Relationship Lending Gains Importance Amid Choppy Market Conditions, Say M&T Bank Executives

The NIC Fall Conference is known as the place where deals get done. About 80 percent of attendees either receive or deliver capital as a result of the meetings they participate in at the conference, according to the National Investment Center for Seniors Housing & Care (NIC). That finding stems from a survey of attendees conducted annually by the Annapolis, Maryland-based nonprofit organization.

The conference also serves as a platform for thought leadership and idea sharing. Some key topics addressed at this year’s conference — which took place Sept. 11-13 at the Sheraton Grand Chicago, and drew more than 3,000 industry professionals — included the forgotten middle market, the move to value-based care, the impact of technology, and the cost and availability of capital.

Buffalo, New York-based M&T Bank, along with its wholly owned commercial mortgage banking subsidiary M&T Realty Capital Corporation, was among the capital providers with a significant presence at the conference to match its large stake in the industry. M&T Bank’s current loan portfolio in the seniors housing and skilled nursing space totals $4.4 billion, including $1.8 billion in construction loans.

For its part, M&T Realty Capital also ranks among the leading lenders in the U.S. Department of Housing and Urban Development’s LEAN mortgage insurance program used to finance nursing homes and assisted living facilities. According to the company, M&T Realty Capital closed more than $450 million in loans through the program during HUD’s fiscal year 2019, which ended Sept. 30.

M&T Realty Capital operates 13 regional offices across the country. Although its offices are primarily located in the Northeast and Mid-Atlantic, the company added two new West Coast offices — in Los Angeles and Seattle — earlier this year. The salespeople based in these offices specialize in providing financing for commercial properties, including multifamily, office, industrial, retail, seniors housing, and healthcare facilities. In addition to having co-located salespeople from the Healthcare Banking group in many of these offices, M&T Bank has three additional offices with teams focused exclusively on healthcare facilities. M&T plans to continue adding resources in order to better serve customers in the seniors housing and healthcare sectors as they expand into new regions.

Seniors Housing Business sat down with three key leaders from M&T on the final day of the 2019 NIC Fall Conference to get their perspective on the state of the industry, against the backdrop of heavy turbulence in the equities market and signs of slowing economic growth.

The trio of executives included Christopher Callaghan, Group Vice President and head of the Healthcare Banking division of M&T Bank; Jack Lewin, Group Vice President and Segment Leader at M&T Bank; and Paula Quigley, Administrative Vice President and the FHA/HUD Program Manager for M&T Realty Capital Corporation.

What follows is an edited transcript of that conversation, which took place in M&T’s suite on the 16th floor of the Sheraton Grand Chicago.

Seniors Housing Business: This is the largest NIC Fall Conference to date, with more than 3,000 attendees. You’ve participated in a lot of meetings and networking events over the past few days. What are some of some of your key takeaways?

Christopher Callaghan: The relationship piece seems to be more of a discussion point than I’ve seen in the past. Borrowers look at the uncertainty going into 2020 when it comes to the ability to access capital. The question is: How are owners and operators getting the capital and securing the partnerships necessary to develop their businesses and grow along the lines of their strategic vision?

SHB: The 10-year Treasury yield — a benchmark for permanent, long-term financing — now stands at approximately 1.7 percent, compared with nearly 3 percent a year ago. When interest rates are so low, does that cause borrowers to view lending as a commodity?

Callaghan: The challenge is that credit can be viewed as a commodity. At times, there is an aspect of ‘easy money’ which may include investors and lenders that don’t fully understand the business. When there are difficult times or challenging markets, industry knowledge and industry experience can provide better solutions and more flexibility around the deal structure.

SHB: I know you conducted a lot of client meetings here at the conference. Did you get a chance to attend any of the NIC Talks or panel presentations here at the show?

Callaghan: M&T had a sizable team here this year. Some folks have strictly held client meetings, while others have attended some of the panel discussions. One thread running through the conference is that very low interest rates create unique issues. Another thread is the question of whether there are adequate savings among seniors as we look at the resident and population base. The capacity of federal agencies to fund loans has been a topic we’ve discussed and heard a lot of conversation around.

SHB: There has been a lot of talk at this conference about the forgotten middle market. The industry has developed plenty of luxury developments as well as low-income housing tax credit projects. Has serving the middle market always been a challenge, or is it more pronounced today? If so, why?

Callaghan: We’ve always tried to figure out the needs of the middle market. There is a more concerted effort today to talk about the issue and try to solve it than there was in the past. The issue has always been there, but it’s growing with the demographic shift. As the number of people age 80 and above grows over the next 10 years, there is going to be a much larger cohort of seniors in that middle market that can’t afford an $8,000- or $10,000-a-month rent. What are the solutions for them, and how are we innovating to get there?

