Loan production rose 5 percent to $2.84 billion in 2016 fiscal year, with Lancaster Pollard edging out KeyBank for the top spot
By Matt Valley
For the second consecutive year and sixth time in seven years, Lancaster Pollard Mortgage Co. ranks as the top-producing lender in the U.S. Department of Housing and Urban Development’s Lean mortgage insurance program. KeyBank moved up several notches to second place in the rankings while Housing & Healthcare Finance came in third.
The HUD Lean program generated $2.84 billion of loan volume during the 2016 fiscal year, which ended Sept. 30, an increase of 5 percent over the prior year. Thirty-four lenders closed loans within the program in FY 2016 with Lancaster Pollard responsible for 21 percent of the total activity, according to the HUD Office of Healthcare Programs.
More specifically, Lancaster Pollard closed 60 loans totaling $554.4 million in FY 2016. KeyBank was a close second with 54 loans closed for $521.8 million, according to HUD. Housing & Healthcare Finance LLC captured the third spot in the rankings with 28 loans closed for $355.9 million.
“Long-term rates fell and remain well below historical averages, and in that low interest rate environment we were able to close 53 refinancings using the FHA/HUD Section 232/223(f) program, mitigating interest rate risk for our clients and improving their fiscal outlook,” says Kass Matt, president of Lancaster Pollard based in Columbus, Ohio.
More commonly referred to as the HUD Lean program, the FHA/HUD Section 232/223(f) program allows for the refinancing or acquisition of healthcare properties, including licensed nursing homes, assisted living, intermediate care, and board and care facilities.
Defying expectations
The yield on the 10-year Treasury note stood at approximately 2.2 percent in January 2016, but by July had tumbled to below 1.4 percent. As of Nov. 4, the 10-year yield stood at 1.8 percent.
“At the beginning of 2016, there was a general feeling that we would see a gradual rise in long-term interest rates, but once again it never materialized,” says Matt. “What resulted however was a significant flattening of the yield curve, which created tremendous opportunities for our clients throughout the year.”
A flat yield curve signifies there is little difference between short-term and long-term rates for bonds of the same credit quality. When industry professionals ask Matt his outlook on interest rates, he tends to look more at the shape of the yield curve and the overall yield on the long-term end to gauge what impact that will have on lending volume.
In addition to the 53 refinancings completed in FY 2016, Lancaster closed seven loans through the HUD/FHA Section 232 and 241(a) programs to provide funds for new construction, expansion and substantial renovations.
The availability of debt capital for construction projects has dried up considerably given the various regulations that banks are grappling with today, according to Matt. For example, regulated institutions are required to set aside increased capital for high-volatility commercial real estate loans.
“We were very excited to close seven transactions in 2016 to facilitate either new construction or a rehabilitation or expansion for our clients. The 241(a) program is one that we’ve used with our clients for a number of years. It’s a program that we think is very advantageous for our clients who are looking to expand or renovate existing HUD facilities.”
Separately, and not included in the aforementioned totals, Lancaster Pollard completed 17 loan modifications of existing HUD loans for a total of $161.2 million, down from $457 million the prior year.
Loan modifications serve a dual purpose, says Matt. Not only do they reduce the clients’ debt service and the overall interest rate, but they also create a stronger insured portfolio for HUD because of the lower interest rate. “There is an absolute win-win benefit to that type of structure,” he says.
KeyBank closes mega deal
During fiscal year 2016, Key-Bank closed 54 loans for $521.8 million through the HUD Lean program, vaulting the bank to second place. That compares with 11 loans closed for $110 million in fiscal 2015. What led to the big jump year over year?
In one of KeyBank’s biggest transactions of FY 2016, its FHA and bridge lending teams worked to close a large portfolio of 41 assets valued at $392 million through the Lean 232/223(f) mortgage insurance program.
“In 2015, we were underwriting the transaction with our balance sheet team. In 2016, the day after our balance sheet loan closed, we submitted the firm applications to HUD and then closed 41 loans,” explains Ed Foulon, senior vice president and FHA chief underwriter at KeyBank Real Estate Capital.
Foulon credits much of KeyBank’s success in 2016 to its ability to provide strong, long-term, permanent financing through bridge-to-HUD financing.
“Currently we are working on a number of sizable portfolios that will be submitted to HUD and closed in 2017. We anticipate that Key’s Lean loan volume could double next year,” forecasts Foulon. If realized, that would mean KeyBank’s deal volume would be approximately $1 billion in FY 2017.
