Elderly housing debt spike isn’t just a senior moment

Demand from aging US population spurs leap in senior housing loans, writes Al Barbarino

Lending to senior housing and healthcare centres is shooting up in the US, with growing demand for accommodation leading to a record-breaking fourth quarter last year.

Senior Resource Group paid $80m for Atlanta's The Piedmont
Senior Resource Group paid $80m for Atlanta’s The Piedmont

A Mortgage Bankers Association preliminary estimate shows that senior housing and medical facility loan origination leapt 92% from Q3 to Q4, compared to a 27% jump for all commercial and multi-family mortgage properties.

Healthcare mergers and acquisitions also “exploded” in the final quarter, the $138.3bn deal volumes and spending shattering the previous $82bn record in Q4 2006, according to Irving Levin Associates, a publisher of senior and healthcare business intelligence.

“We’ve seen huge amounts of acquisition financing because baby boomers are growing older and supporting demand for more housing,” says Betsy Vartanian, head of Greystone’s healthcare lending group. “Senior living cap rates are down and values up, making it an amazing time to be a seller, but also a good time to be a buyer, because the supply of capital is up.”

The number of Americans aged 65 and older is expected at least to double by 2030 and more housing is needed to support them. Institutional investors and REITs dominate big-dollar deals, while smaller investors are flooding the market too.

Q4’s largest deal was NorthStar Realty Finance Corp’s purchase of Griffin-American Healthcare REIT II’s medical office buildings and senior housing for more than $3bn. Q3’s largest deal was the $2.4bn merger between Brookdale Senior Living and Emeritus Corporation, which created a senior housing empire made up of more than 1,100 communities in 46 US states, according to Real Capital Analytics.

 Value-added attraction

But smaller investors are also drawn to senior housing’s strong fundamentals, which offer a tremendous value-added element, Vartanian says. As of Q4, occupancy was 3.6% above its 86.9% cyclical low in Q1 2010, according to the National Investment Center for Seniors Housing & Care.

Opinions differ on the senior housing boom’s impact on underwriting standards. While Ed Hussey, head of multi-family production with multi-family and health care lender Pillar, a Guggenheim Partners affiliate, says underwriting standards “remain strong and consistent” compared to the broader multi-family market, Vartanian believes underwriting is slipping, if not “a little scary.”

A Greystone client buying an asset with a face value “not worth a penny more than $10m” is paying $17.5m for it, based on the potential upside, she notes.

Greystone’s response is to structure deals with hurdles, increasing loan proceeds only when projected cash flows materialise.

“People have their rose-tinted glasses back on and with more lenders getting into health care, I just hope defaults don’t escalate,” she says.

Lenders tune into HUD programme

The US Department of Housing and Urban Development’s (HUD) LEAN mortgage insurance programme is seen as the only game in town for long-term debt on senior housing, experts say.

HUD loan modifications, requiring the sale of a Ginnie Mae mortgage-backed security to pay off existing investors, more than made up for a fall in refinancings last year, says Chris Blanda, a vice-president with Ohio-based senior housing lender Lancaster Pollard.

That was all thanks to interest rate dips, he says; 10-year treasury rates started 2014 around 3% but fell to 2.07% by mid-December, creating a window of opportunity. “There was a rush to capture those savings,” Blanda says, adding that in 2014 his office alone modified tens of millions of dollars of loans. “Prior to the dip in [long-term] interest rates, that wasn’t feasible.”