Senior housing capital markets remain unstable, four months after the coronavirus pandemic. But they are no longer in a state of “peak volatility.”
Debt and equity lenders are returning to the space, but debt lenders in particular are slower to announce their presence, quick to retreat back to the sidelines, and are extremely cautious with the types of deals they will underwrite. In fact, placing debt is four to five times harder than usual, according to one broker.
Banks, meanwhile, have not forgotten the lessons of the Great Recession and are not panicking as Covid outbreaks begin to surge across most of the country, Titan SenQuest Management Co-Founder and CEO Kevin Kaseff told Senior Housing News. Titan SenQuest owns and operates a national platform of senior living communities, and Kasseff also leads Titan Real Estate Investment Group and Titan Realty Investors.
He believes that, while the pandemic hastened a bear market, this is actually the beginning of a market correction.
“This [looks like] a classic cycle. Everybody is more conservative,” he said.
Deals are getting across the finish line in this environment, including some recently announced portfolio transactions that had to overcome challenges related to Covid-19. However, timelines are extended, lender requirements are in some cases extreme, and capital providers are rewarding experienced senior housing players in light of ongoing market uncertainty.
Debt and equity lenders retreated to the sidelines as the pandemic’s grip tightened across the country, and lenders took a wait-and-see approach on when to re-enter.
Now lenders are beginning to do sot, albeit cautiously. But equity providers seem to be stepping back in at a faster pace than their debt counterparts, Kaseff told SHN. The El Segundo, California-based firm owns 17 communities in six states.
“I think there is a real issue with debt,” he said.
The debt providers that are stepping in are doing so cautiously, only underwriting deals where sponsors have proven track records for success. And even with those, it is still a challenge to place debt, Carnegie Capital Managing Partner JD Stettin told SHN.
The Austin, Texas-based senior housing brokerage closed on 14 deals over the past four months, but has had to cast a wider net to find debt placement. Big banks remain on the sidelines, but community and regional banks, credit unions and community development financial institutions (CDFIs) are filling part of the void.
As a result, deals that are successfully securing debt tend to be more local in nature. And they are being thoroughly vetted by lenders with a high familiarity with their markets. The thoroughness applies to acquisitions, refinancings and construction debt placements.
“We’ve had to speak to twice as many lenders per deal as we used to, and we’re getting about half as many term sheets. Arguably, you could say it’s four or fiver times harder to get things done,” Stettin said.
Do not expect debt lenders re-entering the space to advertise that they reopened for business moving forward. These lenders are choosing to only work with proven sponsors and will quickly return to the sidelines if the markets show any signs of negative fluctuations, Blueprint Healthcare Real Estate Advisors Senior Managing Director and Head of Business Development Steve Thomes told SHN. The Chicago-based senior housing and health care real estate brokerage has closed a number of deals recently, including six prior to the Independence Day holiday valued at more than $76.6 million.
“If you have existing lines with that lender, you’re a proven operator and you’re stable from an operating and financial standpoint, it’s probably a worthwhile credit risk,” he said.
The most active segment of the debt market may arguably be in bridge lending. Strong senior housing sponsors still have access to debt from Fannie Mae, Freddie Mac and HUD financing mechanisms, but those agencies have not expedited their lending timetables during the pandemic. Lenders active in bridge financing understand that HUD and agency debt is reliable but not exactly known for expedient placements.
“We typically like to close under a bridge structure, and then have either the time for the asset to season to max out that HUD loan if required or, if it’s a fully stable asset, [sponsors] can start that HUD application process right after closing. But we don’t want to subject our sellers’ transaction timeline to the whims of the government,” Thomes said.
Continued market uncertainty has had a ripple effect on closing deals that extend beyond the capital markets.
Closing timetables are extended for a variety of reasons. Buyers of assets with Covid-19 outbreaks want to wait until the operator has eliminated positive cases from a community. They are reviewing insurance underwriting and increasing premiums and incorporating those into valuations. Operators are weighing the pros and cons of transitioning underperforming assets to their portfolios during the pandemic, with some choosing to manage through the crisis in their existing communities before taking on another property, Thomes told SHN.
Even the strongest sponsors are feeling the pressure. Titan SenQuest received a lending quote from one of the agencies on a deal that required the owner to set aside nine months of cash operational reserves in what it called a “Covid holdback” valued at $450,000.
“The only [sponsor] would do that deal is somebody who is incredibly desperate,” Kaseff said.
That is an extreme example of an increasingly common demand among lenders. For investors targeting acquisitions, it can be a smart trade-off if they are willing to put more equity to work. With interest rates hovering at record lows, the price of debt remains favorable, even as borrowers are asked to put more skin in the game. And this can, by extension, expedite timetables.
“One of the things we’ve seen people freezing on is folks who are used to or only comfortable with non-recourse terms. They either have to start getting comfortable with signing on recourse debt, or we’ll have to wait out this term in the market,” Stettin said. “If you’re willing to write a 30% equity check and post maybe six, nine or 12 months of reserves, then I think you have a great opportunity.”