Labor shortages, rising interest rates and other challenges confronting seniors housing operators have failed to blunt the bullish outlook for industry growth. While the availability of debt and capital to fund that expansion has improved over the last several years, it continues to be an area of concern. In particular, developers are placing an emphasis on finding experienced and relationship-driven financing partners that can properly assess a borrower’s needs, match them with the best possible solution, and react quickly to regulatory changes or other unforeseen circumstances that may impact pro forma financials and affect underwriting or other loan terms.
M&T Bank and M&T Realty Capital Corp. are fulfilling that role by working together to provide developers with solutions for the full continuum of seniors housing, from independent living to skilled nursing. M&T Bank provides bridge financing to healthcare clients for construction, expansion, facility improvements, and strategic acquisitions with accelerated deadlines, while M&T Realty Capital provides permanent acquisition and refinance loans through Fannie Mae, Freddie Mac, and the Federal Housing Administration/U.S. Department of Housing and Urban Development.
To discuss some of the trends taking place in the industry and how M&T is serving its clients, Seniors Housing Business sat down with Paula Quigley, an FHA/HUD program manager with M&T Realty Capital, and Christopher Callaghan, a group vice president in M&T Bank’s healthcare banking division. Both joined M&T when the company acquired First National Bank of Maryland in 2003.
Quigley focused on affordable housing early in her career, first as a community development lender in the Washington, D.C., area and then as a project manager for development in south central Los Angeles. She returned to lending 25 years ago, joining First National Bank to support the commercial real estate and multifamily financing segment in the newly created FHA lending platform. As HUD expanded its healthcare product offerings, the FHA group naturally followed.
Meanwhile, Callaghan started his career with a trust company in Boston and then relocated to the corporate banking department of First National Bank in 1995. Later he began supporting a treasury management services team that saw the dynamic and growing healthcare industry as a growth opportunity. Callaghan then transitioned to lending as seniors housing and skilled nursing financing became a larger part of the business.
Callaghan: Because one division is using the bank’s balance sheet and the other is using agency lenders like Fannie Mae, Freddie Mac and FHA, the metrics we apply are different so we may have differing points of view on the same asset. That’s true within the commercial bank, too. The bank balance sheet usually takes a view of five to seven years, for example, but if it is providing a bridge loan that’s going to be replaced by an agency loan, then we take view of six to 18 months.
For the borrower, the longer-term balance sheet loans create more concern around interest rate sensitivity, capital expense demands and reimbursement challenges. In some situations this might lead to tighter underwriting, higher recourse or lower advance rates.
Quigley: We typically work with clients who are taking a longer view. The sweet spot for Fannie and Freddie loan executions is a term of 10 years, while HUD offers permanent financing products of 35 years, or 40 years if construction is included. So between the bank and M&T Realty Capital, we have all the product lines and services that a borrower needs for their particular situation.
We are also very nimble, because the dynamics of agency lending are changing all the time. If we are providing agency financing to take out a bridge loan from the bank, Christopher and I are in constant communication to make sure the loan fits the agency’s underwriting criteria. That’s the biggest benefit to our borrowers.
SHB: Can you share an example of how you have worked together to meet a borrower’s needs?
Callaghan: One of our clients has a significant number of seniors housing construction projects underway, but wants to create equity to continue to grow. We are providing our new bridge-to-agency solution in which the construction loan is taken out by permanent financing as the property meets certain value-creation events. Multiple borrowers are interested in this type of program, and we’re working on replicating it so that it operates as a turnkey solution in the future.
SHB: What new programs appeal to borrowers?
Quigley: Freddie Mac has developed and really perfected a program that allows borrowers to access permanent financing before reaching full stabilization. It is for new properties that have experienced strong lease-up, and provides borrowers with proceeds commensurate with a stabilized valuation. The program also allows borrowers to proactively manage their long-term interest rate exposure.
SHB: Which categories of seniors housing do you see as having the strongest growth potential in the future?
Quigley: We are bullish on the entire continuum and believe that each asset class serves a critical component to the care needs of individuals. Seniors housing is a need-driven product, and it has proven to be a steadier performer during economic downturns. The industry is still in its infancy, but we believe that it will continue to expand its market penetration rates over the next two decades.
SHB: What are M&T Bank’s growth initiatives for 2019?
Callaghan: The commercial bank is expanding through the addition of a healthcare relationship manager in the Pacific Northwest, where we already have commercial real estate teams making loans from our two main offices in Portland and Seattle. We are also expanding through the creation of a new community bank region in Florida. Initial product offerings in the Florida market will include financing for the healthcare, commercial and industrial business, and commercial real estate sectors.
Quigley: M&T has been following its healthcare clients as they expand beyond the bank’s traditional Northeast footprint, and we now have clients in 40 states. This allows us to leverage all of our tools to support our customers’ business goals and expansions across the U.S. Most importantly, it provides our clients with the type of consistent execution that they would expect from a business partner.