As an operator or sponsor, you currently most likely are assessing a variety of turnaround opportunities. In fact, 50% to 60% of financing in the senior housing and skilled nursing sectors involves turnarounds. If you’re seeking a loan to implement a turnaround strategy, then you’ll need to meet multiple criteria for your banker to say yes.
The prevailing market trends continue to favor turnarounds. According to data released in April by the National Investment Center for Seniors Housing & Care, overall senior housing demand and occupancy rates were up, with construction starts and inventory down; however, occupancy rates vary across primary markets.
Based on the first-quarter NIC data, the occupancy rate for senior housing increased 0.1%, to 88.1% compared with the fourth quarter of 2018. This figure was up 20 basis points over the third quarter of last year. Construction as a share of existing inventory for senior housing was 6.7% versus a high of 7.5% at the end of 2017. The absorption rate in the first quarter was 3%, an increase of 0.7% from a year earlier.
Second-quarter numbers didn’t prove to be as encouraging in the short term, but demographics and other related trends favor senior living in the long term.
Ten thousand baby boomers are retiring daily. With new development slowing and older adults with higher-acuity needs seeking care and services via independent and assisted living, it makes sense to scrutinize the turnaround of an existing property to meet the growing senior demand and expand your business.
So if you need financing to snap up that deal, how do you make your lender happy? Here are three tips.
1. Prepare a comprehensive package. You’ll need to demonstrate how you’re going to execute your turnaround with a detailed and concrete plan. Your banker also will want to see proof of your prior experience and your history as an operator of senior housing and care facilities. Be specific on details of both projected revenue and expense enhancements.
2. Present your entire portfolio to your lender. Your banker will want to examine the complete picture of your properties. Present your entire portfolio broken down by income, Centers for Medicare & Medicaid Services rating and/or other similar rating (if applicable) and debt service. Your banker needs to understand the full scope of your operation and how well you run your global portfolio of facilities.
3. Be up-front about the future expansion plans for your portfolio. You may be seeking funding for a turnaround in one market and simultaneously pursuing turnaround acquisitions elsewhere. You also may have contacted multiple financing sources. Discuss your future plans in depth with your lender. Bankers are evaluating a set of specific factors in the review of your portfolio, and those factors determine the ultimate decision on your loan. If you add a new property to the mix, it will change the entire dynamic.
It also helps to work with a full-service bank experienced in all aspects of financing. Ideally, you should find a financial institution that will take a more personal approach and develop a long-term relationship with you, beyond the individual transaction. Your lender should be your partner as you grow.
Turnarounds are a fact of life in the senior housing sector, and the potential is great. According to June data from the National Reverse Mortgage Lenders Association, housing wealth among people aged 62 or more years reached $7.14 trillion in the first quarter of 2019, a record. Over time, it’s highly likely that seniors’ equity in their current homes will find its way into independent and assisted living. Work carefully and diligently with your lender and both of you could benefit.