Senior Living Capital Markets at ‘Peak Volatility,’ But Sector Has Advantages

The Covid-19 pandemic has created an environment of peak volatility for senior living, but the industry’s need-based, recession-resilient components open it up to available sources of liquidity. And as a real estate class, it is far more stable than other product such as retail and hotels.

Already, lenders are retreating to the sidelines, becoming extremely cautious with underwriting and demanding greater transparency from sponsorees. But senior housing owners and operators that need boosts to liquidity will still have options available. Lenders still in the market have learned their lessons from the Great Recession, exercising discipline and not attaching predatory lending rates to their sponsorships.

Also, short-term occupancy move-in rates have held steady as the pandemic seized hold in the U.S. — a sign that demand for senior housing will grow as the outbreak becomes more fluid, Real Capital Analytics Senior Vice President Jim Costello said Thursday during a webinar hosted by the National Investment Center for Seniors Housing & Care.

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In addition to the toll the Covid-19 pandemic is placing on global health systems, it is also proving to be the “unexpected shock to the economies” that has the U.S. on the brink of recession, if it isn’t already there.

The Department of Labor reported 3.28 million first-time unemployment claims were filed last week as a result pandemic-related layoffs — a record number which effectively reversed over a decade of job expansion, wiped out 18 months of job gains and shattered a 38-year-old record, according to NIC Chief Economist Beth Burnham Mace.

“The great American job machine appears to have ground to a halt,” she said.

‘Peak volatility’ changing lending landscape

The past two weeks have seen the capital markets freeze, trying to divine how the real estate market will eventually respond to the sudden changes brought by Covid-19, KeyBank Real Estate Capital Senior Vice President Matt Ruark said. He heads KeyBank’s Commercial & Healthcare Mortgage division.

Notably, pricing has not dropped precipitously or immediately, compared to how real estate values plummeted during the Great Recession. But Ruark warned that this is only the beginning. Every recession is not the same. In 2008 and 2009, financial challenges stemming from aggressive lending froze the markets and sent pricing into a spiral.

Lending in the post-recession recovery, however, has been more disciplined and was already being restricted well before the coronavirus hit. And investors seeking safe haven for their dry powder have turned to the commercial bond markets, which have exploded since the Federal Reserve announced that it would purchase corporate debt to support the credit markets during the crisis. The Fed also announced that investment firm BlackRock will oversee the debt acquisition efforts.

The markets have responded positively to the news and the growing interest in corporate bonds may also signal that senior housing mortgage and cap rates may actually increase.

“The spike [in bond interest] is indicative in changes in risk perspectives. There is a hesitancy in underwriting [real estate] investment risk,” Ruark said.

Banks and other commercial lenders are retooling in the midst of the outbreak and opting to support existing customers in navigating the choppy Covid-19 waters, MidCap Financial President, Real Estate Kevin McMeen said. Bethesda, Maryland-based MidCap is a middle-market lender.

The unprecedented nature of Covid-19 makes it nearly impossible for lenders to rely on historic data and responses to respond to the volatility, because it does not apply. And it makes it nearly impossible for lenders to assess risk factors in the current market.

“We’ve seen examples where [an outbreak] can be significant and wreak havoc in terms of the care of seniors and economic results of the building,” McMeen said.

MidCap is observing how efforts to “flatten the curve” of the virus’ expansion will have on the economy. But that will take time. For now, the firm will stay on the sidelines.

“As we gain clarity and sense of how to project what the economy looks like in the future, we’ll look at originating new business,” McMeen said.

Slowdown occurring

The operational intensiveness of senior housing, however, gives it something that other real estate classes will find lacking moving forward — access to lending via HUD, Fannie Mae and Freddie Mac financing, RSF Partners Principal Kurt Read said. Dallas-based RSF is a private equity firm that owns 40 senior housing communities, totaling over 7,000 units.

These financing mechanisms provide a foundation of liquidity for senior housing owners, even if it is slower and higher priced. As the pandemic continues, RSF is in more frequent communications with its operating partners, lenders and investors, and requesting full transparency from operators about pain points that may require reaching out to these lending sources.

“Information flow, particularly during uncertain times, is an enormous value to the industry and investors. Those who are transparent and forthright in communicating what is happening will be viewed favorably once we get through the current crisis,” Read said.

Transactions are also taking longer to close, owing to a variety of factors — notably, a slowdown in logistics.

Travel restrictions have ground third-party vendors in place, adding a level of complexity to the due diligence and filing processes that has not been experienced before. In some cases, it has stopped acquisitions from happening, Read said.

Moreover, state and local governments are closing their deed recording offices. Unless these offices are equipped with e-filing capabilities, it becomes nigh-impossible to file a completed transaction or do lien searches on properties.

The risk around transactions is especially pronounced if it involves a community that is transitioning operators which is challenging in any situation, while keeping residents safe, McMeen said.

The challenges and uncertainties of the moment are stark and in some cases historically unprecedented, but the panelists offered words of encouragement to the industry that this crisis, too, will pass.

“We are open while other industries are being forced to shut down. We need to be there, we are there, we want to be there every day, all day, to care for our residents. As we move deeper into crisis, it will become very clear, relative to the rest of the economy, that we are open and continue to serve residents during this most difficult time,” Read said.

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