Despite ‘Risk Everywhere,’ Senior Housing Should Have Healthy Dealmaking Year

An “explosive and combustible environment” in the United States and around the globe is making it difficult to predict how the economy will fare — and how senior housing mergers and acquisitions will shake out — over the course of 2020.

That’s one message from James Flynn, the CEO of Hunt Real Estate Capital who is tasked with leading the newly formed business unit of ORIX Corp. USA created by the combination of Hunt Real Estate Capital, RED Capital Group and Lancaster Pollard.

U.S. Presidential election years always inject some uncertainty into the markets, and the current impeachment of the current commander-in-chief Donald Trump is adding another variable, Flynn told Senior Housing News. Abroad, there are “all sorts of geopolitical risks,” he said, including the recently escalated tensions with Iran and ongoing protests and unrest in Hong Kong and other locations around the world.

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“There’s just risk everywhere,” Flynn said.

Meanwhile, the United States is in the midst of a historically long economic expansion.

“It has to end at some point and you have to go through a cycle,” he observed.

With this in mind, every year since 2015 he has predicted that interest rates would start to meaningfully rise, and each year he has been proven wrong.

For 2020, he is hoping to see slow but steady rate increases, and — despite the geopolitical uncertainty — he expects a healthy year for senior housing transactions, with a rebound from a decline in activity that ended 2019.

“I would expect 2020 to be better than 2019 in terms [lending] volume,” he said.

Middle market fueling activity

The senior housing industry is still trying to rebound from overbuilding that occurred in various markets over the last several years, but activity continues to be robust in the space due to the attractive long-term value proposition rooted in demographics, Flynn observed.

In addition to new investment groups and operators getting into the sector, existing players are seeking capital to upgrade or reposition their offerings for the boomers, he said. This includes a big drive to create a more affordable product. The push for middle-market senior living got a boost last year, with the release of fresh data quantifying the enormous coming demand for this type of housing, which is currently lacking.

Agency lending is a key vehicle for accomplishing this goal, he observed.

“One of the ways to [achieve affordability] is to provide attractive financing alternatives for rehabbing existing facilities,” he said.

He pointed to affordable and workforce housing as a potential parallel, where private investors have been able to tap attractive Federal Housing Administration (FHA) loan programs for preserving properties with rents that are affordable to very low-, low-, and moderate-income families.

Coming up with the right investor proposition and operating model for middle-market senior living will not be easy, but Flynn is optimistic.

“When you get more interest — you get deep pockets [and] sophisticated, smart people who want to solve the problem — you oftentimes can figure it out,” he said.

Unified brand in the works

The newly unified trio of Hunt, RED Capital and Lancaster Pollard should be well-positioned to meet the increasingly complex capital needs of the senior housing sector, Flynn said.

The three companies individually were major players, with Lancaster Pollard often topping the list of FHA 232 lenders. Together, they have the capability to not only offer a diverse array of products but more sophisticated advisory services, Flynn emphasized.

“We want to be viewed by our clients as partners and not simply a vendor or lender — we really want to be their partner in providing them with advisory services and lending opportunities and other capital solutions, both corporately and on a transaction basis,” he said. “I can assure you that will be a centerpiece of the overall brand and messaging for the market.”

That brand is still in development as the entities work on their integration. The integration process should be complete by the start of the new fiscal year on April 1, Flynn anticipates, but a new brand name may not be rolled out until further in the future.

In terms of whether there will be any personnel changes among the leadership at Hunt, RED and Lancaster Pollard, Flynn said the details of the integration are still being hammered out, but there is not much redundancy in roles given that three platforms are “complementary” in terms of their main offerings and geographic concentrations.

Going forward, the unified company also will have the substantial balance sheet of ORIX behind it. ORIX Corp. USA is the United States hub of Tokyo-based ORIX Corp., which has annual revenue of approximately $24 billion.

“We want to continue to position ourselves as a national real estate lender, very much involved in all of the specialty areas within real estate finance,” Flynn said.

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