Capital Corner: Walker & Dunlop closes out 2015 with a mega-sized Freddie Mac refinancing

By Jeff Shaw

Walker & Dunlop ended 2015 by completing the largest transaction in the company’s history for seniors housing or any other property sector when it provided a $1.3 billion Freddie Mac refinancing for Holiday Retirement, the largest independent living operator in the United States.

The loan, secured by a portfolio of 78 properties in 30 states, was double the size of the company’s next biggest loan, and accounted for nearly half of the company’s seniors housing lending for the year ($2.8 billion).

Russell Dey and Laura Beaton, both vice presidents, led the Walker & Dunlop transaction team. Seniors Housing Business recently spoke with Dey, whose main area of focus is seniors housing, about the mammoth loan.


Seniors Housing Business: Walk us through that Holiday Retirement deal. How did it come to be? What are the terms?

Russell Dey: It was a great opportunity for us, obviously. It was done through Freddie Mac — 78 loans separate loans backed by 78 different independent living properties. They are all seven-year, adjustable-rate mortgages. This was a significant part of our year.


SHB: Is it standard procedure to do a separate loan for each property?

Dey: Yes, that’s typically the case. It really provides the borrower with flexibility going forward. If you had one big loan on 78 properties, those properties would be stuck with one another forever.

When we do a deal with Freddie Mac, we fund the loan ourselves and then sell it to Freddie Mac. The timing between when we provide the loan and when we sell it varies from transaction to transaction.


SHB: How does the 2015 loan volume compare to previous years, and what’s the outlook for 2016?

Dey: In total, we closed a little over $2.8 billion in seniors housing loans last year. For 2015, we were the top Freddie Mac lender in the seniors housing space. Our total volume for 2015 was a significant increase compared to previous years, and it’s going to be a challenge to match that this year.


SHB: The Walker & Dunlop’s seniors housing and healthcare financing team offers a mix of Fannie Mae, Freddie Mac, HUD, CMBS and bridge loans. How are your loans divided between those different types?

Dey: Our seniors housing business is almost entirely done through the government agencies Freddie Mac, Fannie Mae and HUD, while balance sheet bridge lending, and brokered loans to banks and life insurance companies make up a lesser component of it. For us, the agencies represent the most dependable source of capital for stabilized assets. Life companies tend to be a bit more selective and prefer lower-leveraged loans in the seniors housing space. We do a lot of life company business in other property sectors.

Our business offers a combination of direct lending and brokered deals, but the majority of our business is done as a direct lender through the agencies and on our balance sheet.


SHB: How are Walker & Dunlop’s seniors housing loans divided among the continuum of care: independent living, assisted living, memory care, skilled nursing and CCRCs? Are there any types of seniors housing that you prefer?

Dey: Our independent living, assisted living and memory care business is typically done with Fannie and Freddie, while 100 percent of our skilled nursing business is done through HUD. That’s just a function of those programs. HUD has a maximum threshold of independent living units that it will allow at the property, and Fannie and Freddie will only accommodate a limited amount of skilled nursing. These limitations are driven by the agencies’ guidelines and not necessarily by the underwriting and underlying credit of a loan. Recently, private-pay independent living, assisted living and memory care have dominated our business.

We’ll look at CCRCs, but we’re limited. It’s a more difficult product to underwrite, the buy-in CCRCs in particular. It’s something Fannie and Freddie haven’t done a lot of, though they’re starting to look at a lot more opportunities now. The buy-in fee is a challenge to getting the loans closed, as are the skilled nursing and government reimbursement components of these properties.


SHB: Why are entrance-fee CCRCs a challenge? Wouldn’t those fees result in more cash flow?

Dey: Our underwriting takes into account historical cash flows in addition to what we think will be feasible for the property going forward. Entrance fees in the traditional CCRC model are hundreds of thousands of dollars. The success of such properties is often dependent on the housing market because selling a home is typically the only way most people can afford to pay the fee. 

The Great Recession is a perfect example. The housing market took a dive, and subsequently many CCRCs were impacted. By lending on these properties and underwriting that income, you are placing a big bet on people’s ability to afford that big entrance fee for your entire loan term. 

Also, a certain percentage of the entrance fee often is refundable when the resident moves out; the money doesn’t always flow straight to the bottom line.


SHB: Is the company planning to increase its lending volume in the affordable space? How can we start attacking the affordability issue in seniors housing from the lender’s end of the process?

Dey: There are a few challenges with lending as it relates to affordable seniors housing properties. Much of the affordable seniors housing out there is owned by nonprofit borrowers. When we’re thinking about the borrower credit piece of our underwriting equation, it can be tough to get comfortable with nonprofits. When we lend to a typical for-profit group, there is the understanding that we are lending to a company that has a lot of experience, has meaningful equity invested in the property and is typically well capitalized. 

When you lend to a nonprofit, you don’t necessarily have any of that. Typically speaking, they do not have a large balance sheet because they are not focused on the bottom line. That’s not their mission. 

While most of our loans are non-recourse to the borrower, and the real estate serves as our collateral, we are still lending the money to someone or some company. That “who” part of the equation is important.

Also, a lot of these affordable housing projects can be tougher to underwrite because of higher expense ratios at the property. An expense ratio represents the property’s expenses as a percentage of revenue. So, a larger expense ratio equates to a smaller profit margin. 

At the end of the day, you can skimp on amenities or luxury services, but you still need to deliver a base level of care for the resident, which costs money. If you are doing that but are offering lower rents, then the lower revenue puts pressure on your bottom line. 

The big challenge for the industry moving forward will be to develop a scalable business model that delivers both a quality level of care and positive experience for the resident, while still keeping it financially feasible for the average person.