The trouble with money

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Capital is boomeranging back to the senior living sector.
Capital is boomeranging back to the senior living sector.

After the housing market collapsed in 2008, the financing community took a break from real estate investing, including seniors housing projects. The immediate aftermath had nearly everyone sitting on the sidelines as the general economy slid into a major recession.

Six years later, the lending environment is a stark contrast to the stagnant atmosphere that brought senior housing investment to a standstill as interest in the market is intensifying from various sectors. While increased activity is generally a positive trend, the seniors housing market has been wracked by overbuilding and irrational exuberance in the past and industry veterans like Dan Biron are on guard against the same mistakes being made.

“The last thing this industry needs is overbuilding,” says Biron, senior vice president at Berkadia. “What worries us is the number of development deals for construction financing. At the [National Investment Center for the Seniors Housing & Care Industry] National Conference there were 500 first-time attendees and 160 of them were developers. We cringe when we see that.”

Interest from investors outside of healthcare and seniors housing typically raises skepticism among those who specialize in the field and are acutely aware of its parameters. Yet because the demographics are so compelling, it is attracting money from investors unfamiliar with the market, Biron says.

“It is usually one of two examples,” he says. “One is a guy wakes up one morning and decides to pursue seniors housing and the other is a guy who decides his condo development isn't working so he wants to convert to senior living. They are desperate to throw money at something and, unfortunately, we can't control it.”

Jeff Binder, principal and managing director of Senior Living Investment Brokerage, agrees that market overheating is a legitimate worry.

“The greatest area of concern revolves around development and if certain markets are ‘too hot' right now, or if virgin developers in the space are savvy enough to successfully quantify markets, build appropriately, and operate efficiently,” he says.

Even so, the market currently appears to have a strong inventory balance and smart money has been the prevailing source of funds to date, Biron says. 

AL sector favored

Although all facets of seniors housing — independent living, assisted living and continuing care retirement communities — are drawing investor interest, the lion's share of funds is going to the assisted living with memory care model, financial specialists say.

“Since assisted living is driven primarily by private pay residents, most lenders that finance in the healthcare space would rather lend to that type of payer class than the Medicare and Medicaid risks in the skilled nursing world,” says Kathryn Burton Gray, senior managing director of seniors housing and healthcare for Red Capital Group.

The focus for Red Capital this year has been on providing balance sheet development loans, specifically for new construction and re-positioning, Gray says. 

“The demand for new assisted living and specialty stand-alone memory care has resulted in our focus on accommodating these requests,” she says. “Our strong balance sheet has allowed us the flexibility to better serve our clients in their construction and rehab projects.”

Concurrently, the continued growth of Alzheimer's and dementia residents will present opportunities for assisted living operators, she says, because “the statistics are staggering in terms of anticipated Americans to need some form of memory care in the next 25 years.” 

Gray also expresses concerns about the stability of the marketplace, however, noting that “we are witnessing a trend where this segment is attracting interest from a variety of developers to include a large number of ‘multifamily-specific' developers that may not fully appreciate that this is an operating business model with a needs base, so partnering with the right operator is crucial to the success of each project.”

The lending mosaic

Not so long ago, seniors housing operators had limited options when it came to financing — HUD, Fannie Mae or Freddie Mac were the only game in town. Those agencies have underwritten the bulk of industry loans in the years following the economic meltdown and continue to handle a large portion today.

Michael Vaughn, senior vice president of FHA Finance for Walker & Dunlop, says his firm regularly works through the HUD Lean program as well as with Fannie and Freddie. 

“HUD insured $1.4 billion in long term fixed rate loans on assisted living and board and care facilities in their fiscal year ending Sept. 30,” he says. “Fannie and Freddie had lower volume, but are very active.”

Over the past two years, a variety of financiers have entered the marketplace, including banks, private equity firms, commercial backed mortgage securities, life insurance companies and bridge lenders. 

Most of the mergers and acquisitions have been handled by real estate investment trusts, which were one of the first players to return to seniors housing.

“The continuing demand for affordable assisted living and memory care is a positive trend for those owners who are able to meet it,” Vaughn says. “Some markets for higher rate facilities may be becoming saturated and lenders are aware of the need to exercise caution where those conditions are starting to occur. Any significant decline in housing prices would have a negative effect, but the gradual recovery of the economy has allowed more families to afford assisted living and memory care options for their elders.” 

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