Welcome to the Dec. 23 Monday Business Briefing.
This is your private business intelligence briefing with Insider Louisville staff and contributors vetting tips collected during the past few days, hours and minutes before we post at 7 a.m.
The Insiders Meetup at Vincenzo’s is on Christmas/New Years hiatus until Monday, Jan. 6. But we must say last week’s meetup with Godfather of Green Gill Holland, and Nancy Church, Kentucky U.S. Green Building Council executive director, attracted a sold-out, sold-out crowd, waaayyy over our 50-person “limit.”
And we’d like to say thank you to the more than 600 people who’ve attended our meetups. They really were fun!
We thought we might get the chance to put MBB on hiatus as well, with business news typically tapering off at the holidays. Not this year.
• The lead story this week was the lead story about a year ago: Denver-based Catholic Health Initiatives was taking over University of Louisville Hospital. It was an extremely controversial deal, with opponents objecting mainly to the imposition of the Roman Catholic hospital system’s Ethical and Religious Directives that would deny reproductive services at U of L Hospital’s heavily indigent population.
No insiders we talked with – and trust us, we consulted dozens in many in-depth interviews – ever quite grasped why CHI was doing the deal, in which they were pledging to inject millions into U of L’s University Medical Center.
UMC provides about $20 million in indigent care services each year over and above any source of reimbursement from Quality and Charity Care Trust, an indigent-care trust overseen by U of L.
The theory was, CHI needed a steady flow of new docs to their rural hospitals from U of L’s School of Medicine. U of L had to do the deal because its hospital was financially strained, with long-term trends hinting at disaster.
Highlights of the joint operating agreement included CHI, through its new wholly owned KentuckyOne Health system in Kentucky, injecting $543.5 million of investment into the university medical operations during the first five years of the JOA, expanding to $1.4 billion over 20 years, including:
- $75 million annually for academic and program investments and another $95 million over the first three years for “key service lines and departments;”
- $70 million for IT infrastructure upgrades at UMC;
- $15 million for discretionary spending by U of L for each of the first three years, targeted at statewide health efforts;
- and $3 million dedicated for research annually and $7.5 million per year in capital investment for technology.
Under the merger, CHI was to invest an initial $200 million in what was termed the “Academic Health Center,” the giant downtown complex that includes University Hospital, Jewish Hospital, J. Graham Brown Cancer Center and Frazier Rehab Institute, and a total of $800 million over a number of years.
Except it never happened.
U of L insiders differ as to where the issue stands. Some insist CHI has paid nothing. The majority tell MBB that CHI made a small payment for research support only after Dr. David Dunn, U of L’s executive vice president for Health Affairs, went to bat for the university, bluntly asking KentuckyOne CEO Ruth Brinkley for the money.
Funny what a difference a year makes. KentuckyOne parent CHI is dramatically less flush than when the merger talks with U of L began back in 2010. So the answer came back to Dunn & Co., “We don’t have the money.”
As we told you in October, KentuckyOne is losing $70 million per quarter, with losses accelerating.
• In the fiscal year ended June 30, 2013, CHI’s operating income declined by over $400 million to a $274 million loss, from a $155 million profit for FY 2011/2012.
• Of CHI’s 12 key regions, six had generated an operating loss in FY 2013. Of these, the largest loss was at KentuckyOne, which was created in early calendar 2012.
• Standard & Poor’s Ratings Services lowered its long-term and underlying (SPUR) ratings to ‘A+’ from ‘AA-’ on debt issued by and on behalf of Catholic Health Initiatives due to weak operating performance and increased debt.
U of L officials declined comment. But those U of L contacts didn’t dispute our insiders’ version of the event – that CHI essentially has agreed to pay a little now and more later, with negotiations continuing.
This isn’t so much a story about a crucial community asset and a deal gone bad as a story about the failure of Louisville’s media. When the U of L-CHI merger was about women’s reproductive rights, it was the hot story for The Courier-Journal and the TV stations. Now that it’s a financial/health care story – one of the biggest of the year – it’s of no interest to anyone in 2013, because it’s so much easier to report on the Cats and the Cards or the latest murder.
That said, U of L tends to deal harshly with news outlets that report anything other than what it puts out in news releases, a fact not lost on TV stations depending on access to U of L sports programs, nor Business First, where U of L is its main advertiser.
• The No. 2 end-of-year story involves mixed signals about our public debt. Insiders are telling us it’s likely the long-awaited report on the $340 million in bonds for the KFC Yum! Center includes an upgrade by Standard & Poor’s.
