Sims Mortgage Funding (SMF) completed its first HUD Lean Portfolio transaction at the end of September when it closed on six FHA-insured loans totaling $72,320,000 for Radius Management Services II, a regional health care company that operates through affiliates and/or manages approximately 1,900 skilled nursing, assisted living and chronic care hospital beds in Massachusetts and Rhode Island. The loans, which were insured under the Section 232/223(f) program, enabled Radius to acquire a portfolio of six skilled nursing facilities totaling 866 beds that it had been operating pursuant to leases with a national healthcare real estate investment trust (REIT). The facilities are located throughout central and eastern Massachusetts in Worcester, Southbridge, Lowell, Plymouth and Cape Cod. The six FHA-insured loans each were underwritten to 80% loan-to-values, with five of the six featuring 35 year amortizations and the sixth with a 30 year amortization. The weighted average debt service coverage ratio for the portfolio once the FHA-insured loans were priced was 2.13X based on the trailing 12 months ended 3/30/10, and the loan to acquisition cost ratios ranged from 83% to 85%. Our underwriting required a total of $207,763 in critical and non-critical repairs, $1,103,985 in initial deposits to reserve for replacement funds, and annual reserve fund deposits starting at $815 per bed.

Cape Heritage, A Radius Healthcare Center	Cape Regency, A Radius Healthcare Center

The Radius portfolio transaction incorporated some of HUD's newest and/or complex program features: accounts receivable financing for the operating companies; secondary financing raised from accredited investors and secured largely by FHA-approved promissory notes; a master lease structure that pools the cash-flow of all six facilities into repayment of the FHA-insured loans, and; debt service escrows on four of the properties that burn off once certain performance targets are met. The latter two features were integral in maintaining the FHA-insured loan amounts at an 80% loan to value. Further, by working closely with the HUD Lean senior program personnel before mortgage insurance applications were submitted, we were able to develop a strategy with respect to how the REIT's purchase price for the properties would be treated for underwriting purposes that enabled Radius to maximize the amount of the FHA-insured loans. In transactions involving REITs, FHA typically requires a 25% discount to be applied to the purchase price or existing debt allocable to a specific property; we were successful in having no discount applied to the purchase price.

Radius Healthcare Center at Southbridge	Radius Healthcare Center at Plymouth

Although the FHA-insured loans were the primary components of the Radius capital structure, the acquisition could not be completed without the $11.3 million in secondary financing arranged by Herbert J. Sims & Co., Inc. through its "HUD Plus" Program, which was discussed in detail in the September 28 edition of the Capital Market Update. HUD Plus can be a powerful leveraging tool by providing additional capital that a) lowers the amount of FHA-insured debt needed, creating a more conservative underwriting that would qualify for HUD's expedited "Green Lane" review, b) limits the borrowers' cash requirements at closing, or, c) as in the case of the Radius Portfolio transaction, completes the sources of funding, enabling a transaction to move forward.

Radius Northwood Healthcare Center (Lowell)	Radius Healthcare Center at Worcester