By Matt Valley
What percentage of existing seniors housing loans are destined for trouble? An audience member posed that question during the closing session of the 2024 NIC Spring Conference in Dallas. The answer appears to be elusive.
Titled “Capital Markets and Economic Update: Where We Have Been and Where We Are Going,” the March 7 session featured Joel Mendes, managing director at JLL, as panel moderator. Fellow participants included Jamie Cobb, chief financial officer at Columbia Pacific Advisors LLC; Doug Duncan, chief economist with Fannie Mae; and John Olympitis, senior vice president, head of corporate development, at Welltower.
Olympitis took a stab at answering the question by recapping the drama of the past decade. “Generally, I think the industry has been through a lot in the last 10 years. We had the supply cycle from 2015 to 2019,” he recalled. On the heels of that construction wave, which led to pockets of oversupply nationally, came the COVID-19 pandemic followed by the labor crisis.
“Now, we have capital markets dislocation and lending has shut down. It’s been one thing after another. So, I do think there have to be troubled loans out there. We all feel good about where the industry is going. We’re building back. Hopefully, we’re building back better, but we still haven’t recovered,” Olympitis said.
The industry is still trying to recover to pre-COVID margins and pre-COVID net operating income levels, let alone returning to the high-water mark of 2015, emphasized Olympitis. “It’s been hard for investors, for lenders, for developers, for operators.”
Through it all, Welltower has been a net buyer. According to the American Seniors Housing Association, Welltower ranked as the largest U.S. seniors housing owner with 943 properties and 95,281 units as of June 1, 2023.
“We believe in the industry and the need for the industry, but the challenges are there. And these things will have to be worked out before we get a clean footing,” emphasized Olympitis.
Cobb of Columbia Pacific Advisors said regional banks are reluctant to take back troubled properties, an aggressive but necessary step in some cases. “There have been some accommodating policies on how they’ve been able to value the debt on their balance sheet,” said Cobb. Perhaps those policies are shielding them from making some tough decisions, he pointed out.
Still, Cobb expects the lending community to take the necessary action at some point. “Until [this problem of troubled assets] works its way through, I just think there’s going to continue to be this dislocation.” (Dislocations occur when financial markets, operating under stressful conditions, experience large, widespread asset mispricings.)
The NIC Lending Trends Report for the third quarter of 2023 noted that escalating loan expenses due to higher interest rates are impacting seniors housing assets, leading to distress in some cases. With the sector facing billions of dollars in maturing loans this year, the financial pressures are mounting for many borrowers.
“While some may endure the repercussions of high interest rates, more stability is anticipated in 2025 for those that can weather the current conditions, with an expected improvement in capital market conditions, occupancy and NOI outlook,” the NIC report stated.
Industry bellwethers
Freddie Mac’s multifamily mortgage portfolio at the end of 2023 was $441 billion, an increase of 3 percent year-over-year. The multifamily delinquency rate stood at 28 basis points at the end of the year, up from 12 basis points at the end of 2022.
“This increase was primarily driven by an increase in delinquent loans in our seniors housing and small-balance loan portfolios,” stated CFO Christian Lown in his prepared remarks highlighting Freddie Mac’s fourth-quarter and full-year 2023 results.
Fannie Mae’s multifamily serious delinquency rate increased to 0.46 percent as of Dec. 31, 2023, compared with 0.24 percent as of Dec. 31, 2022, primarily driven by stress in the company’s seniors housing loans. Multifamily seriously delinquent loans are loans that are 60 days or more past due.
In its full-year 2023 financial results, Fannie Mae noted a $495 million multifamily provision for credit losses. Such a provision is an estimation of potential losses that the company might experience due to credit risk.
“The multifamily provision for credit losses in 2023 was primarily driven by changes in loan activity and declining property values on the company’s overall multifamily guaranty book. The company’s seniors housing loans were not a driver of its multifamily provision for credit losses in 2023. However, the company’s allowance for seniors housing loans remained elevated as of Dec. 31, 2023,” the report stated.
Cloudy interest rate outlook
Duncan of Fannie Mae said during the panel session that he expects the Federal Reserve to cut the benchmark federal funds rate three times this year for a total of 75 basis points, followed by four rate cuts totaling 100 basis points in 2025. The current federal funds rate is 5.25 to 5.5 percent, up from near zero during the pandemic.
But his remarks were well in advance of the release of the Consumer Price Index for March, which came in hotter than expected. The report showed prices rose 3.5 percent in March on a year-over-year basis. Rising gas prices and high housing costs were cited as the reasons for the higher-than-expected reading. A Bloomberg business headline on April 8 stated the following: “Larry Summers Says CPI Raises Chances that Fed’s Next Move Is to Hike.” Summers served as Secretary of the Treasury from 1999-2001. That would be a 180-degree turn by the Fed if it were to come to fruition.
The big swings in the U.S. 10-year Treasury yield reflect ongoing volatility in the bond market. On March 7, the day NIC hosted the capital markets panel, the 10-year yield closed at 4.08 percent. By the close of business on April 10, the yield had spiked to 4.59 percent.
Duncan noted the unique challenge he faces today when analyzing the leading economic indicators. “The last 18 months have been the hardest forecast period of my career because so many things have been disrupted.”