We are sure that management at HCP, Inc. is happy that they spun out the HCR ManorCare assets to a new REIT, since they have not had to deal with the continuing rent shortfall, which started when HCP still owned the assets.
But leveraged investments of any kind seem to be taking their toll across the board. From July 2012 through May 2015, HCP funded a total of $257 million under a collateralized mezzanine loan facility with Tandem Health Care. This loan matures in nine months and has a weighted average interest rate of 11.5% (ouch).
In tandem with this loan, there is a $257 million syndicated senior loan that matures in six months. Through sales of various SNFs, most of the net proceeds of $117 million were used to pay down the senior syndicated loan to the current $257 million level. Tandem owns 32 skilled nursing facilities with 4,766 beds that are leased to Consulate Health Care, which is having financial difficulties and suffered from an adverse qui tam judgement that the judge set aside for the time being because of its size and because it would bankrupt the company.
While Tandem has kept current on its senior debt obligations, the mezzanine loan is another matter. That is why mezzanine investors get the higher returns, if they get paid. HCP has already reduced the carrying value of the mezzanine loan to $197 million, and offered Tandem the option to purchase the debt for that amount. They were not able to do so. HCP has concluded that the additional impairment now exceeds $20 million.
The bigger problem comes in July when the senior syndicated loan matures. The easy solution would be for the lenders to kick the can down the road as long as Tandem continues to make payments. But if operations and cash flow continue to deteriorate, they may be forced to make a decision to foreclose. Meanwhile, HCP’s options include trying to sell its mezzanine investment, which we assume would be at a large discount, or find someone to partner with them. Tandem, which is an affiliate of Formation Capital, has been trying to find some partners or investors for a recapitalization, but given the current industry metrics that may be tough to do, or come at a very high price. Not a good way to start 2018.