As borrower interests change quickly in the post-COVID world, capital sources adapt to their needs.
By Jeff Shaw
Many factors go into a seniors housing investor or developer’s need for capital. Considerations such as occupancy at existing communities, construction costs for new buildings, interest rates, inflation and capitalization rates all play a critical role in how companies choose to invest in the sector.
When those factors push the industry in one direction, causing a trend, lenders and borrowers come together to see if they can make a project work for all sides. With so much upheaval in seniors housing the past three years, those trends are shifting as fast as ever.
“During COVID, we were able to get top-tier institutional sponsors and did fewer acquisition bridge loans on turnaround assets. Then in the first half of this year, we were focused on those turnarounds instead,” said Chad Borst, vice president of seniors housing at Live Oak Bank. “We support both. It’s just a matter of knowing where the market is going, then shifting recourse or leverage to build the bridge to stabilize the project.”
Borst’s comments came during the capital markets panel at the ninth annual InterFace Seniors Housing Southeast conference, a networking and information event hosted by France Media’s InterFace Conference Group and Seniors Housing Business. The conference, which generated more than 320 registrants, was held Wednesday, Aug. 17 at the Westin Buckhead hotel in Atlanta.
Other speakers during the panel — titled “Which Product Types Are Hot and Which Are Not Among Lenders, and Why?” — included Robert Gall, director, Ziegler; Charlie Shoop, senior vice president of the commercial mortgage banking healthcare group, KeyBank Real Estate Capital; Dave Harper, senior vice president, Capital One Healthcare Real Estate; and moderator Richard Thomas, senior vice president of seniors housing and diversified housing, Grandbridge Real Estate Capital.
One of the first questions Thomas asked was: “What is a stabilized property?” Most panelists indicated they reserve that designation for communities above 90 percent occupancy — but the nationwide average occupancy for private-pay seniors housing in the second quarter was 81.4 percent, according to NIC MAP Vision. That means there are a lot of communities that aren’t currently stabilized.
“The big issue right now is stabilization,” said Shoop. “Can we get there? How much product is there? Right now, we’re also looking at staffing, especially how long borrowers might need to use agency staffing. How long until we get back to employees all being on the payroll?”
With labor costs and other expenses still inflated post-COVID, and rent growth trailing behind, even stabilized communities are seeing slimmer profit margins.
“I’m hearing operators say, ‘I’m at 92 percent [occupancy], but my revenues are not where they need to be,’” said Thomas. “From an industry perspective, all of our organizations are modifying how we look at what’s ‘stabilized.’ It’s somewhat fluid. There are norms that are there, and hopefully we’ll get back to them.”
“We need to give operators time to reach stabilization without too much pressure on them,” added Borst.
Needs fluctuate
The ever-changing trends have led to ebbs and flows in what types of lenders even play in seniors housing. Many banks famously left the sector entirely in the early days of COVID. Lenders that are dedicated to the sector and stayed in for the long haul emphasize consistency of commitment, but flexibility to meet these changing needs, said Gall of Ziegler.
“It’s a new economy from 12 months ago. There were $47 billion in inflows from mutual funds 12 months ago, but that’s all flowing back out. Last summer was the best time ever to access bonds. There are still investors that have money, so you have to find the right partner. More scrutiny is happening, but there’s still capital out there,” explained Gall.
“There are opportunities that six months ago lenders would be drooling over, but the banks tell us they’re not doing a lot right now,” added Harper. “Borrowers shouldn’t necessarily go for the best deal. Go for what’s most secure.”
Shoop noted that the banks are currently healthy, unlike during the Great Financial Crisis in 2008. However, the current environment is causing banks to undergo “stress tests,” which may be why some are hesitant to play in a niche they consider risky.
Glass remains half full
Despite myriad headwinds, all panelists said they were bullish on the long-term health of the seniors housing sector. Slowdowns in new construction and the impending wave of baby boomers entering the proper age cohort — usually considered 75 or older — mean that occupancy may get back to pre-pandemic norms sooner rather than later.
“There hasn’t been a lot of development through COVID, and if there’s a recession there still won’t be much,” said Harper. “That’s a big tailwind.”
Harper noted that Capital One is currently focusing primarily on acquisitions, preferably portfolios, and at a maximum leverage of 65 percent.
“If you’re buying a building that’s cash flowing, that’s pretty easy. If you’re buying a property that’s 70 percent occupancy and not cash flowing, we’re still doing them, but at lower leverage.”
Despite the slowdown in construction — or perhaps because of it — Borst says Live Oak is all-in on development loans.
“We’re still bullish on construction. We supported construction through COVID. Inflation and staffing costs have caused some projects not to pencil out. But for the ones that do pencil out, it’s an opportunity. We’re consistently at 65 percent leverage anyway, so we didn’t chase the market [when it was hot].”
As far as the factors that make a borrower a desirable partner, Borst cites experience, financial liquidity and operator alignment. Live Oak prefers to lend to operators that have some financial stake in the asset, even if it’s only 5 percent ownership.
“We’re looking for more than just a third-party manager. And we want them included in the design of the building and other aspects of development,” said Borst.
“There have been a lot of replacement managers,” added Shoop, referring to high turnover among operators due to subpar performance. “Owners are really focused on that alignment with operators. They’re looking for the operator to have a sense of ownership in the community.”