This article is sponsored by Liberty SBF. In this Voices interview, Senior Housing News sits down with Liberty SBF CEO and Co-Founder Alex Cohen to learn the top types of financing Liberty is delivering now, how the health care markets have recovered from the 2020 drop and how operators should prepare for what might become an endemic COVID-19.
Senior Housing News: You co-founded Liberty in 2011. Who does the company serve, and what did you see in the market that led you to found the company?
Alex Cohen: We started right after the Great Recession. When we launched in 2012, we saw an opportunity to serve borrowers in what we call the small balance commercial segment — $1 million to $10 million loan sizes. It was an outgrowth of work we were doing in the capital markets, investing in SBA and CMBS loans and bonds.
We saw an opportunity to launch an origination and lending platform and went to market in 2012, initially focusing on what we call owner-user commercial real estate co-lending with the Small Business Administration. Working on SBA loans opened the door to health care facility finance because skilled nursing and other facilities are eligible for SBA financing. We now offer conventional and bridge loans for health care facilities as well.
What career experiences do you most draw from in your role with Liberty today?
Cohen: I started my career in the capital markets, working on securitizations of mortgage products and, eventually, reporting directly to the treasurer of M&T Bank. In the treasury group we were doing a lot of asset-liability management and oversight of risk management across the bank.
It was a great 360-degree view of how a bank works, and the management team at the bank was exceptional. I credit a lot of that experience to the launch of Liberty. Over the last decade, we’ve been able to lend through a couple of different lending cycles. Having that core banking and capital market background has been very helpful in growing the platform.
How did the health care markets perform in the first half of 2021, and how are you seeing the recovery play out now?
Cohen: We continue to see under-performance across the sector as many facilities are still recovering. If you look at some of the headline data associated with health care facilities in general, there are a lot of issues resulting from the pandemic, but we are still very bullish on the sector, and we still believe in the long-term viability of the industry.
That being said, we can offer great lending programs for operators by taking a facility-by-facility approach. Pricing is a little higher than before the pandemic, but there’s definitely capital available. We’re lucky enough to participate in some government-subsidized programs. As you know, one of the big hallmarks of the response effort to this pandemic, especially as it relates to small business and corporate subsidy, is that the SBA has been a conduit by which the government has pushed out a historically unprecedented amount of dollars.
We financed a lot of health care facilities through PPP and it helped them weather the storm. The SBA also has other loan programs for which facilities qualify. Even with some underperformance, there are attractive loan programs available that can provide the capital they need, especially at this point in time.
With respect to deal type, deal volume or anything else, how did the pandemic impact Liberty’s deal-making?
Cohen: Piggybacking on the last answer, there was a lot of uncertainty in the early days of the pandemic. When things started to hit in March of 2020, most lenders paused new originations for several months. We were lucky enough to be designated a PPP lender by the SBA because of our work with the SBA historically, and we shifted almost entirely to PPP lending during the 12 to 15 months following the initial surge in March of 2020.
We’ve also been lucky to help facility owners take advantage of some of the SBA’s other programs, like coupon deferment, which enabled the SBA to waive fees on certain loans. Coming out of the pandemic, we see health care as an opportunity for us to grow our core lending platform. Obviously PPP is over now, but we are continuing to provide SBA, conventional and now bridge lending options to the health care facility space.
We are now offering even more loan products today for skilled nursing owner-operators, assisted living owner-operators and memory care owner-operators than we did pre-crisis. We’ve been able to take the success we had in PPP and invest that back into our core lending program. Health care facility lending is one of the big areas of growth that we see for the company.
How has your approach to deal-making changed this year, and how are you underwriting deals today since market conditions remain uncertain?
Cohen: Today, we offer both SBA and conventional permanent loan options to borrowers. Compared to the pre-COVID era, we’ve dialed back leverage, so we’re going up to 65% loan-to-value (LTV). Pre-COVID, we may have been at 70% on conventional loans and bridge loans. That’s one major change, and I think you’ve seen that across the board as it relates to hospitality and health care facility lending.
The SBA still has a great high-leverage loan program that hasn’t changed. If anything, the SBA has provided subsidies to encourage lending, making it more attractive for lenders and more attractive for borrowers to tap those programs. A health care facility owner-operator today can borrow 85% LTV through the SBA 504 program at a very low rate. The SBA rate today is 2.97% fixed for 25 years fully amortizing, so it’s a very high-leverage, low-cost financing option.
