Sims Provides 90% Loan to Cost, First Mortgage Loan to Fund Acquisition
A privately held healthcare owner and operator (the “Sponsor”) specializing in the acquisition and management of high quality skilled nursing facilities reached an agreement to acquire a portfolio of two healthcare campuses consisting of over 200 beds (the “Portfolio”). The Sponsor has demonstrated a strong track record of driving census, reducing expenses through the implementation of more favorable contracts, and improving quality mix at other facilities it has acquired. On average, the Sponsor has driven census by approximately 25% at newly acquired properties dating back to 2015, with a strong Quality Mix in excess of 50% at many facilities. The Sponsor intends to implement similar performance improvement measures at the two campuses in the Portfolio with plans to refinance with HUD insured debt in the future after maximizing operating and financial performance.
HJ Sims partnered with a national bank (the “Bank Partner”) to propose a high-leverage, unitranche first mortgage loan to fund the acquisition of the Portfolio. The proposed unitranche loan combined two tranches of debt into a single debt instrument (the “A/B Loan”) with the Bank Partner providing “Tranche A” of the loan on a priority basis and Sims providing “Tranche B” of the loan on a subordinate basis. From the perspective of the borrower, the loan functions as a single debt obligation under a single loan agreement and security package. An agent and loan servicer acts on behalf of both lenders for the entire A/B Loan, simplifying the payment and reporting processes required with multiple lenders.
The Sponsor found the A/B Loan attractive for the acquisition as it provided higher leverage compared to a conventional bank loan, allowing them to avoid raising unsecured subordinate debt at a higher cost of capital or diluting its ownership in the Portfolio from taking on additional equity partners. In addition, the loan was structured with a two year interest only period and can be re-payed any time after two years, allowing the Sponsor to limit debt service expense over the near-term as it implements performance improvement measures, while providing flexibility to refinance any time after the interest only period. The $22.625 million A/B Loan provided approximately 90% of the total cash transaction costs associated with acquisition.
HJ Sims formed a new single purpose entity (the “Sims Issuer”), to issue taxable bonds to fund the Sims portion of the loan. Sims successfully sold $6.5 million of subordinate first mortgage taxable bonds through its Private Client Group to high net worth accredited investors. The financing closed on December 27, 2017, meeting the Sponsor’s timing expectations and agreement with the seller to close by year end.
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