Senior Housing Lending Picks Up, But Debt Market Still ‘Out of Whack’ In Some Ways

Lenders in the senior housing space are becoming increasingly active and confident, but the Covid-19 pandemic is still affecting the debt markets in some significant and unusual ways.

For instance, the relationship between loan-to-value (LTV) and debt service coverage is “kind of out of whack,” Steven Schmidt, national director and production manager for seniors housing at Freddie Mac, said Wednesday during a Leadership Huddle webcast from the National Investment Center for Seniors Housing & Care (NIC).

Right now, senior housing valuations have only dropped 5% to 10% but net operating income (NOI) has dropped more significantly, Schmidt said. As a result, Freddie is seeing many deals in which proceeds are more limited by debt service coverage than LTV.


“That’s pretty much flipped upside down, from the standard,” observed Jim Thompson, director of senior housing investments for BOK Financial.

When it comes to construction financing, the biggest pandemic-related change has been related to recourse, said Joel Mendes, co-head of JLL’s national seniors housing debt practice. 

Lenders are requiring more recourse, and non-recourse debt is hard to come by; however, the trend toward more recourse was underway even before Covid-19, Mendes noted. And, JLL has been closing construction loans through last year and into 2021.


The market for non-recourse bridge lending is quite liquid, he said.

Some underwriting changes caused by the pandemic are still in place, but a more standard approach to lending should resume if vaccination succeeds in normalizing the senior housing operating environment this year.

Freddie Mac, for example, had to make some assumptions about deteriorating performance during the pandemic, and started underwriting to about 3% lower occupancy than rent rolls showed, and also put in place one-year debt service reserves.

“It’ll probably take a couple of months, but we’re hoping to see some green shoots of more move-ins, tours … more occupancy, hopefully some relief on some of the concessions we’re seeing in the market,” Schmidt said. “… As long as we start to see a nice, sustainable upward trend, we’re not going to underwrite to a lower [occupancy], and will gradually begin to reduce the debt service requirements.”

Conventional bank lending also has opened up considerably in the last 90 days, although not necessarily across the board, Thompson said. Banks with experienced staff and a long-term presence in the senior housing market are making the first moves, armed with data.

“Lenders have gotten a better idea of what the downside is to occupancy and EBITDA; there’s a lot more comparative information available relating to Covid from CMS, CDC, state health departments, and lenders are learning what to ask when it comes to underwriting and due diligence,” he said. “I see more lenders willing to dig in and do the due diligence, than earlier in the pandemic.”

The debt markets have not hindered the desire for Bridge Seniors Housing Fund to build or buy, said CEO and Co-Chief Investment Officer Robb Chapin.

Bridge is a long-standing investor in senior housing and currently owns a portfolio of more than 100 communities in 25 states. Chapin believes most other well-resourced platforms — whether they have “super stong, deep credit” or more middle-market credit — also will be able to secure debt on reasonable terms.

“At the end of 2020, we did go out to the debt markets a few times — not at the pace that we did in 2019 or that we expect to in 2021 — but we generally were very pleased with the response from the lending relationships,” he said. “We anticipate that we will continue to have very good outcomes with our lenders as it relates to refinancings, new acquisitions in 2021.”

But conditions of underwriting are “dynamic” and can vary from property to property, with expenses such as personal protective equipment, labor and insurance playing a part in lenders’ conservative approaches.

In 2021, Chapin anticipates that lenders will continue to work constructively with Bridge on challenging situations that arise due to the pandemic, and he believes that this will generally be the case across the industry — but he stressed the importance of treating lenders as partners and being transparent.

“We work here at Bridge under the thesis of bad news doesn’t get better with time,” he said. “We like to get out in front of those challenges and problems in advance of them becoming bigger problems, and bring our lenders into that, to help us.”

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