Q&A: What Do Lenders Look for in a Borrower?

Capital providers share their insights on financing trends Capital providers share their insights on financing trends in the seniors housing industry. 

Roundtable participants

Michael Coiley
Managing Director,
Healthcare Finance
CIT Commercial Finance Division

Grant Saunders
Senior Vice President, Healthcare Group

Charlie Shoop
Senior Vice President, Healthcare Mortgage Banking

Trace Wilson
PGIM Real Estate Finance

Leonard Lucas
Senior Director
Love Funding

Mike Taylor
Senior Vice President, Healthcare Lending Division Group Head
First Midwest Bank

Kevin McMeen
President, Real Estate
MidCap Financial Services

By Jeff Shaw

We all know what borrowers look for in a lender. The best rates and terms. But what type of borrower is actually able to achieve those terms? What tells a lender which projects are likely to succeed?
Seniors Housing Business asked a panel of top lenders in seniors housing to weigh in on the issues facing the industry today.

SHB: What do you consider to be your specialty within seniors housing?
Mike Taylor: First Midwest Bank specializes in providing financing for both for-profit and nonprofit seniors housing, including independent living, assisted living, memory care and skilled nursing providers. We provide tax-exempt loans, bridge-to-HUD loans, cash-out refinancings, construction and expansion financing, and working capital lines of credit.
Leonard Lucas: We provide HUD-insured mortgages for age-restricted housing, assisted living/memory care and skilled nursing. Our loans finance new construction, substantial rehabilitation and acquisitions, as well as traditional refinancings.
We are also very active in the financing of low-income housing tax credit (LIHTC) projects with a focus on age-restricted senior living. We are currently working with healthcare service providers with the goal of creating a model to finance affordable assisted living facilities. This is a part of the marketplace that is vastly underserved and in need of attention.
Our parent company is Midland States Bank. This relationship puts us in the unique position of being able to leverage Midland’s balance sheet and offer bridge loans for properties that are not ready for HUD financing.
Kevin McMeen: We cover the full spectrum, from age-restricted housing to skilled nursing facilities. We don’t necessarily view ourselves as specializing in any particular area of the spectrum. However, we do offer a broad array of products to the skilled nursing sector: working capital, bridge debt and permanent debt through our FHA platform.
Charlie Shoop: Our strength continues to be the breadth of KeyBank’s overall financing platform and our ability to tailor specific financing solutions to the borrower’s needs. Financing includes both on- and off-balance-sheet solutions to include both project-based and multi-facility/institutional financings across all property types.
Michael Coiley: We are primarily middle-market lenders. We like diversity of assets, so we’re generally involved in portfolio transactions. While we prefer stable operating trends, we’ll consider light turnaround and value-add opportunities. Under the right circumstances, we’re also comfortable with cash-out transactions.
One differentiator for CIT is that we finance the full continuum of healthcare by having our real estate, asset-based lending and leverage finance platforms all under one roof. This gives us a unique perspective of the entire healthcare ecosystem, which is critically important today given the continued integration of care, especially across the post-acute spectrum.

SHB: Please recap your seniors housing lending volume the past few years. If there has been a significant change year over year, what was the reason?
Taylor: Over the last few years, First Midwest has completed over $1 billion worth of healthcare transactions. We have been very active in the seniors housing sector since 2013, and we continue to be quite active.
Lucas: Love Funding has closed over $400 million in healthcare transactions over the past few years. One way our volume has changed significantly is in the specific type of transaction.
In January 2015, Midland States Bank acquired Love Funding, bringing balance-sheet lending to our clients. While we previously only originated FHA transactions, since then we have originated over $100 million in healthcare bridge-to-HUD transactions, including construction/mini-perms for assisted living. Midland continues to grow through acquisitions.
McMeen: Our funded volume over the past three years was about $550 million. Our volume last year was about $75 million, including FHA.
Last year was a very low volume for us, which was driven by two factors. First, we had concerns about the skilled nursing market and the challenges around length of stay, reimbursement rates and labor costs, as well as the amount of new construction in assisted living and memory care. Second, the market has been very competitive, which, coupled with a conservative outlook, took us out of competition on many transactions.
In contrast to our $75 million volume last year, our volume in 2018 will exceed $160 million. I attribute that increase to some more opportunistic transactions in the skilled nursing sector and some very attractive bridge loans on strong performing seniors housing assets.
It’s worth pointing out that as a balance-sheet lender with a goal to grow our portfolio, we won’t sacrifice credit quality to attain volume targets.
We have a long-term view. We would much rather miss on short-term volume goals than achieve those by sowing the seeds of loan losses. That would impair our ability to lend and serve our customers when liquidity leaves the market.
Saunders: Our balance-sheet volume has averaged over $1 billion the last several years, exclusive of $1.7 billion in loan syndication volume in 2017. KeyBank’s on-balance-sheet financing is complemented by off-balance-sheet volume (Fannie, Freddie, HUD, life companies), which exceeded $2.5 billion in 2017. That’s up from $1.5 billion in 2016.
KeyBank has been the No. 1 or No. 2 ranked seniors housing originator of Fannie Mae in five of the last six years and Freddie Mac eight of the last 10 years. We have been among the top three HUD lenders the last two years.
Coiley: I can’t get into specific numbers, but we are very active in the seniors housing market. However, we have been more selective over the last two years and we’ve led some large syndicated transactions in the sector.
Recently, we led a $136.9 million credit facility for CommuniCare Health Services Inc. in Ohio. We also served as co-lead arranger for $138.5 million in financing for Continuum Healthcare, which owns and operates skilled nursing facilities in New Jersey and Pennsylvania through its affiliate companies.
SHB: What’s your preferred leverage on a development loan for seniors housing?
Taylor: We prefer to be in the 70 to 75 percent range, inclusive of all working capital and start-up operating reserves.
Lucas: We go up to 75 percent of value for assisted living/memory care or 80 percent of value for skilled nursing. Midland States Bank bridge-to-HUD construction loans will finance up to 75 percent of cost.
Shoop: KeyBank has limited capacity for construction financing and typically reserves such capital for established clients who use a variety of products within KeyBank’s lending platform. For these clients, KeyBank looks to limit financing to less than 70 percent loan to cost.

