A struggling skilled nursing property company that’s behind on loan repayments is causing some financial trouble for HCP Inc. (NYSE: HCP).
The Irvine, California-based real estate investment trust (REIT) is expecting that the resulting material impairment will exceed $20 million.
The skilled nursing entity in question—Tandem Health Care—currently owns 32 post-acute or skilled nursing facilities, in addition to nine leasehold interests. Tandem’s properties are located mainly throughout Pennsylvania, Virginia and Florida. The company leases its complete portfolio under a master lease to certain affiliates of Maitland, Florida-based Consulate Health Care, which, at present, is experiencing operational and financial challenges, according to filings HCP made with the U.S. Securities and Exchange Commission.
Specifically, Consulate is facing an adverse qui tam judgment, and has not paid its contractual rent to Tandem in full since April 1, 2017.
Tandem depends on contractual rent payments in order to service its mezzanine loan interest payments to HCP.
From July 2012 through May 2015, the REIT funded, in aggregate, $257 million under a collateralized mezzanine loan facility to specific Tandem affiliates. The mezzanine loan carries a weighted average interest rate of 11.5% and matures in October 2018.
Additionally, Tandem has outstanding to different lenders a $257 million syndicated senior loan, which matures in July 2018.
Tandem failed to make its monthly interest payment to HCP on Nov. 10, 2017, and on Nov. 17, the REIT declared an event of default under the mezzanine loan. Consequently, the agreement became null and void, and the deposits were forfeited to HCP.
Additionally, Tandem did not make its December 2017 interest payment to HCP. The REIT, however, does not expect that the $5 million in missed interest payments will have a material impact on its fourth quarter or yearly 2017 results. All the while, Tandem remains current on its senior loan interest payments.
HCP and Brookfield Financial—a global investment bank that the REIT has secured as an advisor—are together assessing and pursuing several alternatives, including restructuring the mezzanine loan, foreclosing on the underlying collateral, or selling all or a part of the mezzanine loan to a third party or to a joint venture between HCP and one or more additional investors.
HCP declined to provide further comment to Senior Housing News; as of press time, Consulate Health Care had not responded to a request for comment.
As of market close on Friday, HCP’s stock price had fallen approximately 1% to $25.01.
Written by Mary Kate Nelson