Why KeyBank’s John Randolph is more bullish on financing existing product.
By Taylor Williams
Besides offering a business-friendly regulatory environment and ample land for development, Texas enjoys torrid job and population growth. That combination gives the Lone Star State the demographic appeal that virtually all developers covet.
Development of product in the Texas seniors housing space — where the relationship between developer and operator is as close as that between the hammer and nail — has been a beneficiary of these circumstances.
“Overall, the general health and stability of the Texas economy is driving a growing interest from the seniors housing market,” says John Randolph, who serves as vice president of Cleveland-based KeyBank’s healthcare group. “This holds particularly true in terms of population growth, median income and household values.”
Seniors Housing Business asked Randolph to elaborate on the factors that are shaping the debt and equity market for seniors housing product in Texas. What follows are his edited responses:
Seniors Housing Business: There are concerns that the Dallas market is moving toward being overbuilt. What is KeyBank’s current strategy as far as development financing in this market is concerned, and how does it match up against operating strategies for other major Texas markets?
Randolph: There’s a significant amount of activity occurring in Dallas. According to recent NIC Map data, Dallas is the fourth-most active market for volume of new construction behind Chicago, Atlanta and New York. Houston comes in at No. 6 on that list. That means there are two major markets in Texas where we’re seeing a significant amount of activity on the construction side.
When it comes to how we approach development financing in this market, we look for some form of uniqueness in the project and what competitive advantage that translates into. We underwrite the risks based on who the operator is, their background and how well capitalized they are.
SHB: Compared to 2017, do you expect your production of seniors housing loans to increase, decrease or remain the same in 2018?
Randolph: Generally speaking, we anticipate our seniors housing loan production to increase relative to 2017. We currently have a very robust pipeline, which is ahead of where we were this time last year. Due in large part to the strong demographics in the Texas market, we’re seeing more capital move into the space. Much of this activity stems from the efforts of investors and developers that want to get in front of the looming increase in the number of Baby Boomers entering the market.
SHB: Occupancy rates for skilled nursing facilities are at historic lows. How active is KeyBank in this space at present, and does the firm anticipate major changes in its loan production for this segment of the market in 2018?
Randolph: There’s certainly been an impact on occupancy rates as the skilled nursing market is generally experiencing a shortening in the average length of stay. Additionally, and equally concerning, is the stress on project level net operating income (NOI), as some of these properties are facing labor shortages and reimbursement pressures.
From KeyBank’s perspective, however, we’re not typically pricing or structuring our deals any differently. However, there may be a change in loan terms from other capital providers that had previously been more aggressive on proceeds and structure.
Without question, the seniors space is an operator-driven business, so we spend a lot of time underwriting and understanding who the operator is, as well as the quality of care they provide and their reputation in the marketplace. This allows us to better assess overall risk in any given opportunity and to be more relevant to our clients’ needs.
SHB: How have specific loan terms and structures for skilled nursing assets changed over the past few years?
Randolph: For HUD in particular, because its terms and underwriting requirements are fairly programmatic, there’s a risk in over-advancing on a bridge loan.
If a borrower’s goal is to ultimately obtain permanent HUD financing, and there’s a decline in NOI while a loan is being processed, then there may not be enough value to pay off the existing bridge debt to complete the HUD execution.
What we may see is advance rates on interim bridge financings coming back to more reasonable levels.