There's no question that the credit crisis has affected the lending and investing environment for seniors housing and care. There is also no doubt that investors are concerned that the economic slowdown and residential housing market downturn will spill over into industry fundamentals. What specifically is the data telling us with regard to potential impacts? And what is the expected fallout of external economic events on seniors housing and care for the remainder of 2008 and into 2009?
To help answer these questions, the National Investment Center for the Seniors Housing & Care Industry (NIC) conducted a conference call with top industry leaders in mid-July as part of its Executive Circle service. Speakers represented those from the operations, debt lending, and equity investment sectors: Thilo Best, chairman and chief executive officer, Horizon Bay Senior Communities; Noah Levy, managing director, PREI® (Prudential Real Estate Investors); and Angela Mago, senior vice president and national manager, Key Bank Real Estate Capital. The following are highlights from that call, as moderated by Michael Hargrave, vice president, NIC MAP.
Hargrave: How are fundamentals holding up for Horizon Bay?
Best: As we look at our portfolio of 12,000 units during the first and second quarters of 2008, our move-in rate was actually up, but our move-out rate was up proportionally. So our blended occupancy rate for independent living stood at 94.3% at the end of 2007 and is 93.3% today. For assisted living, our occupancy level has stayed relatively level at 95%. So it's a little hard to characterize the market as anything other than pretty resilient, given some of the macroeconomic factors that everybody's facing.
Hargrave: Has the credit crisis impacted your ability to make acquisitions?
Best: The challenge today seems to be more on the debt side of the equation. And then you have to bifurcate that further into whether you are looking for construction debt or a more permanent-type debt. Fortunately, in our current business, we don't have a significant amount of near-term maturities, which we feel very good about given the state of the markets and refinance options. However, there's no question that, essentially, due to the debt markets, we won't be able to grow as quickly as we have in the past. In the last two years, we've basically doubled units under management.
Hargrave: Are financing terms still favorable? Do you see deals getting done?
Best: The difficulty is on the underwriting side. If a portfolio comes up for sale, we're clearly not underwriting them at 95% levels anymore. There are more conservative guidelines across the board. In looking at acquisitions, people are starting to look more and more at trailing 12-month numbers and then maybe trailing one-quarter numbers as they approach their underwriting. When you combine that more conservative approach to underwriting with the more difficult capital markets and higher capitalization rates, there doesn't appear to be a lot of acquisitions getting done in the short run, as potential sellers are adjusting to the new market reality.
Hargrave: Let's switch to construction financing. How is Key Bank's appetite, as one of the largest construction lenders to the industry, for construction financing right now?
Mago: In terms of our deal flow, we've begun to do less construction lending. We did see the impact from the housing market pretty early on. We've got a large homebuilder portfolio, so we began to focus on areas in the portfolio sub-ject to market risk. Right now, we've got about $150 million in seniors housing projects in lease up. We're going to have several more projects that will come out of construction and into lease up during the next 18 months. Therefore, we're being very selective about continuing to make new construction dollars available today.
Hargrave: How would you describe the current financing situation?
Mago: Of course, each market is a little different, but we do feel that the housing market overall will continue to deteriorate and probably won't reach its lowest point until 2009. Also, there will be a lot of adjustable rate mortgages that will be resetting in the second half of this year. I believe around $300 billion. So there's going to be more foreclosure activity and supply on the market. We're watching the potential impact of the housing market on our portfolio very carefully and are managing it, with our clients, very proactively. Also, I do think that lenders have tightened up. For example, we syndicated a couple of large construction projects earlier this year and they were definitely more difficult to get done. Pricing increased and terms were a little tighter than in the past, and these projects involved excellent sponsors with very solid track records.
Hargrave: Do you think that there will be a drop-off in construction activity in the second half of 2008?