The seniors housing industry today is benefiting from a “more disciplined, rational debt sector” than in the past, emphasizes Chuck Hastings, vice president of finance and business development for Juniper Communities, a seniors housing operator of 22 properties in four states: Colorado, Florida, New Jersey and Pennsylvania.
Twelve years ago, Hastings recalls that a borrower could secure acquisition financing at a 90 percent loan-to-value ratio, and the loan would be nonrecourse. “Those days are gone,” he says.
Today, borrowers seeking acquisition financing can realistically expect to obtain a nonrecourse loan ranging between 65 and 75 percent loan-to-value, say lenders and financial intermediaries.
That’s not to say the abundance of debt capital flowing into the sector is drying up or that competition among lenders has diminished. Ari Dobkin, managing director with Meridan Capital Group, points out that for every one lender that has exited the healthcare finance space over the past 18 to 24 months, three to four new players have entered the market.
Meridian’s healthcare lending platform completed $1.3 billion in transactions from January through mid-November 2018. That activity includes but is not strictly limited to acquisition financing, refinancing, investment sales and joint venture equity raises. Approximately 75 percent of Meridian’s business is either refinancing or acquisition financing activity, according to Dobkin.
Across the U.S. seniors housing and care industry, property and portfolio sales totaled $12 billion from January through November 2018, down from $15.3 billion during the same period in 2017, a 22 percent decrease, according to Real Capital Analytics. The data is based on deals $2.5 million and above.
“Borrowers sometimes feel great when they have 10 term sheets, or 15 term sheets, and a lot of options. We have found that it almost makes the decision harder, and you are literally nitpicking over details that probably don’t end up making a difference,” says Dobkin.
Meridian focuses on ensuring the client and the borrower are a good match. “Many times it comes down to knowing a regional lender, or even a community bank-based lender and knowing what deal works for which lender,” says Dobkin.
The insights from Hastings and Dobkin came during the capital markets panel discussion at InterFace Seniors Housing Northeast in Philadelphia. The one-day event, which took place Nov. 13 at the Sonesta Philadelphia Rittenhouse Square, attracted over 250 industry professionals including owners, operators, developers, brokers, architects, lenders and financial intermediaries.
Joining Hastings and Dobkin on stage were Keith Kodrin, senior vice president, Capital One Healthcare; Adam Sherman, industry expert, senior care, Live Oak Bank; Ryan Stewart, director, BMO
Harris Bank Healthcare Real Estate Finance; and Latoria Thompson, founder and CEO, Latoria Thompson Consulting LLC. Thompson also served as panel moderator.
Recourse versus nonrecourse
While Capital One does not ask for recourse on a well-stabilized property, it will for construction projects, according to Kodrin. “We’re doing a very limited amount of construction financing and it’s typically reserved for repeat customers, or customers that have proven they can build something and fill it up.”
Capital One may also ask for recourse on value-add deals in certain instances, particularly significant turnaround projects. If, for example, an investor acquires a completed development that is still in lease-up mode and not yet fully stabilized, then Capital One typically requires a partial recourse component that burns off once the property is stabilized.
BMO Harris Bank provides acquisition financing at approximately a 65 percent loan-to-value ratio on a nonrecourse basis, according to Stewart. For construction deals, BMO requires a construction completion guarantee and some level of recourse that burns off once the facility reaches stabilization.
When it comes to value-add deals, BMO studies the “going-in” debt yield ratio and what it will be once the project is stabilized. “We want it to be at least in the double digits on a stabilized basis,” says Stewart. (The debt yield is defined as the property’s net operating income divided by the total loan amount.)
Skilled nursing is in a state of flux
Medicare is changing the way skilled nursing operators are paid, effective October 2019. The new Patient-Driven Payment Model (PDPM) system replaces Resource Utilization Groups (RUGs). According to a blog post on the topic from the National Investment Center for Seniors Housing & Care, “PDPM will dramatically shift predictors of financial success, while raising new compliance concerns as operators change their business strategies to adapt.”
Hastings says he doesn’t know what impact PDPM will ultimately have on Juniper, whose portfolio includes a mix of independent living, assisted living, memory care and skilled nursing facilities. What is evident to him is that ever since the passage of the Affordable Care Act in 2010, consolidation among healthcare providers has accelerated in the markets in which Juniper operates.
For example, the University of Pittsburgh Medical Center (UPMC) has acquired several hospitals over the past few years in Pennsylvania and in 2017 agreed to acquire Pinnacle Health System of Harrisburg. The Geisinger Health System, which has a strong presence in central and northeastern Pennsylvania, also has grown through acquisitions in recent years.
The large healthcare systems have a big say in which skilled nursing and assisted living facilities win referrals of patients from hospitals, emphasizes Hastings. “If they are going to control referrals, if they are going to control the healthcare dollar, as a mid-sized player we want to figure out how we can get into that circle. And I know that a lot of our fellow operators feel the same way.”
Consolidation within the healthcare sector is going to be interesting to watch over the next five to 10 years, predicts Hastings. “From a regulatory perspective, that’s what both interests and concerns us — how all that consolidation is going to shake out, and how it’s going to affect us because we’re not going to get to the size of Brookdale Senior Living anytime soon. They have an inherent advantage that we don’t.”
— Matt Valley