Eight Consecutive Rate Hikes and Counting

by Jeff Shaw

The Fed’s aggressive push to tamp down inflation through higher interest rates has temporarily sidelined some lenders, while creating opportunities for others.

By Jeff Shaw

A lot has changed in a year, especially when it comes to the capital markets for seniors housing.

“If you look back just a year ago, you had banks that were awash in deposits, had strong liquidity levels, strong capital positions and were really focused on robust loan growth. The bank balance sheet growth at that time was near historical levels,” said Zach Shulkin, vice president and relationship manager with KeyBank Real Estate Capital.

That sunny outlook was before inflation ran rampant, leading to a historic run-up in interest rates to try and calm the economy and prevent a recession.

“The Fed has raised rates eight times, and there were some pretty steep raises along the way,” said David Boitano, managing director of production for seniors housing and healthcare properties at Lument. “The second half of 2022 is when we really started to feel it in terms of lending starting to slow down and it becoming more difficult to get a deal done.”

“Capital became more scarce and more precious,” concluded Boitano.

The comments from Shulkin and Boitano came during a panel discussion titled “Capital Markets: Update on the Debt Environment and Where’s it Headed” at France Media’s InterFace Seniors Housing West conference. The event, which took place Feb. 2 at the Omni Los Angeles, attracted approximately 227 industry professionals.

Boitano moderated the panel, which also included Christopher Honn, managing director at NewPoint Real Estate Capital; Jason Clouet, vice president at Bayview Asset Management; and Clint Johnson, senior vice president and healthcare banking relationship manager at BOK Financial.

Obstacle or opportunity?

Of course, for every lender that decides not to play the game, that’s one less competitor to worry about for those who remain on the playing field.

For example, Bayview PACE, a wholly owned subsidiary of Bayview Asset Management, works with property owners and developers to help lower their cost of construction. The firm’s Commercial Property Assessed Clean Energy (C-PACE) offering provides low-cost, long-term financing for new and existing commercial properties.

“What we saw going into the second half of 2022 was an opportunity to fill space within that construction pipeline, since so many of the banks pulled back,” said Clouet. “So, we started a construction program that would pair with our PACE program. We just closed our first PACE deal on a student housing property in Tallahassee, and another multifamily deal in Washington.” 

Honn noted that NewPoint jumped at the opportunity created by the new openings in the capital markets.

“We didn’t pull back. We leaned into it and kept with the same strategy: find good operators and good opportunities that work,” said Honn.

Although BOK is still actively lending in the seniors housing space, Johnson said one big challenge for the bank and balance-sheet lender is finding a large, long-term lender to take short-term loans off BOK’s books. Those loans are sticking around with the bank instead, leading to a fuller balance sheet than BOK would like.

“Our goal is to generate loans that will eventually be taken to the permanent markets,” said Johnson. “With all the headwinds in the industry — occupancy growth being slow, NOI compression due to inflation — we just haven’t had the volume of loans roll off to the permanent markets that we normally would. So, that’s also led to us having more of an inflated asset base than we normally would.”

Renegotiations become key

For many borrowers, sharp increases in labor costs in recent years mean that NOI and profit margins aren’t as high as operators and investors were expecting when loans were taken out pre-COVID.

“There are just built-in costs that are not going to go away next week,” said Boitano. “Labor’s not going to show up and take less. That’s the biggest cost. Cash flow is going to take a while to come back.”

But with interest rates now high, renegotiating loans has become a complicated dance. It’s more important than ever that borrowers that wish to renegotiate loan terms come to the lenders with a strategy.

“It has to be a well-thought-out plan, even as to why you’re presenting the plan,” said Honn. “What’s the escape hatch to get to the endgame of a successful permanent loan performance structure?”

Boitano said that agency loans — through Fannie Mae, Freddie Mac or HUD — might be a good outlet for borrowers to find flexibility, especially “for an existing, otherwise-great customer that just got hammered by the environment and is trying to resurface.”

But Fannie Mae and Freddie Mac loans come with their own complications, noted Honn, who served as Fannie Mae’s seniors housing product manager for nearly 13 years, from February 2002 to December 2015.

“Negotiating some sort of relief is much easier with a commercial lender than [through] an agency,” said Honn. 

“For example, most of the Fannie or Freddie loans are in the permanent debt market. They’re embedded with investors that are unrelated to the borrower. If you want to go to negotiate with them, you have to find out where they’re located if you can even find them as an investor partner to negotiate. 

“If you as a borrower need relief and you have a strategy, my recommendation would be to get with the servicer for the loan that you have and create a plan that is presentable to Fannie or Freddie and see if that’s acceptable.”

Shulkin noted that, for all the complications they present, the agency lenders recently got their new loan allocations and “remain very committed to the seniors housing industry and have a strong appetite for new deals.” 

“The challenge becomes that most deals are debt-service constrained,” said Shulkin. “With the NOI compression, it’s just harder to size deals to a debt level that meets investors’ needs at this point for the agencies.

“The one thing I would say about the agencies’ underwriting is, during COVID, they had a lot of credit tightening. Now, that’s all run off at this point. It’s just about building occupancy and increasing NOI and getting to a level that sizes to the debt you need.”

On a personal note, Honn shared with the panel that his 86- and 87-year-old parents both live in assisted living. They are aware of the economic struggles facing the senior living industry and are taking the rent increases in stride.

“Their rent this month just went up 7.8 percent,” said Honn. “I talked to my dad about that. I asked, ‘Dad what are you going to do?’ He said, ‘Well, nothing. I like it here. I’m not moving. Thankfully my Social Security increase went up higher than my rent increase this year.’ So, it’s an interesting situation we’re in today.”

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