We had all heard that the first half of this year was going to see a spike in loan defaults, forced sales of properties and other signs of financial distress in the seniors housing and care sector. But we are not sure many people thought there would be one this big.
We are talking about the TPG Real Estate and Sabra Health Care REIT joint venture involving 157 assisted living communities in 18 states operated by Enlivant, which is the former Assisted Living Concepts. This was not a great portfolio to begin with, and it consists of mostly small and older properties in secondary markets.
Sabra purchased a 49% interest in the portfolio in January 2018, paying a hefty price to help the REIT diversify its portfolio from its heavy concentration in skilled nursing. Sabra also had a right to purchase the remaining 51% a few years later. They will not be exercising that right, having already written down their investment by $164.1 million in the second quarter of 2021, and by another $57.8 million in the fourth quarter of 2022, to zero.
Obviously, the pandemic took its toll on census and costs, and its accounting firm has just issued a going concern letter regarding the joint venture. Other than declining operations, the biggest culprit is the debt load. There is a total of $766.8 million of debt, of which $561.2 million is with Fannie Mae, $177.2 million with Freddie Mac and $28.5 million with KeyBank. They are all floating rate, ranging from SOFR + 221 basis points to + 300 basis points. The interest rates as of December 31, 2022 ranged from 6.3% to 7.1%, or probably nearly double what they were a year ago. Ouch.
As of February 11, the joint venture was no longer current with principal and interest payments on its Fannie and Freddie notes, and they are now in default. On March 1, the JV did not make its payment to KeyBank, and it received a default notice. While the parties are in discussions to restructure the loans, if they can, but at what cost, and to whom? From what we read, there is no recourse to Sabra for the Fannie and Freddie debt, which is obviously good for them, but would they really be prepared to walk away? We may find out. As far as Fannie goes, we have heard there may be another $250 million of troubled seniors housing debt in its portfolio.
The only good news is that if a buyer for the JV assets can be found, if that is the route it goes, there are $229.4 million of federal tax loss carryforwards available. Some of these expire starting in 2033 and some do not expire. The state tax loss carryforwards were $139.2 million, and these begin to expire in 2028. Don’t laugh, as these usually have tremendous value for a profitable entity, even though you won’t find that in this sector for a while, at least not to this extent. In years past, acquisitions of some companies were done mostly to get access to these tax loss carryforwards, but it is not something people like to brag about. The other good news, at least for TPG, is that we are pretty sure they already have their entire investment out, since their original cost basis was so low at around $50,000 a unit. It always helps to buy low.
We hope to have a more thorough analysis of the situation in the upcoming April issue of The SeniorCare Investor, but this is not good news for anyone.
