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Capital Availability Will Tighten

Capital markets have not frozen up completely, but lenders have become more stringent.

A bigger number of respondents believe both equity and debt will be tighter over the next 12 months. Debt is expected to be more constrained with 57 percent who think financing will tighten compared to 29 percent who said it will remain the same and 14 percent who anticipate better access to debt. On the equity side, 45 percent said it will be tighter, 38 percent think it will remain the same and 17 percent believe it could be greater.

That is a notable shift compared to prior surveys. Over each of the past five years, the vast majority of survey respondents have generally predicted greater or the same access to debt and equity. In 2019, about half of respondents had predicted that access to debt (54 percent) and equity (50 percent) would remain the same and those who thought it would be tighter were in the minority at 23 percent for debt and 17 percent for equity.

“There has been a pause or pullback by lenders who want to see how the virus and the impact on performance is going to play out,” says John K. Powell Jr., executive vice president, national director Agency Production at Bellwether Enterprise, a national mortgage banking company. Even Fannie Mae and Freddie Mac have cut back on their overall production to seniors housing compared to prior years, he says.

Out of all the capital providers, FHA has probably been the least impacted, adds Powell. Their pipeline has definitely increased on Section 232 loans, those fixed-rate, non-recourse loans used to finance the acquisition, development or major rehab of seniors housing and skilled nursing facilities.

Survey respondents believe that local/regional banks are considered the most significant sources of debt capital for the seniors housing sector, followed closely by Fannie/Freddie and HUD. Yet Powell also notes that lenders across the board have lowered leverage and increased debt service coverage ratios (DSCRs). For example, Fannie Mae is not going above 60 percent LTV, while Freddie Mac has increased its minimum DSCR by about 5 basis points. DSCRs depend somewhat on the acuity level, with a typical range of 1.35-1.4 for independent living properties and 1.45-1.5x for assisted living and memory care.

“The other thing that we have seen is that lenders are more focused on creating a stressed NOI where they are being asked to increase vacancy a few percentage points above where it is currently, as well as increasing expenses to account for the higher costs associated with operating properties going forward due to new COVID protocols,” he says.

Half of respondents expect increased risk premiums (53 percent) and debt service coverage ratios (50 percent) over the next 12 months, and stable interest rates (52 percent) over the next 12 months. The vast majority (80 percent) also anticipate a tightening of underwriting standards over that same time period.

The wild card that remains for lenders, investors and operators in the coming year is whether or not there will be a bigger resurgence of the coronavirus in the fall or winter months in line with the traditional timing of peak flu season.

“I think the investment thesis for seniors housing remains compelling, but there are challenges in the near term that need to get resolved, and they won’t get fully resolved until we get past this COVID-19 challenge,” says Mace.