WASHINGTON, DC — Ownership groups and lenders may be equally bullish about the senior housing and care market in the year ahead, but that doesn’t mean borrowers should expect a stampede of lending offers for all their needs.
That was the warning from an otherwise optimistic panel on the final day of the 2024 NIC Fall Conference Wednesday. Operators said they expect to grow over the next year, given rate cuts and other improving market conditions.
Michelle Kelly, senior vice president of investments for Tennessee-based National Health Investors, said her portfolio is balanced 70% to 30% between seniors housing and skilled nursing. She is “bullish on being able to make a lot of good investments” in the next 12 months, but that the current environment favors housing deals over healthcare deals in the senior living realm.
“The way we underwrite deals, they’re similar in that you’re getting higher yields on skilled nursing to account for some of the risk there, and you look for higher coverages on skilled nursing for the same reason,” she said. “The reality is that we just are seeing better opportunities now in senior living. We’re having more success on valuation there.”
NHI faces competition from other buyers and lenders who use different underwriting standards and are better able to to absorb elevated SNF valuations, Kelly said. An Altarum report issued this week found skilled nursing prices had risen 3.8% over the past year.
“We’re still seeing valuation very high on that side of the equation, and that’s why you’ll see us do a little more on the senior housing side right now,” Kelly said, later predicting that more interest spurred by falling interest rates would only push values higher.
For capital providers, there’s not necessarily hesitation to lend to skilled nursing borrowers, others said.
“We do not have portfolio allocations,” said Bill Lewittes, senior managing director on the debt team at Kayne Anderson’s Real Estate Group. “I don’t know that we think about it in terms of let’s focus on seniors housing, let’s focus on SNFs or 55-plus. We’re really looking for the right combination of all of those important factors” such as geography, ownership and operations.
Loan maturity and a re-fi rush
As rates tick lower, banks are expecting to stay busy with refinancings and other requests, which Steve Anderson, managing director for Ally Bank Healthcare Capital, said was proof of successful lending strategies during the pandemic.
Bridge loans and other vehicles worked to keep clients in business. Now facing loan maturity, most are able to pay off or convert to a lower fixed rate.
“The bridge to something else, whether it’s a sale or a re-fi with a traditional bank, it’s working in a lot of cases,” Anderson said. “It didn’t work every time, but it worked a lot of times. We’re happy to be looking on the other side of that and trying to put a longer-term stretch on paper to help that borrower… or if they’re a long-term holder, just try to clip coupons out of a 95% occupancy rate.”
Construction quandary
One area where borrowers are likely still to run into trouble is in looking for construction support. That’s problematic, given that demand is starting to outstrip availability in many markets, and — as also emphasized elsewhere at NIC this week — both the skilled nursing and seniors housing stock is aging significantly.
A majority of the nation’s nursing homes were built in the 1970s, and 45% of senior living communities are now older than 25 years old.
Kelly said NHI usually aims to have 10% of its properties under some type of construction in a given year, but the publicly traded company has fallen short of that mark in recent years.
NHI also has provided debt to other owners as traditional bank lending tightened under high interest rates. But Kelly noted that doing so for construction often “didn’t pencil.”
“The challenge we’ve been seeing is finding those right markets because the underwriting fundamentals still need to be the same,” she said, noting that construction costs had pushed new builds far beyond the cost of acquiring similar, high-quality assets.
“That gap is closing. It just hasn’t quite closed all the way,” she added.
“We’re not seeing the same crazy run-up in actual raw construction costs that we saw in 2021 and 2022,” Lewittes confirmed. “That has come back down to more normalized levels. That part of it has taken care of itself.”
Lewittes said his firm has closed only one construction deal in the last 18 months, a rate he acknowledged was “very low.” Debt is available, but it will remain tough to come by for all but the best-positioned borrowers for now, he said.
“Inbound traffic has been very high. My sense is that it is a lot of deals that were tabled and land banked during COVID, and now are coming back down and [borrowers] are trying to re-engage,” he added. “We just haven’t found the right mix, but there are definitely plenty of requests out there.”
Skilled nursing providers, in particular, have been increasingly raising concerns about their ability to update and replace physical facilities, given historically high operational costs and a government financing model that doesn’t account for the costs of capital. According to a recent report from the American Health Care Association, just seven new nursing homes have opened in the US so far this year.
Anderson said Ally was “not really” doing construction financing.
“There’s an obvious need for more construction lenders to exist just to take care of the obvious demand that’s coming,” he said. “We all recognize the need, but we’re not sure we have the solution.”
The panel was moderated by John Pawlowski, managing director of commercial real estate analyst Green Street.
More than 2,800 lenders, operators and vendors participated in this year’s NIC conference.