Jack Lewin, M&T's Healthcare Banking Group

Jack Lewin, M&T’s Healthcare Banking Group

Jack Lewin: Big picture, I believe that purpose-built seniors housing provides advantages to residents affecting their longevity, health and happiness. Market forces of supply, demand and affordability will likely affect the penetration rates differently in the middle and lower end of the housing stock. The demand is there — no question about it. Seniors is a growth segment of the population.

As we move from care delivery models to housing, the question of who funds the gap in affordability will be a key item of focus to drive penetration and occupancy in the affordable segment. There are innovative state models in use today that promote better care coordination across the housing, care delivery, and seniors services. Subsidies, lower construction costs, and new care models within housing may all affect affordability, which will increase penetration rates.

Occupancies still under pressure

SHB: Nationally, the seniors housing occupancy rate (independent living and assisted living combined) decreased to 87.8 percent in the second quarter, the lowest occupancy level since the second quarter of 2011, according to NIC. Is the relatively low occupancy rate primarily due to the wave of new supply, or are other factors at play?

Callaghan: I personally think 88 percent is still a good occupancy number. Demographically, there is a slight blip right now in places where we have built and the supply is a bit outstretching demand. But if you look at some of the demand projections, you are going to see demand outpace the existing or planned supply in a year or two.

The other factor some have been late to address is the increasing age of residents and faster turnover, particularly in the memory care and assisted living segments. That accelerated turnover is putting some pressure on operators, and some are slower to respond than others.

SHB: When you are doing your financial due diligence, do you closely examine the existing product in a five-mile radius, and do you look at the pipeline of what’s under construction. What factors into your analysis?

Callaghan: If we receive a market study that looks at the existing inventory of product within a five-mile radius, we’ll want to also look at a 10-mile radius. And we’ll talk about what else is in the market because that gives a sense of the market acceptance of the product. So, if you have five facilities within five miles, there is some competition. But if you have 15 facilities within 10 miles that are all doing well, that indicates it is a market that should work, and then you need to return to the submarket analysis.

We want to see what corner the building is on, what’s around it, what multifamily product exists in the area, and the population that lives nearby. If you are in a middle income area with workforce housing of younger residents, is seniors housing going to work at that location?

Product preferences

SHB: Which segments of seniors housing are you most bullish or bearish on as a lender and why?

Callaghan: Our growth over the last few years at M&T has been in the seniors housing space. We like independent living and assisted living, and we think there is still pent-up demand in those segments. As that older cohort ages, we think there will be natural demand growth, so we’re very bullish on seniors housing in select markets.

We provide a lot of skilled nursing financing, mostly acquisitions and some construction for repositioning. We like that market. We like certain markets where we’ve done business for a long time. The skilled nursing segment has a more stable reimbursement model and good regional operators.

Part of the reason we are attracted to those industries is that we have a strong collaboration with our mortgage entity, M&T Realty Capital. The nature of the loans today is changing to be shorter term, which is reflected in bridge-to-agency or bridge-to-HUD placements. That gives us a lot of comfort as we’re doing deals in the perceived higher-risk skilled nursing sector, in particular.

SHB: What’s your assessment of the memory care sector, particularly standalone memory care? In the last few years, that segment has experienced some distress. What have we learned?

Callaghan: We see and hear that the market is soft, but we certainly have standalone memory care in our lending portfolio that is performing very well. We think about it as a submarket business, so what’s happening nationally is not necessarily relative to what’s happening in the markets that we like and that have real strong operators. It’s really a submarket business.

Paula Quigley: If other lending sources find standalone memory care a little too risky and out of their purview, HUD is willing to fill that void. That’s nice because memory care is an important part of the continuum of care.

Aggressive but not reckless

SHB: Does M&T have a sweet spot in terms of loan amount, loan type (acquisition, refinancing, new construction) in the seniors housing space?

Callaghan: Our sweet spot is construction-to-agency placement (M&T provides a short-term construction loan before placing the permanent loan with an agency lender), and value-add to an agency placement. That’s really what we like to do.

We worry less about the size of the individual loan and more about the size and totality of the relationship. The loans tend to range from $20 million to $35 million, or $65 million to $100 million. For example, a 200-unit, high-end facility is going to be an $85 million project, maybe $100 million if it’s expensive land. And we will certainly do that. We see that all the time.

If you’re talking about standalone property, a 100-unit, independent living or assisted living building in a small market is probably going to be a $30 million project. We’re seeing some high-end metro projects that are in the hundreds of millions of dollars. We haven’t seen many of those done, but that obviously is a bank group deal. And we’re happy to play in that space as well.

Lewin: Our structure at M&T is really dependent upon a thorough underwriting and understanding of the operator. That’s because at the beginning, middle and end of the day in many of these facilities it’s those operators who are able to have the right staff, develop the right culture, and have leadership in place that can weather storms.

