Debt and equity capital is readily available for the right borrowers, according to panelists at the 2019 NIC Fall Conference.
Private equity interest in the sector has not slowed as players compete for the best properties and development opportunities. Debt funds are assuming a bigger role as a capital source while traditional debt providers aim to stay disciplined amid wariness about the broader economic outlook and overbuilding in certain markets.
“It’s an interesting time,” said Sarah Anderson, managing director, Newmark Knight Frank. “The industry is in a good spot.”
Back-to-back educational sessions at the conference, held last month in Chicago, addressed the capital markets. The first panel discussion explored capitalization options. The second session compared new and traditional debt and equity capital sources.
The broader economic outlook provided context for the discussions. Panelists noted that unemployment is very low, 3.5% in September, its lowest point since December 1969, which has pressured wages and staffing in the sector. The Federal Reserve has cut interest rates two times so far this year, and may cut rates again, a plus for borrowers but also a worrisome sign that economic growth is slowing.
“This is the longest economic expansion we’ve had,” noted panelist Grant Saunders, senior vice president/senior banker, KeyBank Real Estate Capital. He didn’t think any one factor might tip the economy into recession, adding that the correlation between seniors housing performance and the broader economy is somewhat muted in both bad and good times.
Private equity continues to play a big role in the sector. “We don’t see any slowing,” noted Anderson. She added that a lot of opportunistic capital is sitting on the sidelines, waiting to buy up troubled properties in overbuilt markets.
The agencies—Fannie Mae, Freddie Mac, and HUD—are actively lending and offering competitive rates, said panelists.
Debt funds have emerged as an alternative funding source, noted panelist Dan Reilly, managing director, White Oak Healthcare Finance, a debt fund. He’s bullish on skilled nursing properties, especially those owned by local operators that have good relationships with hospitals and other referral sources. “It’s a huge opportunity,” he said. “Great operators with great track records will win in the skilled nursing sector.”
Reilly said his fund has earmarked money to invest in new construction, though other lenders are wary of ground-up development at this point in the economic cycle.
“We like to understand new construction projects,” said Anderson. Developers prefer partners with sufficient liquidity to provide a completion guarantee and an operator with a good track record. Panelists noted that an operator should also be invested in the deal so its interests are aligned with those of the lenders and investors.
Panelists in the first session analyzed three case studies, providing insights into how they viewed each deal.
In the second session, panelist John Mark Ramsey, CEO, Sentio Investments, noted a disconnect between investor expectations and property performance. The operating environment is somewhat tricky while, in his opinion, investors still haven’t lowered return projections.
Ramsey likes repositionings and new development, in certain situations. “Other firms are moving in that direction,” he said.
The mezzanine debt market remains robust, according to Tim Podboy, head of originations, Heitman. Some banks dictate the use of preferred equity as an alternative, however.
Will credit standards tighten?
“I think we will see some tightening,” said panelist Steve Anderson, managing director, Ally Bank Healthcare Capital. He predicts that slower lease-ups will also slow lending.
Panelist Ramsey agreed. He thinks banks will tighten their lending standards because of a combination of an oversupply in some markets, labor shortages and rising expenses. In response, banks will focus on the quality of the operator and sponsor, he added.
Ally’s Anderson urged lenders to be patient. “Buildings will fill eventually,” he said.
Panelists in the second session also discussed the NIC study “The Forgotten Middle,” which explores the future housing needs of middle-income seniors. The speakers addressed how capital sources might work together to produce more housing for this growing cohort of elders.
Public-private partnerships were discussed as a financing option. Private capital sources will probably not accept the lower returns expected from middle-market housing. But other types of capital might, noted Ramsey, singling out so-called impact funds or those that invest with a social goal in mind.
Panelists agreed that middle-market communities may require a variety of capital funding sources. The hard part will be how to pay for the care component.
“There has to be a solution around how to provide care,” said Brock Andrus, managing director, structured finance, Bridge Investment Group. Emerging technologies that improve the efficiency of care delivery will play a role, he said. Partnerships with nonprofit organizations to operate the properties are another alternative, he added.
“We have to figure out a way to care for people in the most appropriate setting,” said Ramsey.