The U.S. Department of Housing and Urban Development (HUD) recently released production data for its 2022 fiscal year, which ended September 30. Unsurprisingly, activity in healthcare (LEAN) fundings decreased from fiscal year 2021, largely due to a drop in refinancing activity as interest rates surged from historically low levels and facilities continued to deal with the operational challenges brought on by the pandemic.
Despite a volatile market, NewPoint Real Estate Capital, which acquired Housing & Healthcare Finance (HHC Finance) in December 2021, showed strongly on the fiscal year 2022 HUD/FHA LEAN Rankings, securing the #2 spot for initial endorsements with $389 million financed across 28 transactions representing 4,813 beds/units. Over the last decade, NewPoint, via HHC Finance, has consistently been ranked in the top echelon of HUD LEAN lenders.
For HUD's fiscal year 2022, there were 269 initial endorsements that totaled roughly $3 billion in volume, down 25% from the $3.9 billion achieved in 2021 and down 33% from the all-time high of $4.4 billion seen in 2020.
The ratio of facility types financed changed little from the prior year, with skilled nursing or immediate care facilities accounting for 69% of the endorsements, assisted living 25%, and board and care facilities the balance.
The drop in HUD volumes can partly be explained by examining trends in (a)(7) activity, that is, refinancings of existing HUD/FHA loans. With $850 million in volume, the percent share of LEAN (a)(7) activity for the first half of HUD's 2022 fiscal year was at its highest level since 2013. The recent drastic upward movement in rates led to less than $200 million in (a)(7) volume for the second half of the year.
In addition to rising rates, owner-operators continued to face operational headwinds. "The industry has not returned to pre-pandemic occupancy and while slowly regaining lost occupancy, facilities are also struggling with expenses – largely driven by the labor market challenges – so they are not yet prepared for the stabilized takeout achieved through a permanent lending source like HUD," said Michael Gehl, Chief Investment Officer of FHA Lending at NewPoint Real Estate Capital.
While we expect the LEAN pipeline to remain muted in the near term – especially on the (a)(7) front – HUD programs will remain the top choice for operators seeking permanent fixed-rate debt. Volume should start to pick up as performance metrics continue to improve, especially given the considerable amount of mini-perm and bridge debt that was placed during the flurry of acquisitions activity seen over the past four years.
Questions about FHA financing? Contact Charles Dabich at (301) 969-3300 or Charles.Dabich@newpoint.com.