Armadale Capital Inc. Leads $95 Million Refinancing for Johnston Health Services Corporation

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Resulting in Savings of Approximately $13.5 Million

Armadale Capital Inc. (New York, NY and West Palm Beach, FL), a FHA multifamily mortgage lender specializing in healthcare finance, announced the closing of a $95 million FHA-insured loan modification refinancing for Johnston Health Services Corporation (“JHSC”) which operates a two campus health system located in Smithfield and Clayton, North Carolina. JHSC is a joint venture of Johnston Memorial Hospital Authority and University of North Carolina (UNC) Healthcare System, a hospital system based in Chapel Hill with 11 hospitals throughout North Carolina. The transaction will save JHSC in excess of $13.5 million on its income statement over the next fifteen years, the present value of which exceeds $6.7 million. The FHA loan is insured under the U.S. Department of Housing and Urban Development (HUD) Section 242 Hospital Mortgage Insurance Program. The transaction closed on September 29, 2020 and also involved the issuance of GNMA mortgage backed securities, which are backed by the full faith and credit of the U.S. Government.

The original 2008 FHA loan financing, which built a new patient tower in Smithfield and a new outpatient facility in Clayton, was refinanced in 2015, reducing the interest rate to 3.38% until maturity in 2035. Taking advantage of a historically low interest rate environment due to the pandemic, JHSC was able to further reduce its cost of capital by more than half, from 3.38% to 1.64%. Prepayment penalties and transactional costs were financed with a five year loan provided by First Citizens Bank.

“We started looking at a refinancing over a year ago with JHSC management. Of course rates dropped with the pandemic, but up until May this year the proposed economics just were not there for us, especially after factoring in the prepayment penalty associated with the 2015 deal. Then we saw a significant move in spreads in early June to our hospital client’s favor. We were in a position to move and JHSC management wasted no time pursuing this opportunity” indicated Stephen Pack, President of Armadale Capital.

“In early June, Steve informed us of a market move with the savings jumping substantially virtually overnight. The 10 year treasury had not moved much but the differential above that index paid to investors had suddenly narrowed” said Eddie Klein, Chief Financial Officer of JHSC.

Based on those developments, Mr. Klein instructed Mr. Pack to assemble a refinancing team to quickly pursue all state and federal approvals and position JHSC to capture the available interest cost savings.

“We needed approvals from the North Carolina Local Government Commission and the U.S. Department of Housing and Urban Development, Office of Hospital Facilities. These refinancing application processes were substantial in terms of work, but we were able to successfully navigate them and secure the necessary approvals” indicated Kevin Cielinski, Associate Vice-President Finance at JHSC.

At the same time, JHSC internally established a specific minimum threshold of savings that met its financial objectives, thereby determining a maximum acceptable refinancing interest rate.

“Our maximum rate was in the low 2% range, but our refinancing team was able to ultimately deliver 1.64%, a great achievement. We went into this hoping to capture $2.8 million in present value savings and ended up with over $6.7 million – more than double our goal. This is a big win for our organization and citizens of Johnston County and beyond” said Tom Williams, Chief Executive Officer of JHSC. “We would like to thank the HUD Office of Hospital Facilities, the North Carolina Local Government Commission, First Citizen’s Bank and our refinancing deal team on a terrific job.”

“Having a client clarify with precision what it wants is incredibly helpful. JHSC was able to quickly analyze the refinancing opportunity, examine the accounting impact and establish its goals, which certainly facilitates getting state and federal approvals and executing a deal” added Pack.

JHSC’s cost of capital has come down substantially since its original 2008 FHA insured financing which carried a 4.89% note rate for 25 years. The hospital system has availed itself of refinancing programs made available by the HUD Office of Hospital Facilities based in Washington D.C.

“HUD has been a terrific partner on multiple fronts, especially back in 2010-2013 when we were struggling” said Klein, who joined the new JHSC management team in 2010 that led the turnaround.

“Steve and Armadale Capital have led all of our major financings since 2008. In this case he saw an opportunity even before it existed and was able to position us to move forward immediately and efficiently with the right professionals. His deal leadership and banking skills makes my life easier, and he understands what is important to us. He consistently delivers value and always keeps our best interests in mind. Most importantly, he has our trust and confidence. We are delighted to get this done in the face of a pandemic” said Klein.

Armadale Capital led the execution of the refinancing, serving as FHA mortgage lender, securing the North Carolina Local Government Commission and HUD approvals and structuring the transaction. Harris Beach PLLC, out of New York City, served as FHA mortgage lender counsel and GNMA lender counsel.

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sherry seeram