GSEs Still Bullish on Senior Housing

SAN DIEGO—Both GSEs exceeded their targets on senior-housing lending last year and have plenty of company in financing this thriving sector, said speakers at CREF15 here yesterday. The “Healthcare Financing: FHA and Private-Funding Sources Speak Out” panel discussed developments in residential-care facilities and hospital programs.

Moderate Stephen Ervin, SVP of Berkadia, explained how government reimbursements for healthcare facilities increase with the level of acuity, being minimal at the independent-living stage and ramping up with assisted living, skilled nursing, acute-care hospital and hospice care.

Michael Lugli, national manager for KeyBank Real Estate Capital, said secondary markets are outperforming primary markets in senior-housing occupancy, driven by the independent-living sector. “Rents exceeded core inflation during the recession in senior housing,” which shows how recession-proof the sector is. However, with more REITs investing in the sector, one of the main concerns is “how are operators going to become more efficient” in order to meet REIT/institutional investors' goals? He added that REITs are intrigued by the demographics and the yields of this sector. Yet demand is outpacing supply, and with new-supply starts at around 2%, a concern is how this relatively small market will grow to meet the demand.

Ervin pointed out that the greatest competition to players in the seniors-housing sector is “people staying in their homes” and not moving into these developments. He asked the panelists about trends in the market that borrowers are facing.

Tracy Maziek, senior managing director, head of healthcare finance for Wells Fargo Capital Finance, said the financing market for this sector is “competitive. It's a borrower's market. There's a lot of money chasing deals. Balance-sheet lenders are competing for deals. There's insatiable demand and a lot of M&A activity. Demand should remain strong as long as interest rates stay low.”

Lugli said it's a very good time to borrow since it's so competitive out there. “People are pushing loan-to-cost. I wonder about the loan-to-value with cap-rate compression. Is there value there?”

Roger Lewis, director, office of residential care facilities, OHP/ORCF, for the US Department of Housing and Urban Development, said we are seeing small portfolios and more non-profits in the market, and Lugli said cap rates for assisted-living properties, which were once in the 8% range, are now in the 6% range. Skilled-nursing cap rates have been steady at 13%, thanks to government regulation, but that sector is also seeing pressure. Maziek said, “Cap rates are more stable in a high-regulatory environment, but from time to time we've seen assisted-living cap rates go to 10% to 12%.” Lugli also said the agencies including HUD have done a “wonderful job” of shortening the loan process.