One of the largest and priciest senior housing deals of the year has been Columbia Pacific Advisors’ acquisition of 79 Hawthorn Retirement Group properties, announced in June. That transaction also contributed to a banner day for Berkadia on Sept. 7, when the firm’s Seniors Housing and Healthcare Group closed more than $1 billion in financings.
The Sept. 7 financings included a $951 million, 10-year, variable rate Fannie Mae Master Credit Facility and a $44 million bridge loan for CPA’s Hawthorn purchase. In addition, the Berkadia team closed on a $35 million bridge loan for a different senior housing client.
Senior Housing News recently caught up with Lisa Lautner, a managing partner with Berkadia who worked on the CPA transaction. She shared some details about that massive financing and discussed current deal flow, the “new normal” for good occupancy and why smart investor money is staying active despite some industry softness.
How was Berkadia brought in on the CPA deal and how long did it take to place the financing?
Lautner: Berkadia and its predecessor companies had a nice long relationship with Dan Baty, one of the founding principals of CPA, back from when he was with Holiday [Retirement] and Emeritus … We kept that relationship going. We consider ourselves very fortunate that we got the call to help them place the financing, and it came together over several months as that deal came together. It was a six to seven month process. There were a lot of moving parts, a lot of assets.
And with Hawthorn being a management company and development company, there were some properties still being built, some fully stabilized assets, a lot going on within the portfolio … You have twenty states, mostly independent living but some assisted living in there as well, so licensing [issues] come into play, and then you’re trying to figure out the best source of financing for those assets in the lease-up stage, not yet stabilized.
How did you approach that challenge?
Lautner: As every month went by, [the portfolio] got more stabilized. [We used] some pro-forma methodology and were keeping track of that every month. We knew if need be, Berkadia also has a bridge program, so if there were some properties not ready to go under the Fannie Mae credit facility, we could bridge that.
We say we’re always sliding in sideways on a large transaction. Initially, we had a long runway, and then it started getting shorter and shorter, but we had a great team on this. Berkadia and Fannie, the buyer and seller … there was a a close-knit relationship between those entities. It was a compressed [timeline] but very doable. We were sliding in sideways a little bit, but we were ready to go.
Why was the Fannie Mae credit facility the right choice for this transaction?
Lautner: CPA is a lot like some of our other larger clients with a multitude of properties. [They’re] financing something for a very long period of time and if they decide they want to sell or buy more properties, for whatever reason, the bells and whistles of the Fannie Mae credit facility … allow companies to grow and really not worry about the financing piece of it. If they need to sell, [they can do that] without going through tremendous hoops and hurdles. We’ve already done that on the front end. It suits a number of our clients.
You had a great day last month, closing more than $1 billion in one day. How is deal flow more generally?
Lautner: Deal flow has been very healthy over the last couple years. People are a little nervous about interest rate movement, but so far, so good. Certainly on the construction and development side, it’s been very robust, and we’re seeing some of the construction slow down a bit, especially in the most notoriously ‘overbuilt’ markets. I put that in air-quotes because some sub-markets in those markets might be very good. But I think we’re seeing a little pullback on construction transactions, it’s harder to get those financed.
We’re seeing some occupancy softness in independent living and assisted living. Maybe flat occupancy quarter over quarter is the new good, for a while. But I think we’ll continue to see some good, and some large, transactions. I think when there’s a little market upheaval—softness in occupancy, overbuilding concerns, issues with the largest provider in the industry—that’s when good transactions can really happen. I think a lot of the smart money keeps active.
Can you elaborate on how industry challenges might lead to some properties changing hands?
Lautner: I think there are folks that have assets that, for whatever reason—new competition and whatnot—won’t have the financial wherewithal to get through the next, say, four quarters, eight quarters, and will want to exit. There may be some equity money that got in high on development and want to exit. And, still in play are some larger companies, [which have to consider] what their shareholders want. It’s hard to have a lot of shareholder pressure.
Are there asset classes that you think are more attractive now than others?
Lautner: Our book of business spans the spectrum and is in great shape. There’s softness in IL/AL, maybe standalone memory care, but there’s just a lot of stuff going on. I think we just have to weather the storm. I think everyone’s concerned with the softening, but we’ve been there before, and we’re very patient lenders.
Written by Tim Mullaney