman told me.
"The miracle of the transaction was that a triple-B-minus health-care system was able to access $40 million, in a transaction that makes economic sense," Goldenberg said.
Contact staff writer Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.
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For Immediate Release
HEALTH REALTY ADVISORS INC. ANNOUNCES $38 MILLION SALE-LEASEBACK ON BEHALF OF CROZER-KEYSTONE HEALTH SYSTEM
Springfield, Pa. – Oct. 21, 2009 – Michael Goldenberg, President of Health Realty Advisors, Inc., announces the completion of a $38 million sale-leaseback transaction on behalf of Crozer-Keystone Health System. The sale of the property on the Springfield Hospital campus gives Crozer-Keystone access to significant capital at a time when funds are difficult to procure.
“Crozer is to be commended for its creativity and ingenuity in using its real estate holdings to access capital,” said Goldenberg.
The parcel includes two 40,000 square-foot medical office buildings, all of which are fully occupied with many specialty practices, and the 176,500 square-foot Healthplex, a medically integrated wellness-facility run by Crozer-Keystone. A. Margolis Realty Co., which has a health care real estate division, served as broker on the transaction.
“In 2007, Crozer-Keystone Health System began to look for opportunities to increase balance sheet liquidity by unlocking built up value in real estate holdings. This transaction allows us to better position the system financially while remaining committed to our mission,” said Philip J. Ryan, CPA, senior vice president and CFO of the Crozer-Keystone Health System. “We could not have gotten this deal closed without Michael Goldenberg. His understanding of our business coupled with his experience in closing transactions was invaluable to us.”
Health Realty Advisors, Inc. identifies and negotiates creative real estate finance solutions for hospitals, physicians, universities and social service agencies. Their unique understanding of these highly specialized businesses allows them to match real estate and finance solutions to their clients’ missions. HRA President Michael Goldenberg has completed more than $200 million in transactions since 1989.
For more information contact Jennifer Bilotta at 609-682-4145 or jbilotta@startoplin.com.
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