By Matt Valley
Two words, “extreme competitiveness,” sum up the first eight months of 2018 in the seniors housing lending arena, says Richard Thomas of Grandbridge Real Estate Capital, a subsidiary of BB&T Corp.
The competition among debt providers to refinance a bank construction loan or a bridge loan is no longer limited to traditional permanent lenders, the agencies and a handful of life companies, says Thomas, senior vice president and seniors housing product manager for Grandbridge. Add banks to the list of competitors seeking to secure long-term financing deals as a way to grow their balance sheets.
“I’m not saying that every bank is doing it, but we are aware of major banks that have slotted funds for longer term (10-year) opportunities. For example, our proprietary balance sheet lending platform, BB&T Real Estate Funding, enables us to structure deals out to 10 years,” explains Thomas who is based in Atlanta. And it’s not exclusively fixed-rate financing. “We will not do variable-rate financing out 10 years, but we’ll certainly do it for a short period of time.”
Kathryn Burton Gray, who leads Hunt Real Estate Capital’s seniors housing and healthcare lending group, says that one of the most compelling trends so far in 2018 has been the divestiture of skilled nursing portfolios by the REITs, which creates financing opportunities.
For a variety of reasons — the higher acuity patients don’t fit a particular REIT’s business model, or the buildings are old and tired, or uncertainty persists over the evolving reimbursement system — many REITs are looking to exit skilled nursing. “Probably the most relevant reason is that they feel it’s been a drag on earnings,” says Burton Gray, who is based in Irvine, California.
Earlier this year, Sabra Health Care REIT (NASDAQ: SBRA) completed the sale of nine facilities leased to Genesis Healthcare (NYSE: GEN) for $81.4 million. The Genesis facilities included seven skilled nursing facilities, one seniors housing community and one continuing care retirement community (CCRC). Sabra’s management team has gone on record saying that it prefers to do business with smaller, regional operators. While the major REITs are also buying portfolios, they are net sellers for the most part.
The other big trend Burton Gray sees is a pullback in construction financing by the banks following a three-year period that she describes as “ridiculous” in terms of the large number of construction lending opportunities that bubbled up. Several traditional multifamily developers even got into the act.
One big reason that banks are turning off the construction lending spigot is that occupancies are falling in many states, says Burton Gray, citing the data compiled quarterly by the National Investment Center for Seniors Housing & Care (NIC). The occupancy rate for assisted living across 31 primary markets in the second quarter averaged 85.2 percent, the lowest since NIC began reporting the data in 2005.
“The occupancy decline in certain sectors of seniors housing is becoming very relevant. That’s affected financing in a direct way,” says Burton Gray.
Is the oversupply problem overhyped?
While he acknowledges that several markets are oversupplied and still experiencing new deliveries, Thomas describes seniors housing as a business largely conducted within a five-mile radius and affected by “very localized” supply-and-demand drivers.
“If you have the right acuity, the right unit mix, the experienced sponsors and best-in-class operators, there are opportunities for select new development even in the most heavily competed markets.”
Take metro Atlanta, for example. While it is arguably overbuilt, particularly on the luxury end, Thomas does see pockets of development opportunity. He cites Decatur, a city with a population of about 23,000 residents located five miles northeast of downtown Atlanta in DeKalb County, as an intriguing possibility. “It has higher barriers from an entitlement perspective,” says Thomas. “We just haven’t seen the growth of new development in that market.”
While he hasn’t conducted or reviewed a market study on Decatur, Thomas believes that a well-conceived seniors housing product would likely flourish in that market.
As a lender, Grandbridge’s response to concerns of oversupply is to “stay the course and dive into understanding specific markets at a grassroots level,” emphasizes Thomas.
In markets where there is heavy competition, Thomas says it is not unusual to see properties lease up at below-market rents or with significant concessions in order to attract residents.
Burton Gray tries to avoid sweeping generalizations about oversupply, but points out that land costs play a key factor. “I’m seeing a lot more transactions in the Fresno and Sacramento areas of California that we haven’t seen before because the land costs are a little less expensive than the metro markets of Orange County, Los Angeles or San Francisco.”
The land costs in Houston — and Texas in general — are also less expensive compared with other major metros, so it’s no surprise that new construction in the Lone Star State has ramped up in recent years, says Burton Gray.
The road ahead
Over the next one to three years, Grandbridge plans to focus on refinance, acquisition and rehab opportunities, plus construction projects on a selective basis, according to Thomas. It helps that several loans that were originated seven to 10 years ago are now reaching maturity. What’s more, the developers of ground-up projects today will seek permanent financing for newly built communities in the near future.
“If you move out to the long run, new construction and the rehab of existing facilities will be a primary driver. And of course the permanent lending will be a strong staple of what we do,” says Thomas.
Against the backdrop of a strong U.S. housing market, where home prices are rising annually at two to three times the rate of inflation, Thomas is bullish on independent living. (The annual U.S. inflation rate stood at 2.9 percent in July.)
But Thomas is bearish on stand-alone memory care. “While it depends on the market, this product has shown itself to be especially easy to develop or convert existing independent living and assisted living units. Therefore, it is relatively vulnerable to overdevelopment.”
In the longer term, Burton Gray believes one big opportunity for the seniors housing industry is affordable assisted living. The average cost of private pay assisted living is $3,638 per month, according to Genworth Financial. But among all households that are age 55 and older and that have not saved for retirement, the average net worth is around $35,000, according to Plante Moran Living Forward. That is a big gap.
“The baby boomers are the next generation that is going into independent living and assisted living,” says Burton Gray. “Affordability is a big concern of mine.” n