Fiscal Cliff, Consolidation Factor into Finance Outlook for 2013

While the past year has been characterized by robust senior housing financing activity, uncertainty related to the fiscal cliff and tax changes has amped up transactional pace prior to 2013—even though the new year is not expected to be substantially different in terms of financing availability.

The fiscal cliff is affecting many areas of the senior living industry, including timelines for completing financing transactions.

GE Capital, Healthcare Financial Services, for example, will end the year with a record-setting fourth quarter aided by sellers determined to close deals before 2013, when tax rates on capital gains are expected to rise significantly.


“The seller motivation is unknown for some transactions, but others told us we have to get it done ahead of the new year,” says Jim Seymour, senior managing director of healthcare real estate with GE Capital, Healthcare Financial Services. He says GE’s healthcare real estate business will close more financings this year than it has in any previous years, north of $2.5 billion of transactions.

The new year will produce its own set of characteristics. The availability of financing is expected to continue, but transaction and refinancing volume might be a little slower toward the beginning of the year before picking up in the second half of 2013, says Imran Javaid, managing director of healthcare real estate at Capital One Bank.

“There are tons of variables in play of what will happen in 2013,” says Javaid. “A lot depends on the economy, and whatever the [debt deficit] reduction ends up being.”


It’s on operators’ minds, he says, and on those of senior housing and long-term care consumers—including the private pay market in addition to Medicare and Medicaid beneficiaries. “[Debt talks] will continue to have an impact,” he says.

While those are some negative variables heading into 2013, there are plenty of positives, including aging demographics and the need-based nature of the sector.

“I think the trend that will continue is consolidation in the marketplace,” Javaid says. “Some of the smaller “mom-and-pops” have a tough time adapting to the changes that are happening in the industry, and it gives rise to acquisitions.”

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That’s already happening. Although the year 2012 was marked by “lots of refinancing,” says Dan Biron, senior vice president at Berkadia Commercial Mortgage LLC, there were also a “fair amount” of acquisitions, and liquidity has continued to improve compared to 2010 and 2011.

Most of Berkadia’s acquisition financings have been for independent living, assisted living, or memory care properties, similar to the industry as a whole. There have been fewer acquisitions of skilled nursing, he says, other than some of the portfolios that healthcare REITs or large operators with REIT backing are purchasing, such as Genesis HealthCare’s $275 million acquisition of Sun Healthcare.

While M&A is a big driver, says Seymour, he’s anticipating other types of activity. “Construction continues to be something we’re hearing more and more about,” he says. Although GE Capital is not a ground-up construction lender, it has been involved more with asset repositioning for operators looking to modernize a property, add memory care, convert independent living beds into assisted living, or other such projects.

Biron believes construction financing will start to become more available, but almost exclusively for those with proven track records. The availability may be helped along by an increase in capital sources.

“REITs have been dominant, and I think they are going to continue to be very active in our space,” Biron says, “but I get the sense there’s more and more active banks that are paying attention to the [senior housing and care] space, and private equity folks as well.”

It might take a little longer to get institutional investors into the game, he says, but as the sector continues to grow as a piece of the real estate business, more may begin to realize that senior housing as an asset class is “much more risk averse” in a recession compared to some other sectors.

Ultimately, 2013 will probably be pretty similar to 2012 in terms of a competitive financing environment. “The assumption is there’s going to be some solution, at some point, on the fiscal cliff,” says Seymour. “There’s not some disaster scenario that throws the economy off course. It’s going to be similar: there are strong fundamentals in the [senior housing] space, and we’re well-positioned and optimistic.”

Written by Alyssa Gerace

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