New Players To Shake Up Senior Living Finance in 2014

New entrants into the senior housing space are creating acquisition and development financing opportunities, lenders say.

Bill Kauffman, Managing Director of Oak Grove Capital’s senior housing division, has seen continued entrance of equity investors moving into the senior housing market and forming alliances with existing operators and a handful of new operators—moves that will create more financing opportunities about two years out.

“I think 2014 will bring continued new development activity,” he says. “There are clearly more commercial banks interested in the sector, so I believe there will be a combination of new banks and equity available for responsible, experienced operators. It will mean new construction starts in markets that make sense.”

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The sector’s growth is a healthy indication that senior housing is being viewed favorably, he says, and other lenders are seeing the same growth.

“What we’re looking at today is a much more competitive landscape with both large and small investment groups and private equity funds getting in on the action,” says Jeffrey Davis, chairman of Cambridge Realty Capital Companies, who notes hesitation among investors in the skilled nursing space due to continued threats of cuts to Medicare and Medicaid reimbursements.

“In contrast, assisted living, independent living and memory care facilities are being viewed more like other commercial real estate types, a viewpoint that has significantly shaped the outlook for senior housing investment over the past 24 months.”

Low interest rates have made the last few quarters ideal for refinancing, but with many of those deals completed and rates rising, senior housing lenders expect new construction to increase its market share with acquisitions remaining steady.

“We’re off to a strong start with our pipeline of refinance projects carrying over from last year, and we are seeing more new construction opportunities,” says Robert Baxter, a senior living underwriter at Lancaster Pollard, the leading HUD Section 232 lender in 2013 with $644 million of LEAN program volume.

Opportunity lies in repositioning or rebuilding older senior living and skilled nursing stock, he says, and as more capital crowds into the space, development pipelines could shift from planning to action. Construction activity that began to spike in 2013 is expected to sustain its momentum, according to Davis.

“With limited opportunities in other commercial sectors, real estate development companies also found the demand demographics for senior housing to be especially appealing” in addition to senior housing investors and owners, he says.

The entrance of equity sources can sometimes serve to diminish senior housing financing opportunities. While Oak Grove Capital had a record year with $1.7 billon of originations across its affordable, market rate, and senior housing financing platforms, it produced a little less than $400 million on the senior housing side, according to Kauffman.

“We had a consistent year that was marred by missing out on a couple deals purchased by all-cash buyers who didn’t need financing,” he says. “Generally speaking, the cost of capital is lower than the mortgage financing rate.”

While private equity borrowers generally look for leverage, REITs typically pass on taking leverage, he says. However, in some cases when they buy a property, if the prepayment premium exceeds the debt assumption costs, they’ll go through the assumption process.

“Depending on the buyer of a property or pool of properties—if it was a big, publicly traded REIT, they would generally pay off our loan if there’s one outstanding on an acquisition,” says Chris Honn, director of Fannie Mae’s Seniors Housing Group. “Other buyer types like private equity, non-listed REITs, or owners/operators typically either assume our loan or come to us through our lenders to negotiate secured debt structures for acquisitions.”

Refinance activity is expected to lessen because many permanent loan terms have already been refinanced. Maturing loans in 2014 are fairly small compared to most recent years, Kauffman says.

“The opportunities for refinancing in our portfolio for 2014 are less than for 2013,” says Honn. “Generally speaking, as rates go up, people try to refinance loans that are [eligible for refinancing].”

Where rates will go this year is anyone’s guess, lenders agree.

“For 2014, while we might see a little increase, I don’t think we’re going to see a material increase in rates,” says Lancaster Pollard’s Baxter. “There’s still going to be lots of opportunity for people to take advantage of refinances, acquisitions, and construction and utilize favorable debt terms to achieve [their goals].”

Written by Alyssa Gerace

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