That’s the rumor.
What we can tell you for certain is the bond trustee has been switched out, with Birmingham, Ala.-based Regions Bank replacing U.S. Bank, the Minneapolis-based financial giant. Alex Rorke, senior managing director at Hilliard Lyons, the Louisville-based brokerage and financial services firm and financial adviser to the LAA, told IL Sunday he expects the Kentucky Economic Development Finance Authority, or KEDFA, will “in the next few days” sign off on shrinking the tax increment financing district to 2 square miles from 6 square miles. Both took bondholders themselves signing off.
If KEDFA really does approve shrinking the TIF district, it would mean about $6 million in revenue this year as opposed to $3.3 million. Even $6 million, if that’s the number, is 40 percent below 2013 TIF projection of $10 million. But it’s going in the right direction.
Now, let’s look at something particularly interesting. Kentucky sold $728 million in bonds for the downtown bridge, an offering that closed Friday. The bonds ended up – are you ready for this? – being rated BBB-minus by Fitch Ratings and Baa3 by Moody’s Investors Services.
BBB-minus is Fitch’s last stop on the investment-grade continuum before junk status. Baa3 is Moody’s lowest rating for investment-grade debt, again, one grade before debt that’s considered “high-risk, speculative” debt, as likely to default as pay out. And, coincidentally, Baa3 is the rating Moody’s just assigned to KFC Yum! Center bonds.
We’ll have more details about the yields we’re paying to investors brave enough to buy these bonds.
Long and short of it … Kentucky taxpayers have another bond issue close to being rated junk. The explanation? The early toll studies back in 2010 were “glowing,” as Kentucky econ-dev Czar Larry Hayes likes to say about KFC Yum! Center finances. But the final for-real tolling studies by Boston-based Steer Davies Gleave predicted far less use of the new bridge and the existing Kennedy Bridge than first projected by environmental impact studies. And by extension, less money from tolls.
So it’s not impossible Kentucky could end up stuck with a public debt too expensive to service, yet too risky to refinance – a $1 billion bridge the majority of the public never wanted in the first place.
• Courier-Journal reporter Sheldon Shafer dug into public records to get a bit of a scoop Friday. Developer Ashley Blacketer is leading the redevelopment of Distillery Commons, a project we told you about in the Nov. 25 Monday Business Briefing.
Shafer blew a few details. We talked with Blacketer yesterday, and she told us while he is involved, Gant Hill is NOT a partner in the deal. Instead, it’s Chad Middendorf, who lives and works in both Louisville and Chicago. Blacketer said it will be several weeks before plans for the site are final. But, she added, the Distillery Commons retrofit will be like nothing else in Louisville.
Blacketer and Gant Hill had a big score at the beginning of the year with their renovation of Flats on Frankfort. They took a decrepit apartment building at 1911 Frankfort Ave. in Clifton and turned the 40-unit property into a well-appointed, single-bedroom apartment complex aimed mostly at the young professional/grad school demographic.
We do know the initial plan involves repurposing the brick Distillery Commons whiskey warehouse at the corner of Lexington Road and Payne Street into housing, retail and a restaurant.
• Looks like we will find out soon whether Steve Poe’s Aloft Hotel project is headed to a showdown. As reported earlier this month, at least one preservationist has requested the paperwork to begin the landmark process for the complex of buildings at First and Main streets where Poe plans a $25 million boutique hotel.
Insiders forwarded us this notice:
You are invited to attend a joint meeting with DDRO & DRC for a Category 3 review of an 8 story hotel. (“DDRO” is the Downtown Development Review Overlay. “DRC” is the Development Review Committee.) In addition the applicant is requesting the approval to demolish three structures in order to build the hotel on the southwest corner of West Main and South First Street.
Subject Property: 102 W. Main Street, 106 & 110 S. First Street
Case Number: 13DDRO1007 & 13DEVPLAN1119
Meeting Type: Downtown Development Review Overlay
Date: Wednesday, January 8, 2014
Time: Meeting will begin at 8:30 A.M. and continue until all cases are heard
Location: 444 S. Fifth Street, Conference Room 101
We told you last Friday that a bipartisan group of Metro Council members are trying to keep the project going.
• What’s this all about? Developer Kevin Cogan is selling the Park Court Apartments on Cherokee Road for $5.2 million, advertised as having a 7-capitalization rate on $364,000 in annual net operating income! Is Cogan raising money to actually do Willow Grande, which we think is needed?
