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Lender Q&A: Capital Providers See ‘Positive Trends’

Strong demographics and — hopefully — an end to interest rate increases make for a strong return for seniors housing lending.

Roundtable participants

Steve Kennedy

Executive Managing Director 

VIUM Capital

Michael Gehl 

Chief Investment Officer, FHA Lending

NewPoint Real Estate Capital

Don Kelly 

Senior Managing Director

Locust Point Capital

Bill Lewittes 

Senior Managing Director,
Loan Origination, Real Estate

Kayne Anderson

Alex Loo 


Hudson Realty Capital

Perry Freitas

Managing Director

Hudson Realty Capital

Michael Coiley

Managing Director, Healthcare Finance

First Citizens Bank

Ken Assiran

Managing Director, Seniors Housing


By Jeff Shaw

The seas have finally calmed for lenders, as the Federal Reserve has signaled an end to interest rate increases for now. But many capital providers in seniors housing continued to lend even when those waters were turbulent.

And you can see why. The COVID-19 pandemic is largely in the rearview mirror now as average occupancy has risen back to near pre-pandemic levels. Interest rates largely froze new development despite increasing demand, spurring this years-long run-up in interest rates.

Seniors Housing Business spoke with some of the top lenders in the seniors housing industry about the past, present and future of loans within the space — and even one Stanley Cup prediction.

SHB: What did your volume look like in 2023 compared with previous years?

Assiran: Although the number of lenders and availability of capital has fluctuated in the market, CFG continues to lead the industry with our one-stop-shop offerings and entrepreneurial approach to lending. In 2023, CFG financed more than $1.7 billion for our clients — comparable to previous years. We expect our volume to grow in 2024.

Coiley: We were very active in 2023 and that has continued into 2024. We leaned back into the sector in early 2022 and have also been able to develop some great new relationships by executing on some high-quality transactions. Our pipeline remains pretty robust, and we continue to selectively evaluate development opportunities.

Gehl: We were the second-largest producer of HUD/FHA healthcare loans for HUD’s fiscal year 2023 with $380 million in loan volume, which was in line with 2022 production and our pre-COVID production. Some years are much larger when interest rates decline and loan modifications come into the picture.

Kennedy: We funded about $1 billion of transactions in 2023, which is roughly equal to our annual average.

Kelly: The reality is that Locust Point Capital’s loan volume has been rather consistent each year in 2021, 2022 and 2023, and it’s tracking to the same deployment in 2024. The goal is to focus on the best risk-adjusted lending opportunities and keep discipline on loan basis to maintain the integrity of the loan’s exit strategy.

Loo: We did not finance any senior housing assets in 2023 despite reviewing a significant number of opportunities, as the origination funnel proved to be challenging. Multifamily has been more fruitful for us on development opportunities, as well as lease-up transactions.

SHB: How are you adjusting to the historic run-up in interest rates over the two years?

Assiran: Recent capital markets challenges have caused many banks to stop lending, but not CFG. Rather, this has created an advantageous environment, allowing us to focus on Class A and B deals with strong in-place cash flows. In some cases, lower leverage is needed to ensure projects can support debt. We are also requiring borrowers to use derivatives to mitigate interest-rate risk. 

Coiley: This has two pieces to it. In one instance, the transactions may not really pencil out. Quite a few properties have reached — or are near — stabilized occupancy, but don’t have the cash flows to support the debt levels, so they’ll need some rent or care increases to drive revenues and margins, but those are tough to finance today. 

The other impact of higher interest rates is the inevitable increase in cap rates combined with a small sample set of true M&A. That has left a bit of a void in determining true value on these assets. So, we are trying to navigate through and are engaging on those transactions where it makes sense. We are still also requiring a substantial amount of the loan be hedged in some fashion.

Kennedy: We’ve utilized some rate caps on our variable-rate bridge loans, but permanent fixed rates have remained relatively low from a historical perspective. The flattening of the yield curve has compelled our clients to seek permanent HUD or GSE financing as soon as the project shows trailing NOI that supports the necessary value for a bridge-loan takeout.

Gehl: There are a few adjustments that impact our business with the rising of rates. On the HUD side, the (a)(7) loan modification business effectively shut down with upward movement in rates. Those programs exist for borrowers to refinance their existing HUD loans with a lower rate, which the run-up in rates completely eliminated. 

We have seen borrowers on the HUD side ask for more flexible prepayment penalties — essentially paying more in rate now — with the idea being that once rates do come down, they can refinance into an (a)(7) or loan modification. We have also seen more clients look into HUD’s Green MIP program in order to bring down their upfront cost of financing.

