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‘Wait and See’

November 1, 2009
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Lenders leery of making deals too soon; NIC's Kramer says seniors housing sector weathering recession well

With a successful annual conference behind him, NIC's Founder and President Robert Kramer discussed with Long-Term Living Editor Maureen Hrehocik the short- and long-term outlook for financing in the seniors housing and care (SHC) sector. With signs that the frozen credit markets are beginning to thaw, people are wondering how soon the thaw will have beneficial effects on the SHC market. How soon will capital begin to flow and from whom to whom? People want to see deals being made to get a sense of pricing and valuation, according to Kramer. No one wants to be first for fear of paying too much. Even with the unprecedented financial events of 2008, Kramer says it's quite remarkable how the SHC industry has performed during this recession compared to other types of investment properties.

Hrehocik: Any signs of the lending logjam breaking up?

Robert Kramer

Robert Kramer

Kramer: There are some early indications of good things happening that normally would lead to that logjam breaking up, but in terms of actual lender activity, there's still very little. We are seeing local banks doing relationship lending, which is resulting in a limited amount of construction in some smaller metro areas. Oftentimes, these banks have not had a lot of real estate exposure, so they may be more inclined to lend. On the private equity side, I think there are a lot of investors who see opportunity in our sector and are poised to get involved. REITs [Real Estate Investment Trusts] have also been strengthening their own balance sheets lately by raising capital, so one expects they'll be rather aggressive players when they see opportunities.

But the missing piece is still debt financing. There just isn't much available yet and that's the challenge. Even when banks participate in deals, their limits are much lower and that means more banks have to be involved. GE is starting to get active again and MidCap Financial has been successful in raising more than $500 million in equity, so there definitely are going to be eager and significant players out there. On the private-pay side, Freddie Mac and Fannie Mae have been the only significant lenders in terms of permanent financing. On the skilled nursing side, obviously, there is the HUD program. There the issue is the volume of requests in the pipeline versus what HUD is actually able to get done.

Hrehocik: What are some other financial instruments that are particularly popular right now?

Kramer: As I mentioned, the GSEs [government-supported exercises] are not just popular but, for the most part, are the only source of permanent financing available. While Freddie Mac and Fannie Mae are only available to stabilized independent living and assisted living properties, HUD offers financing for rehab and renovation of existing skilled nursing and assisted living properties, as well as new construction and takeout financing. Of course, for operators with debt maturities coming due, the focus is on being able to refinance. In that case, many will find that the amount of equity has to be increased because overall valuations have gone down.

Many in the financial community are trying to put together new deal approaches, but nothing has yet taken hold. That's partly due to the hesitancy in being the first in, because people are still unclear on how things should be priced and valued in today's market. No one wants to overpay for a portfolio. Clearly, there's been some action, such as Sunrise selling back to the original management team at Greystone and the sale of parts of the Sunwest portfolio. But other than a few small skilled nursing and assisted living deals, we just haven't yet seen a major volume of activity. My sense is that when a couple of significant deals do get done, they will set some pricing levels and open the doors for others.

Hrehocik: How is the illiquidity of potential customers affecting independent living?

Kramer: It's certainly had an impact, but I'd say it's as much of a perception issue as a real one. The average senior owns their home outright and has been in it for more than 20 years. Even though it has lost value compared to what it would have sold for two years ago, it has still appreciated enormously since they bought it. Some seniors forget that, so it creates the hesitancy. Of course, seeing the sustained significant losses in their investment portfolios also affects the psyche of the senior.

Are there challenges in selling to seniors today? Yes. Seniors housing operators have had to be very creative in working with potential residents to help them sell their homes, including how to price and present them, and also help them find creative types of bridge financing. Elderlife Financial Services, for instance, provides loans to seniors or their families that are really bridge loans. They have more customers than they did two years ago, because so many seniors housing operators desperately want to work with them. That's obviously the result of the economic crisis. The reality is that moving into independent living is a choice that one can postpone, but only for so long because the home just becomes too much to take care of. So there is a need-driven aspect. The average age of people moving into independent living and assisted living is rising, well into the 80s. And since people are moving in when they're older, they're more likely to have increasing frailty.