Cogan spent a lot of money – he’s never said how much – to upgrade what started out as the Aquarius Apartments inside and out, including gas lamps. The changes came after neighbors objected to his replacing the 1960s complex with a new luxury building. Commercial Kentucky is the listing broker.
• We got a tip from one of our most plugged-in insiders (a joke only he’ll get). He passed on news about Brown-Forman renovating an office building on their 18th and Broadway headquarters campus, gutting the floors. “Which is a task, considering how old the facility is. The architect/engineers don’t exactly know what they’ll find when it is torn out. So they’re going to phase it out by completing the demo project, allow architect/engineers to come back in to review the space and then draw it up. Should be a pretty interesting project.”
The Garneau Buiding was built between 1894 and 1904, making it the one of the oldest distillery warehouses in Louisville and the oldest structure in the Brown-Forman complex. The roof of the old bottling house (behind Garaneau) is home to one of Louisville’s landmarks. Standing 68 feet in height, the Old Forester Bottle can be seen from almost anywhere in the downtown area. The bottle holds 100,000 gallons capacity, equal to 8.5 million generous portions of Old Forester.
• This is interesting only because in a state not known for innovation, Lexington-based Alltech is finding Brave New Worlds in which to invest. Alltech is pushing into algae research. Algae – OK, pond scum – turns out to be a sustainable source of protein and the essential fatty acid DHA omega-3, according to the company. Alltech is continuing to expand its algal DHA plant in Winchester, Ky. near Lexington, one of only two plants in the world commercially producing a high-DHA heterotrophic microalgae. The facility, which is capable of producing approximately 15,000 tons of algae, has already been updated since its opening in early 2011, according to an Alltech news release.
“Even with this growth, we will have the need for continued expansion globally, because a commercially available source of algal DHA benefits the entire food chain, including human health with DHA as an essential omega-3 fatty acid,” Becky Timmons, global technical director of Alltech Algae, said in the release.
The rest of the release was so technical even our biology major couldn’t follow it. But here’s the deal: In humans, DHA omega-3 is linked to brain and eye development as well as the reduction of coronary heart disease and Alzheimer’s disease. There’s evidence DHA omega-3 fights depression.
Traditionally, DHA omega-3 has been supplied through fish oil, which is dwindling in supply and non-sustainable. And the stuff tastes bad. DHA omega-3 produced through algae is an alternative to fish oil that can be quickly produced commercially with limited land use and no detectable “fishy” taste in foods sold to consumers. Oh, and it’s good for livestock.
• Look for the Third Avenue Café to reopen. The Old Louisville restaurant, which had a loyal following including IL staffers, closed suddenly in December 2011. Our best Old Louisville source says a group of Middle Eastern investors have it now. “And don’t expect me to keep breaking every story in Old Louisville for Insider Louisville.” Sheesh!
• File this under, “We knew in our heart of hearts they weren’t coming, but we can dream.” Last week, we led the Monday Business Briefing with a long speculative post about Swedish furniture maker IKEA possibly looking at Simpsonville, which has a new factory outlet mall under construction. In the middle of the week, Joseph Roth, IKEA’s U.S. spokesman, called us back. In a long interview, Roth essentially said the global company has looked closely at the Louisville area, but there simply isn’t sufficient population density.
Louisville, Frankfort and Lexington combined total only about 1.7 million in population, though if you tally in the counties around the three cities, the count is 2 million, which Roth said would be the minimum market IKEA would consider. He hinted heavily that Nashville is the more likely market to get the next mega-furnishings store.
“Skada,” as they say in Swedish.
Awards and recognition:
Kentucky Kingdom has named Bandy Carroll Hellige as agency of record. BCH is providing marketing and communications strategy, creative, digital and media services to Kentucky Kingdom and Hurricane Bay, according to a news release. BCH has worked with Louisville Zoo, the Frazier History Museum and the Louisville Convention & Visitors Bureau. The agency was founded in Louisville in 1989 by Susan Bandy, Mark Carroll and Tim Hellige. Today it has 50 employees.
• Norton Suburban Hospital has been designated an AAGL Center of Excellence in Minimally Invasive Gynecology. Earning the COEMIG designation shows that surgeons and the hospital have demonstrated a commitment to minimally invasive gynecological surgical care, according to a news release.
Norton Suburban Hospital is one of 170 hospitals and 440 surgeons in 24 countries participating in the AAGL centers of excellence program. Norton Healthcare physicians earning the designation are David L. Doering, Mary E. Gordinier, Michael R. Milam, Nancy J. Newman, Dwight D. Pridham, Steven H. Pursell and Jonathan H. Reinstine.