The joint venture company of TPG Real Estate and Sabra Health Care REIT (Nasdaq: SBRA), which involves more than 150 senior living communities operated by Enlivant, is in the process of negotiating with lenders to restructure its financing, following certain failures to meet financial covenants and a notice of default.
That is according to amended financial documents Sabra published on March 20. The documents detailed there is “substantial doubt” about the ability of the JV to continue as a going concern.
The JV, under which Sabra owns 49% and TPG owns 51%, faced substantial expenses and lost revenue as a result of the Covid-19 pandemic. Operational and occupancy challenges, coupled with an increase in debt service costs related to rising interest rates, also added to the company’s financial difficulties.
In an email to Senior Housing News, Sabra CEO Rick Matros said the REIT was working on moving 11 Enlivant communities it owned outright from Enlivant to a new operator.
“Our sole focus is transitioning the 11 facilities we wholly own to a new operator and are currently working on that,” he told Senior Housing News Friday.
TPG and Sabra own 154 communities across 18 states that are operated by Enlivant. In 2021, JV partner Sabra signaled plans to exit the Enlivant JV. At that time, Matros said the company intended to allocate proceeds from a sale toward future acquisitions and managing its balance sheet. But that sale was pushed down the road. The sale process was “ongoing,” Matros said on Sabra’s Q4 2022 earnings call.
Analysts noted that the JV’s difficulties may not have a meaningful impact on Sabra, as the REIT wrote off its equity stake to zero in the first quarter of 2023, and share of the outstanding debt is non-recourse. Even so, “the saga provides a good example of the credit issues that can emerge for highly levered properties and/or companies when impacts from higher interest rates and tighter credit availability flow through real estate,” according to a recent note from Green Street.
When reached for comment, a spokesperson for Enlivant said the company “has delivered high-quality, compassionate care to residents across the country” for over 10 years.
“We are committed to working with our lenders and owners to position the business in a way that best serves and protects the wellbeing of these individuals and their families,” a statement from Enlivant reads.
Enlivant’s uncertain future
Occupancy for the Enlivant portfolio sat at 73.4% as of the end of 2022, representing a 580 basis point gain from the company’s pandemic low census of 67.6% in March 2021. For the full year of 2022, Enlivant reported a net loss of $64.3 million.
Some conditions in the Enlivant JV are improving, such as monthly contract labor costs, which trended down to $390,000 in January of this year. The company also implemented a 9% rate increase late last year, a marked increase over the roughly 5% increase in 2021. Overall, total revenue at the Enlivant JV grew 15% between 2021 and 2022.
But despite that progress, Enlivant will need “additional liquidity to continue its operations over the next 12 months,” the audit in the March 20 filing notes. At the heart of that issue is the fact that rising interest rates have impacted the company’s debt service costs, going from a monthly interest expense of roughly $1.7 million in the fourth quarter of 2021 to nearly $3.6 million in the fourth quarter of 2022.
As of Feb. 11, 2023, the company was no longer current on principal and interest payments for Fannie Mae and Freddie Mac loans, per the filing. On March 15, 2023, the company received a notice of default from Keybank. Previously, on March 3 of this year, the company received a notice on its Fannie Mae notes for “immediate repayment in full of the entire unpaid balances of the loan, accrued and unpaid interest” and costs/attorneys’ fees. No such notices have come from Freddie Mac or Keybank.
On March 3, the servicer for the Freddie Mac loan portfolio issued a termination of management agreements notice to Enlivant, which led to Freddie Mac, the operator and its JV owners to enter into a cooperative agreement. Cooperative agreements between the JV and Fannie Mae or KeyBank have not yet been announced.
At present, the filing notes, Enlivant and JV partners are negotiating financing arrangements with lenders. That restructuring could include obtaining forbearance agreements, modifying financial covenants and reducing rate cap escrow requirements, although there is no guarantee of such outcomes.
“A year ago, the effective interest rate on the debt sat in the mid-2% range and is now running in the low-7% range,” the recent Green Street report reads. “Interest rate hedges mitigated the impact of higher rates in ’22, but higher bills are now coming due with a substantial amount of interest rate caps expiring on January 1st of this year, and another batch set to expire in the middle of this year.”
Stifel Analyst Tao Qui wrote to Senior Housing News in an email that there are questions about the viability of Enlivant, given the difficulties and potential changes.
“Since [TPG] has been funding Enlivant manager through support payment of $13M in 4Q22 and $25M for FY2022, there is a question of whether the manager is still viable without the larger Enlivant JV portfolio to manage,” he told SHN.
Enlivant’s roots as a company can be traced back to Assisted Living Concepts, which in 2014 transformed into Enlivant, underwent a turnaround and moved its headquarters from Milwaukee to Chicago under the direction of then-CEO Jack Callison.
In 2021, Callison left Enlivant to lead Sunrise Senior Living, and was succeeded by current CEO Dan Guill.