Affordability, Labor, Tax Laws Impact Seniors Housing

HJ Sims finance veteran tries to get ahead of a shifting financial landscape.

By Jeff Shaw

A wide variety of factors are affecting the landscape of seniors housing finance, and they come from both within and outside the industry. Factors range from the Tax Cuts and Jobs Act signed into law by President Trump in 2017 to Medicare/Medicaid reimbursement changes in skilled nursing to affordability concerns for poor and middle-class seniors.

Jeff Sands, managing principal and general counsel for Fairfield, Connecticut-based lender HJ Sims, has experienced a lot in his 24 years with the company. He’s particularly knowledgeable when it comes to nonprofit continuing care retirement communities, which make up more than half of the company’s seniors housing loan originations.

In 2018, HJ Sims’s total originations in seniors housing was about $1.03 billion, made up of tax-exempt bonds, mezzanine loans, preferred equity and HUD loans.

Seniors Housing Business spoke with Sands regarding the present and future of seniors housing from a lending perspective. The interview below has been edited for space and clarity.

Seniors Housing Business: What was HJ Sims’ volume in the seniors housing space in 2018 compared with previous years?

Jeff Sands, HJ Sims

Jeff Sands: In 2018 it was $1.03 billion of financing. That’s about the same as the previous year, but the mix has changed a little bit.

In 2017 we saw an aberration — we did 70 percent municipal bonds. In 2018 it was about 50 percent bonds, 50 percent either bank, HUD or mezzanine debt. The big difference was the Trump tax law, which took away — as of Dec. 31, 2017 — the ability of nonprofits to advance refund bonds.

A lot of times bonds can’t be paid off for seven years. But you could do advance refunding — you go out, borrow money, and set up an escrow for the old bonds.

The elimination of advance refunding cut down the issuance of bonds considerably. When you finance for seven or 10 years at a fixed rate and interest rates go down, you want to take advantage of that. Advance refunding was a way to take advantage, and that’s just gone away.

SHB: What are the ripple effects in the finance world of losing that advance bond refunding?

Sands: CCRCs can’t use bonds as a mechanism to refinance their existing debt. It is making some nonprofits think more carefully about whether they want to do bond financing or have the flexibility of bank financing.

When you do bank financing, they’ll give you less leverage than bonds. Therefore, if you’re doing bank financing as a nonprofit, you’ll have to use more of your assets for equity. The trade-off is better flexibility.

We try to figure out in that matrix, if you do a bond and you’re locked in on that bond, is it better to do a five-year bank loan and have the flexibility of changing your mind or maybe taking advantage of an opportunity to expand?

It used to be you just did the bond. It was cheap, easy and you got more money. Now there are more considerations.

SHB: From a lender/intermediary perspective, what has changed most in seniors housing over the last few years?

Sands: The whole issue of affordability has become much more of a focus for seniors housing over the last few years. There was a time when most of the development was focused on the higher-end product. People are concerned, and I’m concerned as a lender, that the industry can price itself out of the market if it isn’t careful.

Affordability will only get harder with construction costs increasing. Land has gone up in price, construction costs have grown and operating costs have risen. By the time you calculate the rent you need for a halfway decent profit, you’re already at or above the market price. How do you combine all those factors and get into a spot where the rent will work?

SHB: For quite a few quarters, new deliveries were outpacing absorption throughout seniors housing, leading to depressed occupancy rates. Did you tighten your standards at all for construction lending to account for this trend?

Sands: After the recession a lot of companies were growing by development. Over the next six months we will have a lot more conversations with our clients about growing by acquisitions. When development gets too hot, you switch to acquisitions. When acquisitions get too expensive, you switch to development.

From a lending perspective, we are getting more careful about development. We want to look at the markets more carefully. We’re doing deep dives into the competition. We’re looking at what’s driving the markets — is business moving in and is there wage growth? Just to look at the pure demographics doesn’t get it done anymore. You need to have a deeper understanding of the market.

The other things we’re spending more time on are the liquidity and experience of the developer and the sponsor. We’re seeing so many projects take longer to fill up or need to make rate adjustments to fill up. If they have liquidity, they always make it to occupancy. The trouble is the projects that run out of money.

SHB: The skilled nursing sector is undergoing major changes right now as reimbursement models shift. How has that affected your approach to the skilled nursing side of the industry?

Sands: On the for-profit side, we do a large volume of nursing home work. Over 60 percent of our mezzanine debt, which was over $100 million last year, was nursing homes. Primarily that was being part of the capital stack for nursing home portfolio acquisitions. That directly reflects the changes occurring in the nursing home side of the business.

We are looking for those companies that are aggregating product and have great operating platforms and experience. For example, we just closed a large transaction where a group bought a portfolio from Welltower that was leased to Genesis.

Genesis picked the states it wanted to be in, where it has the experience and mass to negotiate against the insurance companies. After 30 years of talking about the demise of the mom and pop, we’re starting to see not only that but also some of the regional players falling by the wayside.

All that said, with the right group we’re bullish on nursing homes. They’re getting more sophisticated with the care they deliver, but we think they will be successful in the long run.

SHB: Looking ahead into 2019, what changes do you see coming for the seniors housing industry?

Sands: You will see nonprofits continue to explore alternatives to the continuing care retirement community, and as acquisitions become available you will see the nonprofits become much more aggressive.

You will see the continued consolidation in the nursing home field, which is a good thing for the most part.

People will continue to look for ways to make the product more affordable.

Lastly, we need to continue to get information about senior living options out there to try and raise the education game. Maybe we take it back a little bit from A Place for Mom in order to educate people. ASHA has its “Where You Live Matters” program, and we will see a lot more of that in the industry.

The market’s only so big. If you really want to increase your occupancy to continue to have rent growth to cover your labor costs, you really have to get deep in the market.

Education plays a role in broadening that market. More awareness means more people demand the product.