Higher lending caps for the two government-sponsored enterprises, plus a pullback in real estate financing by banks, strengthens their position
By Jane Adler
While Fannie Mae and Freddie Mac won’t reach the record seniors housing mortgage volume achieved in 2015, the agencies are expected to have funds available through the end of the year. That’s good news for building owners and buyers since the government-sponsored entities (GSEs) have become among the most stable and active permanent capital providers in the sector.
The GSE financing programs haven’t undergone any big changes lately, but the agencies continue to tweak their business models to remain competitive. And investors that purchase GSE mortgage-backed securities are becoming more comfortable with the sector.
The pool of borrowers has shifted, however. The big healthcare REITs are not as active in the acquisition market as they had been, though private equity firms and other buyers are taking up some of the slack. And despite ongoing concerns that the agencies could be dissolved (see sidebar, page 23), borrowers are lining up for deals while interest rates are low.
“It’s a great time to be a borrower,” says Aron Will, vice chairman of the national seniors housing group at CBRE who operates out of the Houston office. “The cost of capital is good, and there’s a lot of liquidity in the marketplace.”
Last year, the GSEs racked up record volumes. Fannie Mae purchased loans for seniors housing properties totaling $2.7 billion, nearly double 2014’s volume of $1.5 billion. Fannie Mae provides permanent financing for independent and assisted living, and memory care properties, as well as a smattering of skilled nursing facilities within larger retirement communities.
Seniors housing is part of Fannie Mae’s multifamily portfolio, which had a total volume of $42 billion last year. The seniors housing portfolio totals about $12.4 billion and has no seriously delinquent loans, the agency reports.
Fannie Mae’s seniors housing loan volume should revert to normal levels this year, according to Roosevelt Davis, senior account executive at Fannie Mae based in Washington, D.C. He expects loan volume in 2016 to total about $1.5 billion.
The huge uptick in volume at Fannie Mae in 2015 can be attributed, in part, to large borrowers that took advantage of the agency’s credit facility, says Davis. The facility functions something like a revolving line of credit. Borrowers can substitute assets in the facility as needed. “It gives the borrower great flexibility,” he says.
At Freddie Mac, seniors housing represents about 5 percent of the agency’s multifamily portfolio. In 2015, Freddie Mac purchased $2.5 billion in seniors housing loans. Loan volume was $1.2 billion the previous year. Freddie Mac finances seniors housing property types similar to those of Fannie Mae, though Freddie Mac also backs loans for some age-restricted apartments.
Freddie Mac has introduced its own flexible credit facility, which is designed for seniors housing owners with large development and acquisition pipelines.
In 2014, New York-based Greystone, a national provider of multifamily and healthcare mortgage loans, arranged the first Freddie Mac revolving credit facility for Oakmont Senior Living based in Windsor, Calif. The $150 million credit facility allowed Oakmont to borrow against the increased values and incomes generated by the properties up to the maximum loan amount.
“The [revolver] has been well received,” says Neal Raburn, managing director of seniors housing finance at Greystone’s Atlanta office. “It’s an attractive option.”
Lending cap raised
For seniors housing borrowers, perhaps the most important news is that both Fannie Mae and Freddie Mac will have funds available for the remainder of the year. In May, the Federal Housing Finance Agency (FHFA), which regulates the GSEs, increased the 2016 multifamily lending caps from $31 billion to $35 billion. Caps are meant to ensure that the GSEs don’t impede the participation of private capital in the market.
After concerns surfaced in 2015 that the agencies would hit their caps well before year’s end, it was decided that Fannie Mae and Freddie Mac would meet quarterly with the FHFA to review caps in order to ensure liquidity in the market. The recent adjustment was based on increased estimates of the overall size of the multifamily market.
“We view the hike in the cap as extremely significant,” says Russ Dey, vice president at Walker & Dunlop, a large commercial real estate lender based in Bethesda, Md. “It’s an acknowledgement that Fannie Mae and Freddie Mac play a critical role in the seniors housing and multifamily markets.”
While borrower concerns about exceeding the lending cap have not entirely vanished, Dey says worries are about as low as they’ve been in quite some time. “It’s encouraging that the FHFA is proactive and taking steps in a timely manner,” he says. “That’s hugely important.”
