Existing Supply Dominates Senior Housing & Care Finance in 2011

REITs (real estate investment trusts) and refinances were two key components in the senior housing and care finance game in 2011, with billions of dollars in M&A activity and soaring loan endorsement volume from the Department of Housing and Urban Development (HUD).

Although rumors of an impending construction boom are swirling thickly around U.S. Census data of 10,000 baby boomers turning 65 each day, capital noticeably went to existing senior housing and care facilities, rather than toward new supply.

This is likely to progress into 2012, with REITs and HUD continuing to finance pre-exisitng senior housing and care facilities.


“I look at 2011 as yet another year with HUD financing being one of the primary economic drivers,” says Nick Gesue, senior vice president and director at Lancaster Pollard & Company. “There’s potential for 2012 to be an equal—if not higher—volume year for HUD, just based on what’s in its pipeline.”

Finance Mainly Came from REIT and Government Sources

HUD drove healthcare financing in 2011 with volume growing 32% from the previous year, and Section 232 LEAN loan endorsements through the Office of Healthcare Programs (OHP) totaling nearly $3.3 billion.


The demand for existing supply can be seen through the OHP’s 347 refinance applications for new FHA loans, and 301 applications to refinance an existing FHA loan, compared to just 58 applications for new construction.

Out of the 648 total refinance applications received in 2011, the OHP issued 441 commitments, and from there closed on 389 refinance loans (in comparison, they issued commitments for 31 new construction loans, ultimately closing just two dozen). By the end of the year, there were 123 total Section 232 applications in underwriting review, with 303 in the HUD queue awaiting assignment.

Apart from HUD, REITs also infused a significant amount of capital into the market.

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“You can almost claim that REITs, through M&A activity, were some of the biggest financiers of skilled nursing facilities this year, through sale-leaseback transactions,” says Gesue, adding that HUD “took the bulk of the mom-and-pop type financings,” with commercial banks covering the rest, and private equity largely absent.

Limited Supply Chased by Growing Demand

The first half of 2011, especially, was marked by huge, billion-dollar deals from healthcare REITs such as Ventas, Senior Housing Properties Trust, and Health Care REIT that served to consolidate the market. All told, through the third quarter, REITs accounted for 89% of all dollar volume of seniors housing and care, according to a November 2011 National Investment Center for the Seniors Housing and Care Industry Market Briefing.

Much of the year’s M&A action has to do with limited supply, according to some senior living investment brokers, and the market saw pent-up demand playing out this year.

“Combined with lending availability, you simply had much more buyers chasing very few products, so it was an extremely strong market,” says Ryan Saul, a managing director at Senior Living Investment Brokerage, based in Glen Ellyn, Ill.

The lack of available, quality inventory inherently drove up market values, and 2011 was a peak year from a valuation standpoint, he says.

“With the lack of supply, crossing with the demand of baby boomers, it’s going to result in aggressive pricing. We’re going to continue to see values increase as long as the current inventory of units in the markets remains stagnant,” says Saul.

Financing Outlook for 2012

Not only was it a “banner year” for M&A activity, the year is ending with overall interest rates that are lower than when the year began, says Gesue.

“At this time last year, primary economists were projecting that by this time rates would be on an upward trajectory from where they were,” he says. “Instead, they’ve been very steady, if not declining, and the continued guidances from the Fed is that they’re going to keep rates low into early 2013.”

This has enabled lenders to continue to be able to make loans at “record” low levels, and while it’s been a pleasant surprise, Gesue says it’s also indicative of the fact that the industry is in the midst of a very volatile environment.

In terms of further capital infusions, most expect that healthcare REITs will continue to grow, although most “headline” deals are likely done, in terms of billion-dollar acquisitions.

“REITs deployed a lot of capital [in 2011], but they still have a lot of capital available,” Gesue says. “Once they digest all those acquisitions, they’re gonna be in a position to continue to raise additional capital, so from an M&A perspective, it’ll be really interesting to see what happens and what position some of the REITs take to continue to add product.”

Most financing is going toward existing structures because it’s much less risky, says Gesue, and this will likely continue. New development is just too uncertain, he says, and REITs and other lenders are more willing to deploy capital to properties that are up-and-running.

“It’s very difficult many times when there’s nothing but a field of grass to sort of visualize and determine with good certainty whether building a senior housing project there is going to be well-received, especially in an environment when there weren’t continuous positive trends to get people to see that we were on an economic upswing,” says Gesue.

Written by Alyssa Gerace