GSEs Hit High Note

Fannie Mae, Freddie Mac both post record deal volume in 2017. 


By Jeff Shaw

To say 2017 was a big year for Fannie Mae and Freddie Mac in the seniors housing lending arena would be an understatement.
Fannie Mae’s volume skyrocketed 267 percent, rising from $1.5 billion in 2016 to a record high of $5.5 billion in 2017. Freddie Mac saw a more modest increase, but still set a record high with volume rising from $3.2 billion in 2016 to $3.6 billion in 2017, a 12.5 percent increase.
Both Fannie and Freddie noted that they had an uptick in “large deals” in 2017. Most notably, JLL arranged a $975 million Fannie Mae credit facility to refinance 51 Brookdale Senior Living properties in September. Near the end of the year, KeyBank arranged a total of $192.5 million in Freddie Mac loans for Kayne Anderson Real Estate Advisors to refinance six seniors housing properties in Texas.
“We completed several large transactions in 2017, in addition to our day-to-day business,” says Phyllis Klein, vice president of multifamily customer engagement, production and communication for Fannie Mae. “We have always been a great fan of the seniors housing business. We are very comfortable with increasing our volume to these levels.”
Both lenders note that seniors housing accounts for between 4 and 5 percent of their total deal volume, a rate that has stayed consistent year over year.
What raised the bar?
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that provide liquidity to the multifamily sector. These two agencies purchase loans in the secondary market, which frees up lenders to generate more loans.
Steve Schmidt, national director of Freddie Mac Senior Housing Production, says that the recent trend of the major REITs becoming net sellers opened the door for the GSEs. Institutional investors and private equity firms have been the buyers in those transactions and are among the prime customers of Fannie Mae and Freddie Mac lenders.
“The large deals are going to continue in 2018 and beyond. REITs will stay net sellers, and those properties are often sold to private equity funds,” says Schmidt. “This high volume is a trend we’ll see for a few more years. Brookdale Senior Living is going to increase its dispositions as well, for example.” (For more on Brookdale Senior Living, please turn to page 42).
Fannie Mae is forecasting a slower year in 2018 than it saw in 2017, but that’s to be expected following a 267 percent increase. Klein predicts the agency’s deal volume in the seniors housing space will tally approximately $2.5 billion in 2018, considerably higher than 2016 but much lower than 2017.
“Last year was the largest level of seniors housing production we’ve had since we entered the sector more than 20 years ago,” says Klein. “We don’t anticipate as high a volume in 2018, but still more than where we’ve been in the past.”
Additionally, Schmidt notes that the recent construction boom in seniors housing is slowing down (both new starts and deliveries are on a downward trajectory following a spike). New construction as a percentage of existing inventory hit a high of 6.6 percent in the third of quarter 2016 and has steadily declined since then, according to the National Investment Center for Seniors Housing & Care (NIC).
As new seniors housing projects are completed, borrowers look to refinance construction loans with permanent debt, a perfect time for Fannie and Freddie to swoop in.
“As new properties reach stabilization, we’ll actively refinance those,” says Schmidt.
A breakdown of Freddie Mac’s seniors housing lending activity in 2017 shows that refinancings accounted for 48.2 percent of total volume, followed by acquisition financing (42.4 percent) and credit facilities (9.4 percent).
Specialty products are a hit
Naturally, the lenders authorized to make loans on behalf of Fannie Mae and Freddie Mac recorded increases of their own in 2017. KeyBank, for instance, originated $1.83 billion in agency loans for seniors housing during 2017, up from $818.5 million in 2016.
KeyBank notched considerably more loan volume with Fannie over Freddie in 2017. In fact, KeyBank was Fannie’s top Delegated Underwriting and Servicing (DUS) lender for seniors housing last year. The company says many of its clients sought out Fannie Mae’s credit facility product.
Borrowers like the credit facility for a few different reasons. It can provide a single loan to an entire portfolio (rather than single loans for each asset). And the borrower has the ability to add and release assets, mix fixed with floating interest rates, and even have different loan terms in the same financing, according to Carolyn Nazdin, national production manager for healthcare mortgage banking with KeyBank Real Estate Capital.
“It’s very flexible,” says Nazdin. “Maybe an investor bought a portfolio that was underperforming. As the buyers improve the performance of the assets, they would like to access that additional equity that’s been created. The ability to do that with the credit facility is a feature that has been attractive to a lot of our clients.”
Nazdin is quick to note that Freddie Mac unveiled its own credit facility product near the end of 2017 in an effort to compete with Fannie’s product.
