As the seniors housing industry slowly recovers from occupancy declines and disrupted operations due to COVID-19, investors are back in the market hunting for deals. Some $3.2 billion in seniors housing and care facilities traded hands in the second quarter this year, a year-over-year increase of a whopping 122 percent, according to Real Capital Analytics, which tracks real estate deals of $2.5 million or more.
The jump in sales is hardly surprising when compared to the pandemic-riddled prior period. But unlike past downturns, the fact that seniors housing has become a widely accepted asset class is helping to fuel the rebound in transactions, says Charlie Shoop, a senior vice president of healthcare mortgage banking at KeyBank.
“The seniors housing sector has more of a history today than ever, and lenders are more comfortable with the product,” he says. “That has created better access to capital. And capital is definitely available.”
KeyBank’s healthcare finance mortgage platform provides a wide array of financing products to seniors housing and nursing home owners, including balance sheet loans and permanent loans through lenders such as Fannie Mae, Freddie Mac, the Department of Housing and Urban Development (HUD) and life insurance companies. Often KeyBank’s balance sheet and permanent loan teams work in tandem to help meet client financing needs. The healthcare group also facilitates debt and equity raises for real estate investment trusts (REITs), private equity funds and other organizations.
Shoop, who has been with KeyBank’s seniors housing and healthcare group for 30 years, recently sat down with Seniors Housing Business to discuss the state of seniors housing and how lenders are responding.
Seniors Housing Business: The National Investment Center for Seniors Housing & Care pegged seniors housing occupancy at 78.7 percent in the second quarter, which was flat compared with the first quarter. Considering the record occupancy lows that hit the sector due to the pandemic, are we at the bottom?
Shoop: Occupancy varies within specific markets and properties — some are clearly doing better than others. But we generally saw a positive occupancy bump with the advent of vaccinations back around February after seeing month-over-month declines. Up until then, properties were largely closed to outside visitors and even tours — a lot of marketing was done remotely. So, that created a lot of operational challenges, but the vaccines have made a huge difference and communities are ramping up their marketing efforts again. Now, obviously, we’re coming off of a pretty large occupancy decline, so it is going to take some time for it to work its way back.
Seniors Housing Business: How has the sunnier outlook translated into investment sales transactions?
Shoop: Transaction volume was way down last year, although there were some larger portfolios that traded hands. But for the most part, there was a disconnect between the bid and ask. Buyers weren’t willing to pay full value for a stabilized asset without seeing light at the end of the tunnel. They are seeing light at the end of the tunnel this year, and there have been some large transactions — Ventas’ $2.3 billion acquisition of New Senior Investment Group, for one. But we are seeing deals even at the smaller, one-off property level as the bid-ask gap is narrowing.
Seniors Housing Business: Lenders like Fannie Mae and Freddie Mac required debt service reserves to mitigate risk during the pandemic but recently reversed course. Have lenders largely returned to pre-pandemic parameters?
Shoop: Many lenders, including Fannie Mae, Freddie Mac, HUD and life insurance companies over the last year became much more conservative when underwriting deals — they ratcheted down loan amounts to 55 percent or 60 percent of value, versus 75 percent in more normal times. Now they are slowly loosening parameters and returning to full leverage as occupancy increases, which is helping borrowers acquire or refinance properties. But they have to be the right deals — there has to be stabilized cash flow and strong occupancy trends and a good story behind the community. The Agencies are also leaning toward new properties that tend to not have as many capital issues and meets the needs of the market.
National and regional banks have been active as well, as they too need to put earning assets on the books through direct lending, and, over the last couple of months, we’ve seen competition increase among banks. In some cases, they are financing five to seven-year deals that are similar to permanent transactions. Additionally, life insurance companies have become more aggressive in the market, even in bridge lending at attractive terms.
Seniors Housing Business: How are buyers valuing properties where net operating income (NOI) has not fully recovered?
Shoop: We’ve seen some larger transactions priced more on a per-unit basis rather than from an NOI or a capitalization rate perspective. Generally speaking, non-recourse permanent lenders want to see in-place cash flow, and if it’s not there, then they aren’t going to finance on a per-unit basis. Buyers like public REITs are able to execute on those deals because they have other resources, like corporate credit facilities and the ability to issue public debt and equity.
Seniors Housing Business: How would you characterize new seniors housing development?
Shoop: There are always going to be developers looking for construction financing, but I wouldn’t say that there are more requests for financing today than in the past. Where it is happening, developers that have strong track records, in good markets, with experienced operating partners and strong lending relationships are in a better position to secure financing, especially with inflating construction costs. Alternatively, lenders are seeing refinance opportunities at communities that are in early-mid stages of lease-up, where developers need short-term financing to take out construction loans prior to permanent financing. We’ve played an active role in that market, and it allows us to recycle our capital into the permanent loan market upon stabilization.
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