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Capital Moves Off the Sidelines

Industry pros expect debt and equity to become more available in the next 12 months.

Money is starting to come back to the seniors housing sector after a near total shut-down in financing for new deals during the pandmic. Respondents expect the availability of both debt and equity to improve over the next 12 months. Although 44 percent think availability of equity will remain the same, 42 percent believe it will increase and only 14 percent anticipate a decline. That outlook is distinctly more favorable compared to the 2020 survey where 45 percent predicted that it would be more difficult to access equity.

On the debt side, 40 percent believe there will be no change, while 36 percent said availability is likely to increase and 24 percent predict a decline. That sentiment also shows a marked improvement to 2020 when 57 percent thought availability of debt would be tighter.

“The liquidity in the capital markets right now is tremendous,” says Myers. Unlike the 2008 crisis, capital sources during the pandemic were not put at risk. So, when the vaccine came out and the public health crisis began to recede, those various capital sources remain well positioned. Banks, for example, are sitting on billions (if not trillions) in liquidity due to increased deposits from stimulus money. In addition, some of the mortgage REITs are borrowing at 77 basis points over LIBOR, notes Myers. “What you’re seeing is low cost of capital that is prompting investors to say, ‘let’s get something done, because there may never be a time when capital is this affordable again,” he says.

Although banks have traditionally been viewed as a top source of capital in prior surveys, the 2021 survey shows that REITs are now viewed as the most significant source by 42 percent of respondents followed by institutional lenders at 34 percent, pension funds at 32 percent and Fannie Mae/Freddie Mac at 31 percent. Banks rated lower in the survey with local/regional banks at 28 percent and national banks trailing at 24 percent.

That shift in sentiment could be a reflection of the “spottiness” in the bank financing market right now. Some banks have a lot of seniors housing loans on the books that were impacted by the pandemic that may have debt service coverage ratios (DSCRs) below 1.0x. Banks that have that exposure are not going to be willing to put a lot more capital into the market until occupancies improve, notes Stephanie Anderson, head of seniors housing and healthcare at Berkadia. Those banks that have less on their balance sheets are willing to do recourse loans at 1.0x DSCR in anticipation of lease-up ahead. However, anything below 1.0x DSCR is very difficult to achieve in the current market, she adds. According to Anderson, REITs also could be in favor because they are willing to provide higher leverage—up to 90 percent LTV.

Half of respondents predict no change to underwriting over the next 12 months, while 32 percent expect underwriting to become tighter and 18 percent who said standards are more likely to loosen. Although more than half of respondents expect no change to DSCRs and LTVs, 34 percent do think that DSCRs could increase, and 32 percent believe LTVs could increase.

There is a lot of equity capital, as well as a lot of B-piece mezzanine capital, on the sidelines waiting for more stabilization and “underwritable” deals. Investors are cautiously getting off the sidelines and those deals are coming out to the market for financing, notes Anderson. “Historically, seniors housing has been seasonal with more occupancy gains in third quarter. So, we’re coming up to a real test,” she says. Lenders will be watching those numbers closely to see if it will be a long road back or a quicker recovery. “If there is a lot of contraction in vacancy in third quarter, then I would expect that we will see everyone diving back in and loosening underwriting standards,” she adds.