Of course, we are looking at location, as well as supply and demand curves. Our bankers generally look across the spectrum, from tax-exempt to continuing care retirement communities all the way through to standalone memory care. We think this provides our clients with relationship bankers who can speak about different trends affecting each sector — from SNF and seniors housing, to hospital finance, CCRC, and physician practices to deepen the conversation.

SHB: It’s clear that M&T does not shy away from construction lending. One might even say the bank is aggressive on that front. Why is that the case?

Callaghan: M&T operates in really solid real estate markets. As a bank, we are comfortable with a higher level of commercial real estate exposure. We have more commercial real estate exposure than some of our peer banks, but we also have a low record of losses or credit struggles in that portfolio. We’re very comfortable with construction in commercial real estate in the markets in which we operate.

Lewin: We tend to be very careful in our underwriting process at M&T, living our tagline of “Understanding what’s important.” Our process includes a lot of learning about how our clients are positioned today, as well as different scenarios. The nice thing about being a bank with $121 billion in total assets (as of June 30) is that we have a lot of capacity for our customers to come to us to help them structure deals and, if need be, participate out credit to others.

SHB: Who are your clients?

Callaghan: We tend to like regional players focused on a strategy that looks out five to 10 years. Their strategy might shift, but they have a plan, they have a vision and a mission to meet their goals. How do we partner with them over a long period of time?

If someone is new to the industry and doesn’t seem committed to it — they want to own a few properties here and there — they may not be as good of a fit as someone who is looking for select properties in certain submarkets. The committed investors and developers will tell you how many properties they want to acquire or build over the next five years, how they want to grow and change, and where they are going to innovate. Those strategic partnerships really make it more valuable for each of us, quite frankly.

Expansion plans

SHB: What new offices has M&T opened this year?

Callaghan: M&T is a Northeastern-based bank that stretches from New England down to Virginia. We’ve added Florida as a new bank region and [recently] put a healthcare lender in West Palm Beach, Florida. We have a commercial real estate group based in Portland, Oregon. And we’ve put a healthcare lender this year in Seattle to cover the West Coast.

We‘ve launched a national initiative in order to generate and develop new relationships in new regions. So, we have added significant resources to both M&T Realty Capital and the commercial bank to provide more financing for healthcare and seniors housing properties.

Lewin: We’ve helped to finance our clients’ communities in 34 different states. So, while we’re very strong on the East Coast, we have the capacity to go to [additional] locations where we deem it to be a good market. That window of capital availability has been open, and we’re going to continue to keep it open.

HUD deal velocity accelerates

SHB: What has been the impact of the sharp drop in the 10-year Treasury yield on the pace of lending activity among borrowers seeking long-term, permanent financing?

Paula Quigley, M&T Realty Capital Corporation

Paula Quigley, M&T Realty Capital Corporation

Quigley: From the HUD perspective, I can tell you it’s crazy. The loan requests are just out of control. We’re doing [a lot of] loan modifications. Everybody is submitting them as quickly as possible because now the 10-year Treasury is likely going to move back up [at some point]. There are not a lot of HUD 232/223 (a)(7) loans left to do because they’ve already been done. (The (a)(7) loan is a refinancing of an existing HUD-insured loan.)

I see HUD getting swamped very quickly in the next six months. Whenever the conventional lending side experiences a blip, the lending activity [tends to] move over to the HUD side.

Closing thoughts

SHB: Is there anything that you would like to add or emphasize about the conference or your company before we wrap up this interview?

Callaghan: The NIC Conference is a fantastic gathering of a lot of interested industry participants, including lenders, operators and equity partners. It is just a great place for us to come meet new people, learn different ideas and develop new relationships. This is such a valuable conference for us. We appreciate the openness and working with the folks who are here.

Quigley: It’s always good to hear from our customers, what they’re envisioning for the next year, and the challenges they are coming up against. That helps us strategize how to help them [better].

Lewin: One year ago at the NIC conference, we were sitting in this room with some individuals we knew from a particular business. It was a Friday, the least popular day to have a meeting. We really wanted to hear what their total strategy was for the company. They articulated their business strategy, and we articulated some of the possibilities that we could help them with. Fast forward one year: We just closed our first construction loan opportunity with them last week. That meeting a year ago was the impetus to changing not only a little bit of their strategy, but also our relationship with the company. NIC is a great place to do that.

— Interview by Matt Valley, editor of Seniors Housing Business.

M&T Realty Capital Corporation is a content partner of Seniors Housing Business. M&T Realty Capital Corporation is a wholly-owned commercial mortgage banking subsidiary of M&T Bank, Member FDIC. Equal Housing Lender Equal Housing Lender. Bank NMLS #381076.

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