Another special feature drawing borrowers is Freddie Mac’s Green Advantage program, which offers better terms to borrowers implementing sustainability initiatives on a property. Schmidt says the volume of green loans in seniors housing is on the rise. Seeing an opportunity, Fannie Mae implemented a similar program.
In the last quarter of 2017, Walker & Dunlop provided the first seniors housing loan under Fannie Mae’s new green program: an $82 million refinancing for Paradise Village, a newly constructed independent living, assisted living and memory care community near San Diego.
Using the program, the borrower received a lower interest rate and additional proceeds, as Walker & Dunlop was able to underwrite based on reduced utility expenses (and therefore higher net operating income).
“While this was the first deal of its kind, we anticipate more borrowers leveraging green financing through Fannie and Freddie for their seniors housing properties,” says Jeff Ringwald, managing director with Walker & Dunlop who worked on the deal. “These programs have cost- and energy-saving benefits for both the borrower and the community members.”
Oversupply, new players
In 2017, HFF also enjoyed a major spike in its GSE lending volume, becoming Freddie Mac’s top-producing seniors housing lender for the year with $732.7 million in volume.
“There have been a number of new entrants to the space, which is very exciting from both an equity and debt perspective,” says Sarah Anderson, director with HFF. “We have a ton of data with regard to other real estate types, and seniors housing is one of the best returns a buyer can get. It’s an attractive product type and it’s really catching the eye of a lot of equity providers and developers.”
Overall, multifamily properties average a 6.16 percent annual return on acquisition cost, according to the National Council of Real Estate Investment Fiduciaries, which tracks the performance of real estate assets owned by institutional investors. NIC data shows that returns for private-pay seniors housing fluctuates between 7 percent and 8 percent, while skilled nursing’s annual returns are consistently above 9 percent.
The flip side of increased interest in the sector is that many of the new entrants don’t understand the business well enough to succeed. Additionally, investors rushing to seniors housing’s high rate of return can lead to oversupply and, by extension, low occupancy rates.
However, Anderson suggests that continued strict underwriting by lenders (including Fannie and Freddie) have largely kept these heightened risks in check.
“Some new entrants are building a product that might not be perfect,” says Anderson. “But I don’t see a ton of that because the banks have been a great governor of new supply.”
The requirements of a developer to receive a loan include a strong operating partner with a financial stake in the development, good credit by the borrowers and a market that’s not already oversupplied, says Anderson.
She points out that with a big wave of Baby Boomers starting to hit retirement age, what appears to be oversupply now could prove to be inadequate in the near future. Short-term pain could equal long-term gain.
“We’re not worried about oversupply,” says Anderson. “With the demographics going the way they are, we’ll be undersupplied at the rate construction is happening.”
But oversupply concerns still resonate with both KeyBank and Walker & Dunlop, which both say they’re watching seniors housing construction levels with a keen eye.
“Fundamentals are good in general, but there is some concern with oversupply in certain markets as new entrants migrate into the seniors housing space,” says Bill Jackson, senior vice president with Walker & Dunlop. “The seniors housing industry is certainly on the map as an attractive investment and growth asset class, so naturally we are going to experience excess supply in certain markets.”
All the lenders interviewed for this story indicated that Fannie Mae and Freddie Mac do an excellent job making sure that they’re only involved in stable, well-underwritten deals.
“[The GSEs] understand the seniors housing market better than anyone out there,” says Anderson. “They really are thoughtful and creative in their structuring. While they are constrained to their underwriting guidelines, they understand real estate and they understand good operators.”
That strict underwriting leads to success. Freddie Mac, for example, had zero delinquent seniors housing loans in 2017.
KeyBank’s Nazdin praised Fannie’s and Freddie’s flexibility when it comes to vetting potential loans. The GSEs offer “outside-the-box” thinking that is rare with standard lenders.
“Fannie and Freddie are apt to look at most transactions today on a case-by-case basis,” says Nazdin. “While they have guidelines, they understand that every deal is different. In that spirit, they are willing to work with us to win the deal and get the deal done.”
Both Anderson and Nazdin note that the GSEs are also easy to get on the phone to discuss a potential deal.
For their own part, both Fannie Mae and Freddie Mac say that they expect to continue to lend heavily in the seniors housing sector.
“Fannie Mae was one of the early entrants into seniors housing many years ago. We’ve found it to be a core market,” says Klein. “We’re about to have our 30th anniversary, and seniors housing has been a great part of that business for us.”