Fact or Fiction: Lending Markets During a Pandemic, and Beyond

Hundreds of investors, owners, operators, analysts, and other industry stakeholders attended the latest in NIC’s new series of Leadership Huddle events Wednesday. In the webinar portion of the event, which was sponsored by National Health Investors (NHI), they were treated to a virtual smorgasbord of insights and expert discussion around financing markets in seniors housing and care. Attendees who had opted to participate in the Zoom discussion breakout session that followed, continued the discussion, adding their own thoughts and experiences in small groups.

On whether COVID-19 has reduced investor interest in seniors housing funds, Chapin responded, “that’s a hard fact, for sure.” He said that his group shelved those funds in the first six months of the year, focusing instead on the operational challenges brought on by the pandemic. For the rest of the year, he saw “10% to 15%” of normal flows of investment.

Mendes, responding to a question on non-recourse acquisition financing in 2020, suggested that the most-used term within the industry last year was “hit the pause button.” Permanent lenders such as Fannie Mae and Freddie Mac underwrote fewer loans as in-place cash flows, which they require to support their loans, declined throughout the year. Further, the non-recourse bridge debt market, according to Mendes, “did not fully materialize until later in 2020.”

Asked whether Freddie Mac’s senior housing portfolio has fared well, Schmidt responded, “relative to what we’ve heard from other lenders, that is predominantly true.” However, he said that the pandemic caused more stress in the seniors housing sector than did the global financial crisis. Freddie Mac instituted a three-month forbearance program, which he said was taken up by twice as many in seniors housing than in multifamily. The good news, according to Schmidt, is that most of those borrowers are now current. “We feel the program provided the necessary relief during the worst part of the pandemic, and we feel very good about that.”

Another line of questioning concerned the impact of regulators throughout the pandemic. Generally, panelists were positive, lauding the CARES Act, the Federal Reserve, who took action to temporarily ease balance sheet requirements, and PPP loans, all of which helped stabilize the sector throughout 2020.

Other questions focused on the present situation. The first of these concerned whether debt markets are a hindrance to the desire to buy and build new assets. Chapin labeled this one as a fiction, indicating that his organization was generally pleased with the response from lending relationships. He said, “we anticipate that we will continue to have very good outcomes with our lenders as it relates to refinancings and new acquisitions in 2021.” He continued, saying, “What we’re generally seeing is more conservative underwriting on debt service coverage ratios, lower LTVs, increased underwriting expenses for PPE, labor, insurance, and all the typical things that we’re all experiencing right now that have to be factored in.” He said that, although his company isn’t planning any new ground-up development projects for 2021, they expect to have shovel-ready projects in 2022.

Another “fiction,” according to Mendes, is that “new development financing terms are so conservative as to render them non-existent.” On the contrary, he said, “we closed new development debt financings all through 2020 and continue to do so today.” He said, “If I could pick one financing term that has changed the most since March 2020, I’d say it’s ‘recourse.’ Lenders are requiring more of it. Non-recourse debt financing, particularly that starts with a six on the loan-to-cost, is pretty hard to come by.” He continued, “If you’ve got a solid project it can get financed today, no doubt about it.”

On current lending, both Chapin and Thompson indicated optimism, particularly as vaccinations continue to reach millions of residents within seniors housing. Thompson said, “Lenders are learning what to ask when it comes to underwriting and due diligence. I see more lenders willing to dig in and do the due diligence than earlier in the pandemic. It’s early in the year so, from a practical standpoint, lending groups have loan-growth goals that they have to deal with.”

Some questions probed into the near future. Mendes, explaining his optimism, said, “a theme in the senior housing capital markets in 2020 and through to today is that in-place performance at the asset level is usually declining month-over-month. You engage a deal in September and, come December, the numbers look worse, which has caused ongoing stress in the transaction process. I believe what we’ll see later this year is just the opposite. The numbers are going to start looking better as the transaction process progresses. This trend, in my opinion, will be accelerated by the decline in construction starts, and also combined with the growth in the 80-plus demographic.” He pointed out that growth in that demographic from 2021 to 2023, “is projected to be twice what it was from 2017 to 2019.”

Mendes continued, saying, “from an equity perspective, dry powder in the United States for real estate in December 2020 was over $200 billion, that’s uninvested private equity, which is close to a record high.” He explained that, with so much liquidity in the market, “lenders can expect high quality sponsors, like Bridge for instance, with the ability to invest meaningful equity into transactions.”

Looking ahead, the panelists generally foresee a gradual return to pre-pandemic business practices and performance. They discussed the impact of numerous factors throughout 2021, including the regulatory impact on banks, the potential for improved occupancy, and the attractiveness of the sector to investors. On that point, Schmidt pointed out that big pre-COVID challenges, such as labor shortages and oversupply of new properties have eased. He said, “Operators will have to recognize, and I think we are, the new normal and not revert back to the old normal and continue to evolve. That creates the real opportunity. The owners and operators that do that really well will attract a lot of investment capital going forward.” The webinar portion of this NIC Leadership Huddle event is available, in its entirety, on NIC.org. Registration is now open for the upcoming February 24 Leadership Huddle, titled, “Is There an Investment Case for Skilled Nursing in the Intra-and Post-Pandemic World?” Spaces for the follow-up discussion group are limited, and are offered on a first-come, first-served basis