A Lender's Perspective: Opportunities + Challenges for Seniors Housing Borrowers
Christopher Honn, Managing Director of Seniors Housing Originations, recently participated in a webinar, 'Financing for Seniors Housing and Care in 2023 and Beyond,' put on by The SeniorCare Investor. Here are four quick takeaways for those who were unable to attend.
Rising Rates Continue to Complicate Things
Though interest rates have cooled off a bit in recent weeks, they are still high in the sense of the 'historical near term.' Higher rates are particularly challenging for properties with bridge loans – typically structured with a floating rate – that are approaching maturity. This is especially true as property fundamentals did not improve enough to stabilize these assets in many cases. As a result, maturing bridge loans must often look for a new bridge loan, renegotiate loan covenants, and/or make a significant loan reduction.
For the wider seniors housing and healthcare market, the increased cost of debt has reduced overall transaction volume (outside of distressed properties) and refinancing volume as owner-operators find it harder to meet required debt service coverage ratios (DSCRs) and loan-to-values (LTVs).
Fundamentals Remain Challenging
DSCR requirements are harder to hit due to a rise in expenses that have made it difficult for some communities to achieve a budgeted or historical net operating income (NOI) margin. The reliance on temporary agency workers has led to increased costs in wages. Rising insurance, utility and food costs have not made things any easier. Though rent growth and occupancy are on the uptrend, so far, it has not been enough to offset rising expenses. For these reasons, institutional equity remains very cautious, making it all the harder to lower leverage on an acquisition or recapitalization.
Agencies Continue to Provide Support for the Right Properties/Sponsors
Fannie Mae and Freddie Mac continue to provide support to strong and experienced borrowers. As banks became focused on becoming more flexible on short-term loans, the Agencies have noted and adjusted pricing to be competitive. Though underwriting requirements have not changed materially, the Agencies are keeping close tabs on rent growth, expense growth and NOI margins. Like most lending sources, Fannie Mae and Freddie Mac's production volume decreased in 2020-2022 compared to the pre-COVID market. As market fundamentals continue to improve, we can expect volume to return to pre-pandemic levels as sales and refinancings pick back up.
Challenges Will Not Resolve Overnight, But Demographics Favor Industry Long Term
Just as it seemed the industry was ready to turn the corner, inflation, rising rates and market volatility put a damper on its recovery. Yet, despite the current challenges, there are reasons to be optimistic. Rent growth is at an all-time high, and occupancy – though not quite at pre-pandemic levels – is recovering. Data from NIC, in fact, shows that Q4 2022 set a new record in terms of the number of occupied units within primary markets. And demographics, of course, continue to favor the space. By 2030, all Baby Boomers will be older than 65, and we recently crossed the point where more people are turning 83 and 84 than the year prior.
Question about financing? Contact Chris at Christopher.Honn@NewPoint.com or 630.272.7343.