The GSEs could become even more important to the seniors housing sector as other lenders pull back in the months ahead, says Dey. He notes that big banks are lending less because of regulations stipulating high levels of capital reserves.
And, he adds, life insurance companies and pension funds, which are becoming more active in the sector, typically have already allocated their entire funds by midyear. “That’s a pertinent reality for a lot of borrowers,” says Dey. “The nice thing about Fannie Mae and Freddie Mac is that you know they’ll be there for you all year long.”
In an effort to create more affordable housing, it’s important to note that a portion of a seniors housing loan may be excluded from the multifamily cap if it meets certain targets. “Affordability is a key metric we look at,” says Davis at Fannie Mae. While the percentage of seniors housing loans that falls outside the cap was not available, Davis says about 30 percent of Fannie Mae’s multifamily business is not capped.
About one-third of Freddie Mac’s multifamily business is uncapped, says Steven Schmidt, national director of Freddie Mac Senior Housing. About 50 percent of the seniors housing business falls outside the cap.
In general, the most aggressive credit terms, structures and prices are available for loans that have a high percentage of affordable units excluded from the cap, says Schmidt who is based in Chicago.
Walker & Dunlop recently closed a $9.57 million loan from Fannie Mae for The Lexington, an assisted living property in Lincoln, Neb. The development includes 104 units and is owned by a local entity that also operates the building.
A majority of the 12-year, fixed-rate loan was not included in Fannie Mae’s cap because the property provides affordable assisted living, says Dey at Walker & Dunlop. The borrower used the funds to pay off existing debt on the property as well as equity investors in the low-income housing tax credits used to finance the project.
“Fannie Mae came in with a great quote and allowed the borrower to execute on a business plan to provide an affordable alternative in an industry that otherwise is expensive for the average person,” says Dey.
Program tweaks
Fannie Mae and Freddie Mac lenders don’t expect any big interest rate hikes, especially after the subpar May employment report showing that the economy added only 38,000 jobs.
The yield on the benchmark 10-year Treasury note fell to 1.70 percent, near its 2016 low, after the report was issued.
“The interest rate environment isn’t that different than it was 12 to 18 months ago,” notes Will at CBRE. “Rates are relatively inexpensive.”
Fannie Mae and Freddie Mac offer fixed-rate loans with interest rates that currently range from the high 3s to 4.35 percent for a five-, seven- or 10-year term. With properties trading at cap rates of 6 to 7 percent and loans in the 4 percent range, it’s still a healthy environment, says Will.
He notes that the GSEs have been more aggressive in some ways than other long-term, fixed-rate capital providers. Borrowers seeking high leverage and an extended interest-only period should consider the GSEs, says Will. “That’s where they shine.”
Freddie Mac recently began offering a rate lock for 75 days after the execution of a seniors housing loan application. The adjustment was made in response to an uncertain interest rate environment. “It’s been really well received by borrowers,” says Schmidt at Freddie Mac. “It’s a game changer.”
Schmidt adds that the agency has recently focused on streamlining its loan processing times, cutting it by several weeks. Deals are now processed in 45 to 60 days, he says.
While the basic elements at both GSEs remain the same, the agencies are aware of the shift that has taken place in the pool of borrowers. With the cost of capital rising for the REITs, private equity firms and other groups are making more acquisitions now.
The GSEs continue to emphasize the importance of the operating partner — especially for borrowers new to the seniors segment.
“We’re looking for good, experienced owners,” says Phyllis Klein, vice president of structured and seniors housing at Fannie Mae. “They should know how to manage a property and be respectful of residents’ needs,” adds Klein. She notes that the agency finances the entire spectrum of seniors housing, not just Class A properties.
From an underwriting perspective, operations are critical, according to Allison Holland, senior vice president of healthcare agency lending at Capital One Bank in Dallas. “Seniors housing is very different from multifamily deals,” she says. “The way the community is run is key.”
In 2015, Capital One closed $4 billion of multifamily loans with the GSEs, including seniors housing. Holland notes that Capital One plans to significantly increase its seniors housing lending activity this year.
An analysis of occupancy continues to be a big part of the underwriting process. The GSEs are seeking properties with stable or rising occupancies, says Holland.
A lack of seniors housing experience at a private equity firm shouldn’t be an issue as long as the investor partners with a strong operator, says Holland. “The operator needs a good track record.”