Debt-Financing Trends Encouraging for Borrowers

By Matt Valley

With mass vaccination efforts in the fight against COVID-19 well underway across the country and the economic clouds beginning to lift, the lending outlook for seniors housing has brightened considerably in recent months, say industry professionals.

“If you are comparing today to pre-pandemic [market conditions], we think the lending environment is actually pretty good,” says Chuck Hastings vice president of finance and business development for Juniper Communities, an owner and/or operator of 25 seniors housing communities in New Jersey, Pennsylvania, Colorado and Texas. The portfolio’s total resident capacity is nearly 2,200.

The regional banks that Bloomfield, New Jersey-based Juniper works with closely are lending once again, notes Hastings. “They’ve got new budgets, new targets, and they seem optimistic. A couple of our lenders that I’ve talked to during the last few weeks are very much looking at ground-up development deals.”

Hastings says today’s lending environment is a stark contrast from six to eight months ago, an especially “brutal” period because COVID-19 was raging at the time. “A lot of folks who are sitting in the type of seat that I’m sitting in had deals crater that were underwritten prior to the pandemic, but that didn’t get done. And then after the pandemic hit, those deals just died.”

Juniper, whose portfolio is made up largely of private-pay assisted living communities, is what Hastings describes as a “plain-vanilla” borrower that considers itself fortunate to have closed a deal amid a pandemic.

“We do not have private equity partners on the equity side, and we don’t have venture capital,” explains Hastings. “We have balance-sheet cash that we use on the equity side, and then we go out to one of our regional long-term lending partners and do a plain-vanilla, balance-sheet financing.”

Prior to COVID-19 striking the U.S. full force last March, Juniper approached one of its regional bank lenders seeking to refinance a portfolio of three assisted living properties in southeast Pennsylvania’s Lancaster area, approximately 80 miles west of Philadelphia. The existing mortgage loan was nearing maturity.

“Keep in mind that we underwrote the deal pre-
pandemic and closed it during the early part of the pandemic, and our lender was incredibly helpful in getting the deal pushed through,” recalls Hastings. “If that had been a brand new relationship with a brand new bank — somebody we didn’t know — I don’t think it would have happened. I think the deal would have cratered.”

Ultimately, Juniper secured a seven-year, fixed-rate loan at a 2.81 percent interest rate and 70 percent loan-to-value. The disruption in the financial markets caused by COVID-19 also worked to Juniper’s advantage.

“We didn’t lock in the rate until after the pandemic hit, and basically rates plummeted after March 10 of last year. We really benefitted from that,” says Hastings. 

Signs of a rebound

Allison Holland, managing director in the Dallas office of JLL Capital Markets who specializes in seniors housing transactions, says that a healthier debt environment exists today across the sector versus six to nine months ago. The structure of the deals — pricing, leverage and term — resembles transactions executed prior to the pandemic, she says.

“We’ve also seen some new lenders enter the space, the non-bank type lenders, which has been a nice assortment to be able to pursue for bridge financing,” says Holland.

The velocity of transaction activity hasn’t yet rebounded to pre-pandemic levels, observes Holland, but she expects the pace to pick up in the second half of 2021, and for the level of activity in 2022 to be greater than in 2019. 

U.S. seniors housing property and portfolio sales totaled $18.3 billion in 2019 before plummeting 46 percent to $9.9 billion in 2020, according to Real Capital Analytics.

As a result of the health and economic crisis caused by the COVID-19 pandemic, lenders across the board have adjusted their loan-to-value (LTV) ratios, according to Holland. During the heart of the COVID-19 outbreak, borrowers seeking to refinance an existing seniors housing property or portfolio through Fannie Mae or Freddie Mac could expect a maximum LTV ranging from 60 to 65 percent, down from 70 to 75 percent pre-pandemic. The maximum LTV provided by banks amid the worst of the pandemic ranged from 60 to 65 percent, but now many more banks are quoting LTVs at 65 to 70 percent.

“Once the vaccines were released, that’s when we started seeing more of the lenders re-engage,” says Holland. “In each debt package that we submit in the market today, one of the first questions that is being asked is ‘What percentage of residents and staff are fully vaccinated? What are your COVID protocols, and how are you maintaining that on a go-forward basis at your community?’”

Occupancy push

Tyler Armstrong, managing director with Greystone’s seniors housing lending team based in the firm’s Dallas office, says that at the start of 2020 “life was normal pre-COVID, or pre-pandemic, and then life changed pretty quickly.” The second quarter of last year was especially tumultuous, he recalls. “Everyone was trying to figure out what was going on, whether you were a borrower or a lender out in the market. There obviously were a lot of unknowns.”

Fast forward to today: The widespread distribution of COVID-19 vaccines is raising a lot of optimism that it will lead to higher occupancy rates at seniors housing communities. Operators are telling Greystone that lead generation activity is improving at their communities, says Armstrong. 

In other words, the pipeline of prospective future residents is growing, which is welcome news for a beleaguered industry. Private-pay seniors housing occupancy in the United States reached a record low of 78.8 percent in the first quarter of 2021, falling 180 basis points from the fourth quarter of 2020 and 870 basis points year over year, according to NIC.

Despite last year’s shock to the system, Armstrong is encouraged by the direction of the industry based on the conversations Greystone continues to have with borrowers and the questions his seniors housing lending team is fielding from them. The overriding theme has been, and continues to be, that lenders are focused on sponsorship, and they are focused on the quality of the operator and cashflow, Armstrong emphasizes.

Opportunities Ahead

From a business growth standpoint, one of JLL’s biggest opportunities is in the active adult segment, says Holland. “Between our investment sales and debt-financing teams, we have certainly increased our market share over the last 12 to 18 months in the amount of transactions that we’ve done in the active adult sector,” says Holland. She adds that there are more investors seeking to acquire the product type than there are properties available.

Juniper, meanwhile, is targeting select acquisition opportunities in the continuing care retirement community (CCRC) segment due to the financial distress some of these properties face, a situation that was exacerbated by the pandemic. Juniper has two CCRCs in its portfolio. “We like the model and product. We’re comfortable managing independent living, assisted living and skilled nursing,” says Hastings.

On the operations side, Hastings says that private equity investors and institutional owners such as REITs are growing increasingly impatient with underperforming properties due to mismanagement. “That’s definitely one opportunity for smaller, regional hands-on operators like us.”