SHB: What do you look for in an investor/developer when it comes to seniors housing lending?
Taylor: Experience. We want people who have a track record in developing and/or operating seniors housing facilities. We like to see them partnering with architects, contractors and other professionals who are experienced in developing seniors housing properties. From there, it is the market, financial projections, transaction structure, and access to equity to support the project should there be operational challenges during the fill-up of the community.
Lucas: Bricks-and-sticks experience is important. However, seniors housing projects are operating businesses that require a high degree of operational experience. A borrower should be suited to day-to-day management and, more importantly, the lease-up process.
McMeen: We look for organizations that have a track record of performance, both financially and with respect to quality of care. We also look for sponsors of high integrity and character.
Saunders: KeyBank targets clients with an experienced track record of owning and/or operating assets in the seniors space, with a preference for multi-property pool financings. We look for those with strong financial sponsorship who value KeyBank’s platform of providing both on- and off-balance-sheet financing solutions.
Coiley: We want to see someone who has experience and a solid reputation in the sector — someone who has done their homework and is willing or able to put meaningful capital into the opportunity.

SHB: Do you have concerns about overbuilding in seniors housing?
Taylor: As with any sector, seniors housing is a very localized market. Do we feel that certain metro markets are reaching the point of saturation? Potentially, yes.
We do not feel there is overbuilding across the entire industry. Many markets continue to have favorable demographics and positive trends with low overall penetration rates.
That being said, penetration rates may need to increase in order to absorb the number of new units that are coming on line. With new competition in the market, providers will have to battle to differentiate themselves. They will also have to continue to compete with residents choosing to stay in their homes with services or care coming to them. The home health industry continues to mature, and with technological advancements it will continue to become easier for seniors to stay home.
Lucas: In a general sense, I do not have concerns about overbuilding. Of course, seniors housing demand varies from market to market and by product type within a market.
McMeen: We do have concerns, but those concerns vary in intensity by submarket. There are certainly markets where overbuilding is not a concern and others where it is a very serious issue.
Shoop: Global concerns include supply issues industrywide. We realize, however, that supply and demand vary greatly on a market-by-market basis.
Coiley: Yes, we do. Everyone appears to be chasing the Baby Boomer aging curve. But we could easily see overcapacity if market demand is not carefully analyzed and monitored.

SHB: What are some areas in seniors housing where borrowers are currently underserved?
Taylor: I don’t think there are any areas that are currently underserved in the space. Over the course of the last few years, there have been a number of new capital providers that have entered the space. As a result, providers today have greater access to capital than ever before.
Lucas: The development of affordable assisted living presents many challenges. The capital markets have yet to adequately address these needs. We are currently working on a model that will provide financing for the development of affordable assisted living.
McMeen: There is so much capital searching for opportunities in this market that is difficult to say any part of the seniors housing industry is underserved. There may be people who say there are sectors that are underserved, but I would argue that is based on outsized expectations regarding leverage, pricing or a combination of both.
Saunders: In the past decade, seniors housing has become an increasingly respected asset class and has attracted more institutional equity and debt capital from a variety of sources. However, the industry has generally focused on the higher-end, private-pay market and not on affordable or moderately priced housing models. This is especially true, given the anticipated demographics and ever-increasing needs for seniors housing within the country.

SHB: What does your ideal seniors housing development look like? For example, what part of the continuum of care does it include? How many units does it have?
Taylor: If I was to construct a new building, it would have the full continuum of care. My ideal facility would have 120 to 150 units comprised of approximately 20 to 30 skilled nursing beds, 10 to 20 memory care units, 20 to 30 assisted living units, and the remainder in independent living. It would be scalable such that each level of care could be expanded as future demand increases.
With this size building, I feel there is less risk. This provides flexibility should the market change, or you have unexpected competition enter the market. In addition, I see tremendous value in allowing residents to age in place, and to not be forced to move.
Lucas: The ideal senior housing development is set on a campus that provides a full continuum of care, from age-restricted housing to independent living, assisted living, memory care, skilled nursing and hospice.
The older people get, the more of a challenge it is to move from one location to another. This applies to individuals and especially to couples. Couples do not decline in health at the same rate. It is important that they be able to live in a community that meets the healthcare demands of each while allowing them to be in close proximity to one another.
McMeen: We would prefer assets with some sort of care continuum that feature more than 60 units but less than 200.
Shoop: Generally, we focus on rental campus communities where the community can offer various services to allow residents to age in place. This ranges from freestanding villas to independent living and assisted living/memory care, all within a campus that typically offers over 150 units combined.
Coiley: We generally leave that analysis to the borrower or investor. Our role is to provide comprehensive financing and banking solutions that help finance these projects when they make good economic sense. We have the expertise needed to tailor financing to meet the needs of the borrower and we’re not afraid of complex deals that may be difficult for other lenders.