Lewittes: We are a floating-rate lender, so the significant increase in indexes has been meaningful. Our spreads have widened as well, but we make a concerted effort to recognize the prohibitive nature of the increased cost of debt.

Further, while we still require some form of interest-rate management, we have been creatively working with our borrowers to structure efficient and economical solutions that fit the needs of both borrower and lender.

Freitas: We have always thought of ourselves first and foremost as owners and operators of real estate — it’s in our firm’s DNA. Our principals remember the days of more elevated interest rates and have ingrained in our underwriting a neutral and unbiased perspective toward interest rates. 

We anticipated that interest rates would continue to increase and had our sensitivity tests reflect that. In other words, we have not had to adjust as we were always open and ready for this possibility.

SHB: How have your underwriting standards shifted to the turbulent economic environment?

Assiran: Our underwriting standards have not changed. We have seen our deal flow increase due to the lack of lending by many banks in response to the conditions of the capital markets.

Coiley: I’m not sure I’d use “turbulent,” but certainly it is a challenging time for the sector, so we have refined our underwriting. We are looking hard at cash flows, asset value, asset quality, market analysis, sponsorship and more. And if any one of those doesn’t work, we aren’t bending. We have seen lots of transactions and have clients that are reaching and exceeding pre-
pandemic margins.

Kennedy: Our underwriting standards have remained relatively static. We lend to appropriately capitalized, proven owners and operators that are focused on the seniors housing and healthcare sector. The increase in rates has impacted coverage ratios, but we have not seen it dramatically impact the number of solid recapitalization or M&A debt funding opportunities.

Gehl: The general program parameters for HUD have not changed, with maximum loan amount the lesser of:

• 80 percent of loan-to-value ratio;

• 1.45x debt-service coverage ratio (DSCR);

• 85 percent of purchase price; and

• existing debt plus eligible transaction costs

In fact, HUD, recognizing the ongoing recovery in the space, recently released guidance that allows a trailing six-month analysis as well as a trailing 12-month analysis with published new rate information and corresponding expense growth considered in underwriting. Previously, HUD would have only looked at a trailing 12-month analysis and would not have picked up a deal without a 1.45x DSCR on that basis.

Lewittes: We make it a point never to look at two deals through the same lens. That is to say that no two deals are ever the exact same. Each deal has its own nuances, and every transaction needs to be evaluated thoroughly and from the ground up. 

Accordingly, we don’t have a unilateral set of underwriting standards, but rather the merits of every deal — including the potential impact of any economic turbulence — are looked at, stressed and analyzed in the context of the whole deal picture each and every time.

Loo: Our underwriting standards have not changed. We have always been concerned about the interest rate environment and chose not to pursue high-leverage opportunities in the run-up of tightening monetary policies. 

This has provided us with more flexibility to pursue opportunities this year that other lenders might not be able to consider. We do not have to take future financings into consideration in light of our overall credit portfolio.

SHB: How has the general, ongoing recovery of seniors housing sector post-COVID-19 affected how lenders view the industry?

Assiran: CFG’s positive outlook on seniors housing has remained unchanged. The staffing expenses and capital market conditions are a concern for the industry. However, many owner-operators have controlled expenses and implemented rent increases to sustain profitability. 

The current outlook on seniors housing is strong given the demographic growth of the senior population in the 80-and-older age cohort. We believe lenders’ outlook on the industry will continue to be positive due to the ever-growing demand seen from encouraging demographics and the lack of inventory growth, a result of minimal new construction starts caused by high interest rates and high construction costs. The resulting excess demand will allow operators to continue to grow the bottom line.

Kennedy: In general, lenders have been hesitant to jump back into the seniors housing sector with both feet as occupancy remains slightly below pre-pandemic levels, higher interest rates have compressed coverage, and banks continue to deal with asset management issues within their current loan book. The skilled nursing sector has been quicker to return to pre-pandemic NOI (net operating income) levels as occupancy has rebounded more rapidly, and Medicaid rebasing has provided much needed reimbursement.

Gehl: In the immediate aftermath of the pandemic, lenders and borrowers alike were looking to pre-COVID financials, cautiously hopeful for a quick recovery to pre-pandemic levels. However, sustained inflation and staffing shortages have caused enormous increases in expenses. Now that reimbursement in many states is starting to follow suit, the numbers on both the revenue and expense sides of the equation are now so different that they have rendered the pre-pandemic financials close to irrelevant. 

Kelly: In speaking with many owner-
operators across the sector, as well as other lenders, there has been meaningful census and EBITDAR margin growth across the sector for the newer-vintage, private-pay communities. That said, individual market dynamics are a meaningful determinant of performance. Older communities have been slower to recover, while Medicaid-subsidized assisted living is performing quite well in the current environment.

