The mood at Housing & Healthcare Finance LLC is understandably a celebratory one following a record year for the financial services firm.
The Chevy Chase, Md.-based company ranked as the top lender in the U.S. Department of Housing and Urban Development’s LEAN mortgage insurance program for seniors housing properties in fiscal year 2014.
Specifically, Housing & Healthcare Finance closed $748.4 million in loans for the fiscal year that ended Sept. 30, representing close to 18 percent of the program’s $4.21 billion of loan production. Columbus, Ohio-based Lancaster Pollard finished second with $718.6 million in loans closed.
Overall, fiscal 2014 was a somewhat subdued year for the HUD LEAN program with many HUD lenders reporting a decrease in financings. After hitting a record $5.8 billion in loan production in fiscal year 2013, the program experienced a significant drop in volume in fiscal 2014 due to a decline in the refinancing of existing HUD loans, known as Section 223(a)(7) loans.
Seniors Housing Business spoke with Richard Lerner, director with Housing & Healthcare Finance, about the company’s recent accomplishments and the state of the seniors housing industry.
Seniors Housing Business: Every deal is unique to a certain degree, but is there a typical deal originating out of your shop?
Richard Lerner: Over 90 percent of our closed deals by dollar amount in fiscal year 2014 came from refinancing of conventional loans into HUD loans, also known as 232/223(f) loans. Our model deal is a client who gets a bridge loan to buy a piece of real estate (a skilled nursing or assisted living facility), puts in its management team and gets a track record under its belt, and then comes to HUD and we finance the purchase.
SHB: Who are Housing & Healthcare’s clients?
Lerner: We have got single-property borrowers all the way up to private companies that have 50 facilities and public companies with 250 facilities. We run the gamut. You can’t do 73 deals in a year and not have a wide range of clients.
SHB: In your shop, do you set goals to grow deal volume by a certain percentage annually?
Lerner: No, we know that HUD deal volume is a fickle beast. We’re not a public company. We don’t have to deliver a quarterly return for public shareholders. We don’t chase volume for volume sake. We do deals that we know are good for the client and that are a good fit for HUD and its programs. There should always be enough business for us to keep the lights on and keep everyone paid and happy.
SHB: Housing & Healthcare Finance was founded in 2002. Would you describe your company as a juggernaut?
Lerner: No, we’re not a juggernaut. We’re very good at what we do. We’re experts at healthcare lending. We have a diverse, experienced group. Our chief underwriter has at least 30 years of experience underwriting these loans. Our asset manager has 30 years of experience as an asset manager in HUD loans.
Our chief investment officer and I came from Credit Suisse on the Wall Street side, where we not only did all the FHA work, but we also did Fannie Mae and Freddie Mac, CMBS, low-income housing tax credits and regular investment banking for REITs, as well as M&As for large transactions.
We’re the little train that could. We’re only 20 people. This is all we do. We don’t have a big financial partner. Almost everyone on that list (top 10 HUD healthcare lenders for fiscal year 2014) has either been around for 30 years or has a big financial partner.
SHB: How does your Wall Street background help you when it comes to making HUD loans to the seniors housing industry?
Lerner: HUD was made for mom and pops. Knowing how to marry the HUD thought process, the HUD programs — the things that are important to the federal government — with the public investment world (REITs, rating agencies, reporting requirements by public companies) is something that has been very advantageous to us. We’ve done quite a few deals for publicly traded companies and publicly traded REITs.
SHB: Can you give us an example?
Lerner: We’ve got one client that I’ve known for years because of my Wall Street background. Before they were a client, I stopped by one day for a friendly social visit with the management team and I asked, “Have you guys ever thought about HUD financing”? The CFO said, “We field calls three times a week from mortgage bankers regarding HUD financing. We can’t do a HUD loan and here’s why.” I said, “That’s not true.” He said, “What do you mean?” I said, “That’s what the regulations say, but there is an exemption for REITs. If we go in and present our case to HUD and offer something as a mitigant, HUD will allow you to do the loan the way you are currently structured. They’ve already granted this type of waiver before. When they wrote the regulations, they anticipated this situation.”
So, we got the waiver we needed to allow the borrower to get the loan. The REIT has received $90 million in HUD loans so far.
I would be remiss if I didn’t point out that we have a lot of appreciation for the HUD staff and its tireless efforts to provide liquidity and quality service to all of the HUD lenders and borrowers.
SHB: Can you assess for us the current state of the seniors housing industry?
Lerner: Seniors housing is very healthy right now. There is a lot of uncertainty around reimbursement and Obamacare and the effect that it’s going to have on skilled healthcare. But there is always uncertainty around healthcare. People have been worried about that as an asset class since 1998. It hasn’t changed.
The more and more institutional capital you see coming in, the better it is for the industry. Is that better for HUD? Usually not, because HUD does not want to be there squeezing out private capital. It’s good for HUD’s public mission, but it’s probably bad for HUD’s total deal volume that other money is coming into the sector.
SHB: What is the outlook for the HUD LEAN program in your shop in 2015?
Lerner: We’ll still have a healthy level of financing, but we know that our volume will be down from fiscal year 2014. The backup in HUD’s loan approval queue stemming from the budget sequestration and partial government shutdown in 2013 pushed a lot of closings into fiscal year 2014.
— Matt Valley