A lot of health care facility borrowers think about HUD. HUD is obviously an attractive, high-leverage, low-cost financing option for borrowers, but they don’t necessarily think about the SBA loan option. The SBA can go higher in leverage and it can be just as competitively priced, if not cheaper. For non-institutional owners and lower-middle market owners, it’s a great option to think about both for construction financing, or financing deals on an acquisition where there is some CapEx, a business plan associated with the loan and the permanent loan.
We offer conventional loans as well. Again, it’s going to be at a lower leverage point, so we often suggest that borrowers look at the SBA option, especially when most conventional lenders have dialed back on leverage and increased pricing on coupons and fees.
In terms of underwriting cash flow, most facilities have been affected by COVID. There’s been business disruption across the board when you look at historical financials for 2020, but typically, the way that we’re underwriting deals today is looking at pre-COVID census occupancy. I think that is ultimately the way most lenders are looking at deals and taking a bit of a haircut off the top in terms of the mass leverage point they’re willing to advance.
We understand that margins have gone up, but to the extent that facilities are able to demonstrate the ability to get back to occupancy levels on their census for between three and nine months. That’s really key for us.
What financing options are the best fit for this industry, and how are they best utilized?
Cohen: It’s very specific to the business plan of the borrower and the business plan of the facility. I’ll give you a few examples of some live deals that we’re working on right now, with different loan products for different circumstances. The first is a conventional loan where the borrower doesn’t necessarily need the high leverage afforded by an SBA loan. They’ve put in a significant amount of equity into an acquisition and have leased up an underperforming asset. That asset is now generating cash flow.
We were able to provide a low-cost conventional loan based on a $12 million appraisal for stabilized value. We were then able to advance $4 million against that, which is what the borrower needed in that circumstance. In deals where the borrower has more significant amounts of equity and a more experienced operator, we have conventional loan options today that I think are very competitive. Borrowers can tap the conventional perm market. It’s not as liquid as it has been, but there are conventional options with the deal we just signed up this month, so it is timely.
We’re working on a ground-up skilled nursing facility right now using the SBA 504 program. That’s a deal where a borrower is able to get 85% of total costs — including land, improvement, construction and closing costs and fees — included in total projects.
We also offer bridge loans. I think bridge loans are good options for more institutional-type borrowers. The capital market execution for borrowers like that can be a little fickle, especially during COVID where you have flare-ups. Whether it’s hospitality or health care, there have been months where folks feel bullish on these types of assets and months where the market pulls back.
When that window is open, I think it’s a good opportunity for borrowers to take advantage of bridge loans, and pricing today is a little bit wider than it had been before the pandemic.
What is your outlook for the asset class in 2022?
Cohen: I think it’s a constantly evolving reality. With some of the surges of Delta and other variants on the horizon, we expect continued choppiness, which will make access to capital more difficult for borrowers.
There are two trends that we feel pretty confident about. As each surge progresses, the subsequent response becomes more and more sophisticated in terms of our ability to adapt. It will continue to drag down performance and drive caution in the industry overall, but we are lending. We believe the next 12 to 24 months will be choppy, but there will be opportunities to participate.
In the end, it all comes down to working with operators who have the ability to adapt and take advantage of technology and infrastructure to manage through these moments of crisis.
Coming into this year, no one knew what to expect in senior housing. What is the biggest surprise you’ve seen in the industry this year, and what impact do you think that surprise will have on the industry going forward into 2022?
Cohen: I think the industry’s resiliency has been number one. I don’t think anyone expected a significant surge in the Delta variant or breakthrough cases among vaccinated seniors. Everyone thought the vaccine rollout and prior surges provided a better blanket of inoculation to the wider population and particularly within facilities. That combined with the fact that there’s still a lot of uncertainty from caregivers and regulation around caregivers in terms of vaccination and policies creates a lot of choppiness.
We do believe there’s a lot more resiliency. There hasn’t been a strong, cohesive response when it comes to the law. Things have been pushed down very much to state and municipal governments to set policies, which creates a very different landscape across the country. We still don’t know what the outcome of that’s going to be.
Several states have put emergency measures in place because their hospital beds are full. Most of those cases are non-vaccinated patients. You start to see major strains on the health care system, and I don’t think that that was something we anticipated going into the fall. Most likely, the new normal is that this is an endemic virus, and it’s something that will create uncertainty and choppiness in the industry for the next couple of years.
Editor’s note: This interview has been edited for length and clarity.
Liberty SBF is a non-bank lender with over 10 years of experience providing low-cost capital to business owners and property investors. To learn more, visit apply.libertysbf.com.
The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact firstname.lastname@example.org.
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