Lewittes: In our view, we are past the COVID-19 story, both in terms of the pandemic itself and the recovery. In other words, we believe that any impact on a property from COVID should be well in the past, and any recovery that a property needed to achieve because of the pandemic should be behind them as well.

Freitas: The general, ongoing recovery of seniors housing post-COVID is a testament to the relentless compassion and energy of frontline care staff, operators and owners who have poured their resources into supporting their residents. 

Unfortunately, markets have recovered differently. We understand this is separate from operational competency. However, the ongoing macro-recovery has made it harder for lenders to ignore properties that have continued to flounder or not lease-up to anticipated levels.

SHB: What has surprised you the most regarding the seniors housing lending environment in the last 12 months and why?

Assiran: Strong operators have been able to produce reasonable margins through the ongoing staffing challenges and other expense headwinds that have affected the industry post-pandemic.

Kennedy: The reluctance of the GSEs to provide competitive terms. Fannie Mae remains essentially closed for business, and Freddie’s relatively low leverage and reluctance to fund much equity out is not attractive or competitive in many situations.

Gehl: Over the past year, temporary COVID-19 relief funds from state governments have begun to materialize into more permanent solutions within the seniors housing sector. Initially intended as emergency measures to mitigate the pandemic’s immediate impacts, these funds have increasingly transitioned toward longer-term reimbursement strategies and budget adjustments. Particularly in states with a per-cost-basis Medicaid system, reimbursement rates are being rebased to recent cost reports with increased operational costs incurred by seniors housing facilities. 

What has been astonishing is the level to which some of these rates have increased. We have seen Medicaid rates that have increased upwards of $100 per patient day and facilities in rural areas receiving rates that have historically been associated with large metropolitan areas. 

The calculation behind each increase is state-specific and, for some, the sustainability of the cash flow is questionable. We may see states pulling back in the form of budget adjustments to the rates. We are keeping a watchful eye out, and we have seen appraisers increasing cap rates to mitigate the risk associated with the unpredictability in this revenue stream.

Kelly: Lending activity among industry lenders is less than I would have originally expected if I were sitting back in late 2022 or early 2023. That said, interest rate increases did not reverse course as many had expected.

Lewittes: There are still several borrowers out there with overly zealous expectations, especially when it comes to proceeds and pricing. While we will always try our best to get as close to borrower asks as we can, this is still a difficult capital markets environment, and borrowers need to accept that not every deal is going to pencil the way they want it to.

Freitas: The remarkable flexibility and cooperation among lenders in tackling troubled transactions have been surprising and commendable. Everyone’s patience and collaboration have been phenomenal, and we applaud the collective commitment to the sector.

SHB: Any predictions on what might happen in the next 12 months? 

Assiran: CFG anticipates an improved lending environment for the industry over the next 12 months. The lack of new construction in the industry has resulted in minimal inventory growth. This lack of inventory, along with the continued growth of the 80-and-older population, should positively affect the industry, improving the lending environment.

Kennedy: We do not expect interest rates to increase, boding well for the recapitalization of seniors housing assets that still need six to 12 months of increased occupancy and sustained NOI. HUD will continue to play a vitally important role for the skilled nursing and seniors housing sectors, providing dependable, permanent capital at relatively attractive pricing and terms. Expect HUD’s 232 program to have a big 2024 and 2025.

Gehl: We have already witnessed a sizeable uptick in activity, reflecting slow but steady improvements in market fundamentals. These positive trends are paving the way for more facilities to become eligible for HUD refinancing, and we are optimistic that the momentum will continue. Of course, if interest-rate cuts go into effect as hoped for, our ability to execute transactions that are limited by debt-service coverage will improve.

Kelly: My sense is that two key factors will determine the lending environment in the coming year or two: the direction of both long-term and short-term interest rates, and the willingness of lenders to divest of non-performing loans to cleanse balance sheets. There may also be a continuing evolution in lending sources toward private credit.

Loo: Commercial real estate and its associated risks dominate the conversations within every major regulatory, financial and government institution. Over the next year, we predict that lenders will more aggressively manage their portfolios and be less lenient, which would greatly impact seniors housing. 

We worry that seniors housing will get lumped in with all commercial real estate (particularly office), and the baby will be thrown out with the bath water, despite the seniors housing sector’s recovery.

Lewittes: The Federal Reserve will ease rates three times in 2024, and an additional three times in 2025. Bank lending will remain constrained through year-end 2025 and real estate asset values will bottom out in 2024 and start to rise in the second half of 2025. Additionally, the Florida Panthers are going to win the Stanley Cup.

The post Lender Q&A: Capital Providers See ‘Positive Trends’ appeared first on Seniors Housing Business.

Source: Senior Housing Business

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