Covid-19 disrupted capital market activity for senior living providers of all kinds, including nonprofit continuing care retirement communities (CCRCs). However, this summer has marked a shift, with multiple large financing deals being completed — a testament to greater confidence in bond market investors, and a reflection of CCRCs’ ability to withstand pandemic pressures.
The coronavirus pandemic disrupted the tax-exempt bond market for nonprofit senior living in a similar fashion to how the for-profit segment was impacted by the virus.In the months since, however, bond funds and investors have returned to the space at a faster pace than the banks, Ziegler President and CEO Dan Hermann told Senior Housing News.
The Chicago-based specialty investment bank has been very active in the space in the past couple months. Among its notable closings:
- A $199.4 million Series 2020 Bond package for Acts Retirement-Life Communities, consisting of $115.11 million in Series 2020 tax-exempt bonds and $84.3 million in 2020 taxable bonds
- A $110.9 million financing package for Westminster, a continuing care retirement community in Austin, Texas managed by Life Care Services (LCS)
- A $45.2 million financing package for The Village at Germantown, a nonprofit that is developing and will operate a continuing care retirement community in Germantown, Tennessee.
In total, Ziegler closed on bond packages and bank financings totaling $518 million in June and July, which Hermann cites as proof of the quality of the nonprofit space in the Covid-19 era. The Acts financing was particularly notable, as 37 different institutional investors placed orders, resulting in an oversubscription of more than 13 times in aggregate on the longest bonds. This allowed the bank to leverage oversubscription by lowering yields 15 basis points on the long end of the curve. The resulting arbitrage yield on the bonds was 3.11%, while the yield to maturity is 3.74%.
“A number of folks that wanted to do deals [pre-coronavirus] are back on the calendar. Others are evaluating the right mix,” Ziegler Director, Senior Living Research and Development Lisa McCraken told SHN.
Financing is slowly loosening throughout the senior living space, although securing bank debt remains a struggle. And not all CCRCs are landing bond financing amounts on the level of Acts. Fitch Ratings revised its outlook on several CCRCs it monitors. Notably, it revised the ratings outlook for Wesley Enhanced Life from stable to Negative, while reaffirming its “BB” rating.
Other firms active in the bond and CCRC space such as HJ Sims concur that the bond market is resurging.
Bond investors return
Tax-exempt bond investors were quicker to retreat to the sidelines than their for-profit counterparts, HJ Sims Managing Principal Aaron Rulnick told SHN. Based in Rockville, Maryland, Rulnick co-leads the firm’s investment banking team.
A lack of knowledge regarding the virus, as well as concern over how prepared the industry was to respond to it, hastened the retreat beginning in mid-March. This was exacerbated by early reports of outbreaks in skilled nursing facilities, and conflating CCRCs — which typically have more independent and assisted living units — with the skilled nursing segment.
As providers became more transparent reporting positive cases and in the measures taken to keep residents and staff safe, investors gradually returned to the market in mid-June, confident that the CCRC cohort was on the right track responding to the crisis.
“The bond market does not like surprises and uncertainty. Access to data was helpful because it painted a better picture of what was really happening, relative to all of the negative headlines,” he said.
Ziegler kept its investors apprised of tax-exempt bond fluctuations and activity constantly during the pandemic’s early weeks. The firm held calls every other week with up to 80 distinct investors on each in March and April because of market uncertainty. The firm has also maintained its own research regarding CCRC occupancy rates and sales velocity, providing investors with the information needed to make an informed decision on returning to the market. Another advantage with CCRCs is their weighting census toward independent living.
According to Ziegler’s data, entry-fee CCRC occupancy rates are holding steady at 93%. This is notably higher than the industry occupancy rate tracked by the National Investment Center for Seniors Housing & Care (NIC), Hermann noted. The occupancy rate for majority independent living properties in the for-profit segment is currently 87.4%, according to NIC’s June intra-quarterly snapshot. Sales at CCRCs, meanwhile, are trending at a better pace than rental properties, according to Hermann.
The increase in current and future deal flow is driven by 11 consecutive weeks of inflows back into tax-exempt bond funds, additional cash generated by reinvestment of June 1 and July 1 principal and interest payments, and returning confidence in the sector.
The return of investors to the tax-exempt bond space created opportunities for taxable bonds to fill the void, and that segment is growing significantly as the outbreak continues.
“[Taxable debt] has taken supply away from the tax-exempt bond market because there are deals that may have gone tax-exempt in the past are now going taxable,” Rulnick said.
Big banks still on sidelines
Banks are behaving toward the CCRC space similarly to how they are in the for-profit senior housing market. Big banks remain on the sidelines, but community and regional banks, credit unions and community development financial institutions (CDFIs) have returned and are active in their placements.
A contributing factor to this activity is a favorable Treasury curve, which is dictating swap rates with banks, Hermann told SHN. Ziegler covers over 100 banks active in the space and has completed eight to 10 transactions in recent weeks, at favorable rates to borrowers. Moreover, money flows are coming into the fixed rate cohort, driving credit spreads down.
“It’s unbelievable. The bank market is almost more attractive than this fixed rate market,” he said.
The big banks continue to exercise caution, having learned lessons on overextension from the Great Recession, and are prioritizing serving existing clients with proven track records as sponsors. The lack of national bank activity may also be attributed to larger banks acting as stewards, meting out relief funds from the CARES Act stimulus package.
“The deals that we’re seeing get done tend to be more the local or regional bank that know the market, as opposed to some of the national players,” Hermann said. “Borrowers that have a strong credit profile, particularly investment-grade rated, are in a better position to access bank financing.”