Ventas will assume ownership of the collateral that supports its approximately $486 million cash-pay mezzanine loan to Santerre Health Investors, the Chicago-based real estate investment trust announced Friday.
The REIT said it expects to take ownership of the Santerre portfolio assets through a “loan to own” structure that converts the outstanding principal amount of the mezzanine loan to equity, with no additional consideration being paid.
The transaction will be completed in the second quarter, Molly McEvily, Ventas vice president of corporate communications, told the McKnight’s Business Daily.
The portfolio, according to Ventas, includes 48 skilled nursing facilities and hospitals, representing almost 40% of the Santerre portfolio’s net operating income; 16 large-scale senior living operating portfolio communities, accounting for almost 20% of NOI; and 88 medical office buildings.
Ventas made the loan to Santerre in 2019 when the properties’ previous owner, Colony Capital, refinanced its debt on its healthcare assets, Stifel analyst Tao Qiu, CFA, told the McKnight’s Business Daily. The interest rate was the London Interbank Offered Rate [LIBOR] plus 6.42% at that time.
“The loan was performing when LIBOR hovered around 0% to 1% and blended asset cap rate (yield) was 7%,” Qui said. “Fast forward three years. Now, LIBOR stood at over 5% and, suddenly, cost on the loan is over 11% at the same time the part of the underlying portfolio (nursing home and senior housing) is still recovering from COVID losses, as seen in the 74% occupancy rate disclosed today, and therefore yield less. So you have a scenario where return on asset is below cost of debt, and it is not surprising that the owner cannot pay and debt needs to be restructured.”
Until Ventas takes ownership, the REIT has the right to receive interest income due on the loan. The company reported that the interest due in January and February previously was paid in full and that it has received approximately 90% of the interest due in March under the loan.
Qiu said that, in her view, Ventas’ transaction is an example of how the fast-rising interest rate could affect debt financing and refinancing.
“Among all the discussion about how the Fed has broken the market with the most aggressive tightening, commercial real estate has been an area of focus,” she said. “For those sitting on levered structures with floating debt, 2023 may be the year of reckoning.”
For example, she noted that Dallas-based Sonida Senior Living announced on Thursday’s fourth-quarter and full-year 2022 earnings call that it had defaulted on loans related to mortgages covering four of the company’s properties after electing not to make principal and interest payments in February and March. Outstanding debt related to those loans was $70 million as of Dec. 31.
