Crozer does a sales lease back to raise $40M

Sale-lease backs are going to be more common in 2010 until creditors loosen the noose for lending and lines of credit.

"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 United 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 Goldenberg, who put the deal together.

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.

"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."