Senior housing capital markets are settling down, with many lenders returning to the space, weeks after the coronavirus pandemic sent them scurrying to the sidelines. Meanwhile, equity investors are sitting on billions and are viewing senior housing favorably.
Deals are still being completed, albeit with a bit more due diligence and less leverage than before — a testament to the market fundamentals in place before the crisis shut everything down, as well as the strong credit profile in the sector compared to other asset types, Newmark Knight Frank (Nasdaq: NMRK) Vice Chairman Chad Lavender said Tuesday when he joined the SHN TALKS series.
Lavender, who joined NKF in February 2019, has closed on over $20 billion in transactions in his career. He co-chairs the global commercial real estate advisory firm’s health care and alternative real estate assets practice. Like other leaders across the sector, he has faced unusual challenges due to Covid-19, particularly in the early days of the crisis.
“The last two weeks of March, things were moving so much — the public markets were moving a couple thousand points a day. The Treasury ran way out quickly, then ran way back in. There was just so much volatility that people were having trouble pricing risk, and really understanding what how much liquidity was going to be in the markets,” he said
More recently, Lavender is on firmer footing: April saw the dust settle and liquidity flood back into the space. In fact, NKF is having more active dialogue about incoming business than the firm has had in some time, mostly in an advisory capacity.
Fannie Mae and Freddie Mac figured out how to structure deals moving forward. Private equity funds are looking to deploy a steady stream of cash toward private-pay senior housing, and regional banks are still sponsoring strong assets — notably, core and core-plus properties.
NKF has closed between $300 million to $400 million in deal value last month, although some deals did fall through. Still, Lavender is optimistic that business will pick up again.
“[The market landscape is] changing daily, and the ground is really moving under our feet. I feel like it’s firming up,” he said.
Three deal tranches
Deal flow has segmented into three categories: core and core-plus assets, value-add, and construction financing/joint ventures.
Lavender has seen little to no change in core product valuations in the short-term and deals are getting done.
“Core is still king,” he said.
This bodes well for portfolio sales, where global investor appetite remains strong even as some investors have postponed pulling the trigger on eight and nine-figure deals. Notably, Sabra Health Care REIT (Nasdaq: SBRA) indefinitely postponed plans to acquire a $150 million senior housing investment.
Lavender hinted that there would be a couple large transactions happening in the next couple weeks, but could not offer details.
“I don’t think there’s going to be any change from a portfolio perspective,” he said.
Value-add deals — which typically require a change in operator, capital expenditures and repositioning to maximize value — have been slightly tougher to close, with a lot of deals going on hold for the time being, and those that are closing were started before the pandemic spread.
There is no timetable for when value-add interest will rebound, but doing so will entail third parties getting creative to push deals through.
“It’s really bespoke whether we go to market now or we wait to go to market, after this passes or after we have a little more clarity. It’s really asset by asset decision,” Lavender said.
Much of NKF’s deal flow thus far involves recapitalizations where the operators stand in place, making the transaction a bit easier and less risky.
Deeper lender pool
Strong sponsors will find better access to capital than was available only a few weeks ago, with agency debt, private equity and regional banks — and even foreign capital — all looking to deploy powder.
An NKF rolling poll revealed that private equity interests have raised a combined $11.5 billion in capital to deploy in senior housing opportunities. With lenders across the board now requiring at least 65% in equity up front before discussions on laying down debt are even discussed, that equates to around $33 billion worth of buying power in today’s market, Lavender said.
National banks remain on the sidelines, preferring to tend to their existing clients. Regional banks, however, are still placing debt, but spreads have widened. Fannie Mae and Freddie Mac initially widened their spreads but have pulled them back in recent weeks, while also changing their reserve and leverage requirements — a fluid, constantly changing situation.
The agencies are finding growing competition for bridge lending from the private sector. NKF has executed a couple of bridge loan deals in the past month.
“The debt funds have widened spreads a bit, because [in] a lot of cases their cost of funds is more expensive. We’ve seen [banks] want to be lower leverage or require a sliver of recourse, north of 60%. Then we’ve seen life companies want to be lower leveraged. There’s plenty of liquidity there,” Lavender said.
Active adult gains slightly
Many experts predicted that active adult and independent living would be most impacted by the pandemic because these properties are viewed as lifestyle choices and possibly more susceptible to Covid-19 outbreaks, compared to higher acuity levels such as assisted living.
The opposite has happened, in Lavender’s view. Discussions between NKF and major active adult owners and operators indicate that move-ins continue and leases are being signed based on virtual tours. The healthier census in active adult communities, meanwhile, counters the average age of 73 years.
“We’ve seen active adult hold up really well,” Lavender said.
Whether in lower- or higher-acuity senior housing settings, the resident pool does present risks given their susceptibility to Covid-19 complications. However, Lavender stressed the appeal of the sector given the stability of residents’ ability to pay rent.
“You look at senior housing from a credit tenant perspective. Most, if not all, of our residents collect Social Security. A lot of them have pensions, sold their homes and are very liquid, or will get income supplemented from their kids in order to pay their rent,” he said.
With the landscape coming into better focus by the day, Lavender believes the pandemic may prove to be a large bump on an otherwise steady road, if the quick return of players to the space is an indication.
In-demand markets hard hit by Covid such as the tri-state area of New York, New Jersey and Connecticut, as well as the Pacific Northwest, are expected to bounce back as soon as the outbreak is under control in those markets. The tri-state area, especially, has been the most desirable market for investors but the hardest to access to capital.
“Any time we’ve ever worked on something there, we’ve had more action than anywhere. So I think that’ll come right back to form as soon as things settle down a bit there,” he said.
Lease-ups and occupancy gains continue in many southeastern markets, as well. Houston is another market that may see an uptick in interest as the outbreak gets under control, although Lavender indicated that there may be pockets of distress on a micromarket level.
He is heartened by how the industry has pulled together to face this crisis, noting that he knew this was an unusual time when he was on the phone himself trying to locate PPE for operators. Going forward, investors and lenders will likely evaluate operators based on how are performing now.
“I don’t think [positive] cases at a property is going to [determine] whether you’re doing a good job or not; sometimes it’s out of [operators’] control. I think it’s how they respond, how they treat the families, how they treat the residents, how proactive they are, and how their policies and procedures are written and how they enact them and and really how they take hold,” he said.
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