Capital Corner: Transaction Volume Proves to be ‘Surprisingly Strong’

Divestitures in skilled nursing arena helped transaction activity spike in 2017.

By Matt Valley

PHILADELPHIA — Reflecting on 2017, Ari Dobkin, managing director with Meridian Capital Group, characterized transaction activity in the seniors housing sector as “surprisingly strong.” The healthy deal flow helped boost the mortgage brokerage firm’s annual volume of business.

According to Real Capital Analytics, property and portfolio sales in the U.S. seniors housing and care sector totaled slightly more than $13.8 billion year-to-date through November 2017, up from nearly $12.8 billion during the same period a year earlier. The figures are based on completed deals $2.5 million and above.

Looking under the hood more closely, the data show 422 deals involving 1,328 properties closed year-to-date through November 2017. By comparison, there were 487 deals involving 977 properties that closed during the same period in 2016.

“There are a lot of sales going on. A lot of the big boys in the skilled space are divesting of assets,” remarked Dobkin during a capital markets panel discussion at InterFace Seniors Housing Northeast on Nov. 8. The one-day conference, which took place at the Sheraton Philadelphia Downtown, drew more than 240 industry professionals.  

To Dobkin’s point, Kindred Healthcare Inc. completed the sale of 54 of its skilled nursing facilities across 10 states on Aug. 31, 2017. Sale proceeds from the closing were approximately $519 million. 

The transaction was the first closing related to Kindred’s previously announced agreement with BM Eagle Holdings LLC — a joint venture led by affiliates of BlueMountain Capital Management LLC — to sell the company’s skilled nursing facility business for $700 million in cash.

Heading into 2017, Dobkin and many of his colleagues were anticipating a dip in deal volume. “Prices per bed were getting crazy in the skilled space. Cap rates still remain very low in the assisted living space, but lenders are robust,” said Dobkin. “We’re seeing a lot of new lenders enter the space as maybe one or two others are leaving.”

Joining Dobkin on the capital markets panel at InterFace Seniors Housing Northeast were Steve Caligor, senior managing director, Monticello Asset Management; Meredith Davis, vice president, seniors housing, Grandbridge Real Estate Capital-BB&T; Keith Kodrin, senior vice president, Capital One Healthcare; Jason Schreiber, senior vice president, manager of seniors housing finance, PNC Real Estate; and panel moderator Latoria Thompson, chief operations officer, Housing & Healthcare Finance.

Tightening the reins

While the banks still have a highly favorable view of skilled nursing and remain “extremely active” in the space, they are incorporating more recourse financing into the deals that they structure with borrowers, said Dobkin. 

“In the past, we had more lenders in the stable willing to do non-recourse deals. Maybe because they are slightly nervous about the space, they want more of a tie-in where the owner-operator is standing behind its product through the form of a personal guarantee.” The stronger the reputation of the operator, the easier is to secure non-recourse financing, he added.

Dobkin expects the pace of agency financing to accelerate in 2018 as borrowers seek to put more long-term debt on their properties rather than opt for short-term bridge loans and five-year deals offered by banks. (Agency financing refers to the government-sponsored enterprises Fannie Mae and Freddie Mac, in addition to HUD). In a rising-interest-rate environment, it’s best to lock in a rate sooner rather than later. 

From the bank’s perspective, the skilled nursing space is experiencing significant headwinds due to regulatory reform and the changing payment system, said Kodrin of Capital One Healthcare. In short, the bank wants to make sure that an operator applying for a loan can withstand those headwinds before it will commit to providing debt financing. Capital One will thoroughly research a particular submarket in which an asset or portfolio is located to determine the likelihood that the operator is going to be successful.

Capital One is a big fan of properties that provide a continuum of care, says Kodrin. “I think there is a lot of value [in the continuum], and as an institution we strongly believe in the independent living/assisted living/memory care campus concept. A portfolio deal for a bank is always better than a single-asset deal. Diversify your exposure and your risk.”

Branching out

Grandbridge’s Davis said investors are more active in tertiary markets today than they were two years ago. Back then, a lot of private equity and institutional money was focused solely on primary markets. “Just with the amount of competition and the prices, we’re seeing [capital] come into secondary and tertiary markets more and more. Our credit teams have become more used to seeing this,” said Davis.

Grandbridge often helps arrange financing for investors who specialize in turning around troubled seniors housing assets. “Often that means adding memory care, or going from a lower-level acuity to a higher-level acuity and diversifying the building. We do see a lot of that. Our credit team likes that, as do the agencies,” said Davis.

That diversification strategy helps ensure an operator doesn’t have all its eggs in one basket in terms of a payor source, said Davis.

PNC Real Estate is “treading very cautiously” in the skilled nursing sector due to the challenges operators face as a result of new regulations and requirements, said Schreiber. Standalone memory care is another area where the bank treads cautiously. When financing a project with a continuum of care, the memory care component is often the most challenged part of the continuum, he added.

“We really do like the continuum products — to have independent living, assisted living and memory care all under one roof,” emphasized Schreiber. “It’s a pretty compelling product from the consumer perspective. It also hedges risk and also has multiple entry points for the consumer and strong market presence.”