A wall of debt maturities this year and next have amounted to a dark storm cloud for many senior living operators. But some rays of sunshine are starting to poke through, according to Lonnie Hendry, chief product officer of Trepp.

For one, banks that were on the sidelines for the last two years are returning to senior living lending, and the frozen state of lending appears to be thawing just as senior living operators are turning their collective focus to a new year of growth.

Hendry noted during an Oct. 8 National Investment Center for Seniors Housing and Care webinar that a relatively small number of senior living properties – a little more than 5.3% of the ones in Trepp’s database – have current unit vacancy greater than 25%.

At the same time, although there are a “miniscule” number of properties with loan-to-value ratios lower than 100%, about 19% of the properties in Trepp’s dataset are not fully covering their debt service payments.

“What that means is the borrower or the owner is having to [pay] out of their pocket every month to cover debt service. At some point, they probably decide they don’t want to do that,” he said. “So this is a pretty good indication of maybe where some of that pent-up delinquency and distress … starts to play itself out over the next 24 to 36 months.”

Although Hendry stressed that he doesn’t think 19% of the sector will ultimately be delinquent on their loans, he does believe the current senior living loan delinquency rate of about 1.6% will likely tick up in the years ahead.

“The reality for a lot of these maturing loans is they may have been locked in on their previous financing at a 3.5% interest rate, they may refinance into a 5.5% interest rate,” Hendry said. “It’s better than maybe the 7% they would have had to refinance into over the last 18 months, but it’s still going to cost them more … than what they were paying.”

Set against the backdrop of a relatively tougher lending environment, senior living operators have made progress increasing occupancy and revenue this year. Indeed, “operating revenues are increasing, overall expenses are stabilizing and NOI margins are improving,” Lisa McCracken, NIC’s head of research and analytics.

The median NOI margin growth in 2024 is 4.1%, “which is a sizable improvement from the negative NOI growth that we saw in the prior time series,” she added.

According to Trepp’s data, net operating income margins grew to 30.6% in 2023, up from 29% in 2021.

“I think the data through the first three quarters would echo this type of positive trajectory for both revenue and net operating income,” Hendry said.

Compared to other industries, senior living operators carry more favorable loan delinquency rates. For example, the industry’s rate of delinquent loans pales in comparison to the office sector’s current rate of delinquencies, which sits at more than 8%, Hendry said.

“The headlines would make you believe that the sky is falling and that the commercial real estate market is doomed,” Hendry said. “The data actually suggests that the market’s been really resilient in the face of unprecedented rate hikes.

During the most recent NIC Fall Conference in Washington, D.C., attendees were asked about their thoughts for senior living the year ahead. On a scale of 0 to 5, attendees were asked how they were feeling about the year ahead. On average, they answered about 4.14 – “ a positive sentiment,” said McCracken.

The number of loans issued to senior living companies peaked just before the Covid-19 pandemic in 2019, with about $8.5 billion doled out that year, Hendry said.

That number has since dipped. So far in 2024, Trepp has tracked 82 completed deals, with 39 loans totaling about $1.5 billion. That is “down considerably from over $3 billion [total loan issuance] in 2023,” Hendry said. But he added that although there have been fewer loans issued, “the deals that have gotten done are larger in size.”

The average senior living loan size is around $18.5 million, with a maximum loan size of $49.9 million. Hendry noted while the average is higher than last year, the maximum sized loan is less than half compared to 2023’s largest at $121 million.

The question in Hendry’s mind is what lenders do now. Although the Fed’s recent 50-basis-point interest rate cuts created new enthusiasm for the prospect of senior living lending and new M&A transactions, the reality is that, “for at least the next couple of quarters, the Fed’s actions on the pivot are not going to be enough to save some of these folks that are going to have to maybe bring some cash to the table to [refinance] in the higher interest rate environment,” he said.

Still, Hendry noted that lending agencies have pipelines for new business that are “chock full” of opportunities for the remainder of the year.

“I think we’re going to see a really aggressive close to the end of this year,” he said.