“In 2016, our balance sheet team focused on large institutional clients with skilled nursing facilities,” adds Foulon. “When it comes to financing these types of deals, we believe FHA is the best and, quite frankly, the only execution for long-term permanent nursing home financing.”
Nice rebound
The lending volume generated by Housing & Healthcare Finance increased by $91.9 million, or 35 percent, in FY 2016 over the prior year. Still, that pales in comparison to FY 2014 when the Bethesda, Md.-based company won honors as the top HUD lender with $748.4 million in loans closed. Loan production that year in the overall HUD Lean program tallied $4.21 billion.
“The HUD business is a lumpy business,” explains Erik Lindenauer, director of Housing Healthcare & Finance. “We knew that the prior year (FY 2015) was a down year. We focused a lot of our energy that year on loan modifications with interest rates so low. We completed about $300 million in loan modifications that year. In FY 2016, we went back to doing what we normally do.”
Loan modifications aren’t included in the HUD data used to compile the top lender rankings because they are not considered to be a new transaction. In a loan modification, the interest rate is reduced but the loan terms remain the same.
Unlike KeyBank, which completed a big portfolio deal in FY 2016 to help propel it to near the top of the rankings, Housing & Healthcare Finance didn’t close any portfolio transactions during the same period. Instead, its deals were more of the “one-off” variety. “We’re happy with the diversification and our originations this past year,” emphasizes Lindenauer, who didn’t elaborate further.
The flurry of acquisitions in the skilled nursing and seniors housing space that’s occurred over the past few years presents a great opportunity for lenders like Housing & Healthcare Finance, says Lindenauer.
“Buyers acquire projects with conventional loans through banks, and a lot of those loans have now seasoned and they are ripe for refinancing. So, we’re getting a bunch of deals out of that.”
HUD handbook changes act as deal catalyst
In May of this year, HUD released an update to its Section 232 Handbook that included significant changes on eligible indebtedness: specifically the elimination of the two-year seasoning rule in certain instances. Under the changes, certain high-quality, stable, cash-flowing projects that previously were subject to debt seasoning for two years were now immediately eligible to seek HUD financing.
Lancaster Pollard recently put the new HUD debt eligibility guidance to use through the successful closings of 10 separate transactions for three different clients.
Six of the transactions were for a portfolio of facilities owned and operated by The Brook Retirement Communities, a provider of seniors housing in northern and central Michigan. Lancaster Pollard helped Brook Retirement Communities recapitalize six of its facilities using the HUD Lean program for a total loan amount of $26.9 million.
Using the new debt eligibility guidance, Lancaster Pollard obtained the waiver necessary to immediately begin the process, allowing the borrower to benefit from permanent financing at a low interest rate.
Similarly, Lancaster Pollard assisted Agemark Corp. in bypassing the two-year seasoning period and refinancing two of its memory care facilities in Nebraska via the HUD Lean program. The total loan amount was $11.1 million.
“Agemark has been a best-in-class owner and operator for decades, and we were pleased to obtain such a favorable long-term debt solution for the recapitalization of its facilities using HUD’s updated debt eligibility guidelines,” says Grant Goodman, who spearheaded the transactions for Lancaster Pollard.
The final two transactions were for a seniors housing operator in the Midwest. In this case, the operator was looking to buy out its partners and refinance the facilities’ existing debt.
“We utilized our internal bridge loan platform to structure the buyout and refinance,” explains Brendan Healy, who led the transaction for Lancaster Pollard. “We then submitted the FHA 232/223(f) applications as soon as the new debt eligibility guidance was released.”
What’s ahead?
Foulon of KeyBank expects HUD’s deal volume to increase going forward because the HUD Handbook changes are favorable to the program at no increased risk to HUD.
“We anticipate there will be changes in deal size and in ownership and operational makeup. We also anticipate that we’ll see larger deals with more sophisticated owners and operators, which is in line with where the industry is going as well,” says Foulon.
Lancaster Pollard’s deal pipeline is about twice the level that it was on Jan. 1 of this year, which Matt says was already robust.
What accounts for that? “One is the flattening yield curve coupled with the historically low interest rate environment,” he says.
“The second is that the updated HUD eligibility rules with regard to recapitalizations and partner buyouts have accelerated an opportunity for organizations to access the HUD Lean program in this low interest rate environment.”