When it comes to investment in senior living and post-acute care communities, there is plenty of money available for new projects. In the current marketplace, this money is neither the “crazy money” or the “careful money” of the past. It is somewhere in between, which is a reasoned, pragmatic outlook from financiers.
Some lenders, such as Mark Meyers of Walker & Dunlop, are downright bullish.
“There has never been a better time to be a beneficiary of the capital stack provided through various means in our industry,” says Meyers, managing director. “The maturation of operators, property types and services, along with the science of identifying optimal sites and developing successful properties, along with the maturation of the seniors housing capital markets, results in a powerful opportunity.”
In this environment, the onus is on operators to demonstrate their mettle for those who hold the purse strings for new projects, whether new greenfield developments or extensive renovations of existing buildings. Showing solid fiscal and occupancy numbers should get the interest of investors, says Anders Pesavento, vice president of capital markets for Ryan Companies US.
“We feel the market is currently strong for finding accretive financing for the right projects,” he says. “Lenders want to know who the sponsor is and, more importantly, who the operator is. We continue to talk with new lenders – both traditional banks and debt funds – that want to get into the space and have capital allocated for senior living projects.”
Likewise, Jeff Sands, managing principal and general counsel for HJ Sims, agrees that senior living projects are still generating interest, although it depends on the purpose.
“Acquisitions and renovations are still attracting money. There has been a decline in debt and equity for new development,” he says. “For those new projects being financed, the key to success is the strength and track record of the owner/operator.”
Because a strong track record is essential to attract investors’ cash, operators need to exert discipline in several areas, Meyers says.
“It demands a keen eye on properly positioning the property in the market, effectively maintaining and renovating each property and offering the right mix of pricing and services for a given market,” he says. “It also requires a keen eye on new competitors entering the market, or ones who are repositioning through renovations or development. Too many operators have wandered far afield from their base of expertise, and they have tried to become experts across too broad a spectrum and too many markets.”
Conner Girdley, director for Lancaster Pollard, asserts that because senior living is an operator-driven business, it makes sense that capital would be available to those with good track records.
“Yet it is more challenging for developers that do not have an operating platform or existing relationship with an operator,” he adds. “Third-party managers have stepped in to provide operational expertise, but finding financing for new developments is more challenging when the manager does not have an ownership stake and may walk away from the project with little consequence.”
Low rates favorable
After a year of hiking interest rates, the Federal Reserve has reversed course, which presents new opportunities in the marketplace, says Scott Thurm, chief credit officer of FHA lending for Greystone.
“With interest rates being so low again, it makes a lot of sense for investors to capture equity to renovate properties or capitalize an expansion of their portfolio,” he says. “As an example for one client that has limited capital to expand their holdings, we are exploring the option for them to first come in as an operator with the potential to buy the assets in the future. And we have helped other clients find equity sources or mezzanine loans to fill gaps or capitalize their equity.”
To be sure, property investors should be taking advantage of the current low rate environment to invest in renovating and modernizing older buildings, or in some cases, building a replacement facility, Thurm says.
“The low rates can also help with affordability and reimbursement rate uncertainty in the future,” he says. “I also think figuring out how to deliver more services to independent living facilities – or even in the home – will be imperative for the future demand that is rapidly becoming a reality.”
Aaron Rulnick, managing principal for HJ Sims, says a strong bond market has helped keep rates at near-historic lows. The situation has been driven by two related factors – cash inflows into the bond funds and limited supply of tax-exempt bonds being issued.
“The lack of balance between supply and demand has shifted with a surge of issuance, which often happens towards the end of the year,” he says. “As the market tries to absorb the flush in issuance, there has been an upward pressure on interest rates. Appetite from commercial banks has also been robust during the year.”
As the spread between short-term and long-term rates narrowed in the early part of the year, many providers shifted towards long-term financing, Rulnick says.
“Given recent action by the Federal Reserve to reduce interest rates, bank financing has become more attractive,” he says. “Despite this draw towards commercial banks, the increasingly complex bank regulatory environment has challenged their ability to be competitive in new construction financing by placing and increasing equity requirements for project finance.”
Project, mix preferences
Trends in project types and population mix historically have driven new developments, with investors showing interest in particular building models and resident types. With maturation of senior living, the financial community has gotten more savvy and creative with the types of projects they support, Pesavento says.
“Both project types are attractive, but only if you can assume the underwriting is based on realistic assumptions supported by real market data,” he says. “Urban projects are something we are looking at but are mindful of. Type 1 construction, commonly found in high-rise buildings, and Group 1 occupancies require higher rents to support the cost, and not all markets have the right demographics and incomes to support this, so you need to be careful and do your homework.”
Melissa Messina, senior vice president for HJ Sims, says: “Greenfield projects are less of a focus by financiers, though greenfield development still has limited sources of capital. Lenders, underwriters and investors are looking to the market surrounding the project and how deeply those markets are penetrated by existing products.”
Good sites are becoming more difficult to find and developers are having to be more creative, Girdley says, adding, “We have seen an increase in financing requests for mixed use developments, repurposing of existing buildings and developments on university and hospital campuses.”
Population mix has been centered around assisted living and memory care, a decision influenced by the amount of product that is coming into the market, Rulnick says.
“There has been very little development of skilled nursing in recent years as efforts have shifted towards replacement facilities, renovation, downsizing of skilled nursing offerings and repositioning skilled nursing with private units and short-term rehab,” he says.
Fannie, Freddie & HUD
Determining the right type of financing depends on property type, age, investment horizon, investor profile and risk tolerance. Based on those criteria, many operators select government-sponsored enterprise financing, such as Fannie Mae, Freddie Mac or HUD. These agencies have underwritten the bulk of long-term care financing over the past decade.
“After taking some time to re-group this summer following higher than expected loan volume through the first half of the year and regulatory uncertainly, Fannie and Freddie now have a clear mandate from the Federal Housing Finance Agency through the end of 2020,” says Russell Dey, vice president for Walker & Dunlop.
“The senior housing asset class dovetails well with Fannie and Freddie’s mission. In the permanent financing segment of the market for stabilized assets, Fannie and Freddie continue to offer very competitive loan terms for experienced owners and operators. HUD also remains an important part of the seniors housing and skilled nursing debt capital markets, having closed $3.7 billion in total loans through their latest physical year. With its fully amortizing, 35-year loan terms, HUD arguably offers the most compelling financing option for long term holders of both assisted living and skilled nursing properties.”
HUD predominately is active in the refinancing of existing facilities, most notably for “bridge-to-HUD” transactions, and for the purchase of existing properties, says Anthony Luzzi, president of Sims Mortgage Funding.
“Approximately 10 percent of HUD’s loan volume from 2016 to 2018 was for new construction projects, substantial rehabilitation of existing structures, or additions or renovations to existing properties with HUD-insured loans,” Luzzi says. “HUD is still clearly a major player in the refinancing space but has been modestly active for development deals.”
Geography lesson
The Sunbelt has seen the most senior living development activity over the past couple decades, and although states in the South and West continue to be a focus, other regions, such as New England, mid-Atlantic and Midwest, also are seeing significant growth, Sands says.
“Seniors in these areas are either aging-in-place or returning to their hometown from retirement areas to be with family,” he says.
Ryan Companies also is very interested in the upper Midwest, Pesavento says.
