Next Healthcare Group (“NHG”) is a privately held healthcare real estate investment firm specializing in the acquisition and management of high-quality, skilled nursing facilities. NHG is primarily aligned with national operators with a proven track record of operating skilled nursing facilities. NHG has acquired over $250 million of skilled nursing facilities, primarily in the southeast, midwest and west.
In 2013, Sims partnered with a related company of NHG, HBS Assets, providing a HUD PlusTM subordinate loan which, together with a senior bridge loan, was used to finance the acquisition of a portfolio of two nursing homes located in Florida (the “Portfolio”). Upon acquisition, the Portfolio was leased to Consulate Health Care (“Consulate”) based in Maitland, Florida. Consulate is one of the nation’s leading providers of senior healthcare services, specializing in post-acute care. Consulate operates 182 facilities that offer services ranging from short-term transitional care to Alzheimer’s and dementia care.
The Portfolio has consistently demonstrated strong operating and financial performance since it was acquired in 2013. As part of its strategy when acquiring the Portfolio, NHG intended to pursue a HUD refinancing. True to plan, NHG completed a HUD insured refinancing in 2015, repaying the outstanding senior bridge loan and a portion of the Sims HUD PlusTM loan. The balance of the HUD PlusTM loan remained in place upon the HUD refinancing.
Seeking to take advantage of the strong operational performance of the Portfolio, NHG approached Sims to evaluate a recapitalization of the subordinate loan and equity invested in the project. NHG’s primary goals for the recapitalization were to a) minimize debt service payments to improve cash flow received from lease payments and b) maximize leverage to access equity invested in the Portfolio. As a second step to the recapitalization strategy, NHG intended to pursue additional HUD financing within 6 to 12 months, the proceeds of which would be used to repay a portion of the existing subordinate debt, presenting a challenge as any new subordinate debt would need to remain eligible for the potential HUD refinancing.
To effectuate the recapitalization, Sims acquired and modified its existing HUD PlusTM loan and provided a new mezzanine loan (collectively the “Sims Loans”). This structure provided NHG with the flexibility to refinance the modified loan with additional HUD debt at a later date. The Sims Loans were structured with graduating amortization schedules, minimizing annual debt service payments for the borrower. Proceeds from the new mezzanine loan were used to recapitalize a portion of NHG’s equity interest in the Portfolio, as well as fund an interest reserve and issuance expenses related to the financing.
A new entity, NHG Funding I, LLC (the “Sims Issuer”), was formed to issue taxable bonds to fund the Sims Loans. Sims successfully sold $7.4 million of subordinate taxable bonds through its Private Client Group to high-net-worth accredited investors. Sims was able to structure the subordinate financing to meet the capital needs of NHG. The modification of Sims’ existing loan provided NHG with debt service savings while maintaining NHG’s flexibility to retire the loan with a future HUD refinancing. New proceeds from the financing allowed NHG to recapture a portion of its equity interest in the Portfolio, providing NHG with capital to pursue additional investment opportunities.