Making Senior Housing Loans Pencil During COVID-19
Both lenders and investors are concerned about occupancy, but a turning point may be ahead, said panelists at the National Investment Center for Seniors Housing & Care fall conference.
More than half a year after the initial shock of the COVID-19 pandemic, uncertainty characterizes multifamily real estate, and, in particular, senior housing. Accordingly, many lenders have introduced stricter underwriting standards for financing as transactions slow to a trickle. But deals are still closing, despite the uncertainty.
“We’re still optimistic about senior housing—we’re still lending,” said Steve Schmidt, national director of Freddie Mac’s Seniors Housing Group, during a panel discussion on the first day of the National Investment Center for Seniors Housing & Care (NIC) fall conference. Schmidt was joined by Lori Coombs of Wells Fargo and Brian Cannella of Kayne Anderson Real Estate to discuss a recently closed portfolio acquisition from Welltower, which included financing for seven senior housing properties in Florida.
Coombs, managing director of multifamily capital at Wells Fargo, highlighted occupancy concerns across the sector, and how the GSE is taking account of the unknown in underwriting new debt. “Freddie Mac is going to stress the occupancy for 1 percent a month for the next couple of months,” Coombs noted. “They’re really going to take a look at where they think it will be … three to six months from closing.” She added that the lender is also examining longer-term occupancy trends, as well as how far a property’s occupancy would need to fall before a borrower could no longer cover debt service.
At a baseline, Freddie Mac requires that, at the time of underwriting, a senior housing community must have no active cases of COVID-19 and be open to accepting new residents. Borrowers must spell out pandemic-related policies in place and ensure those align with Freddie Mac’s identified best practices.
However, the overall occupancy pressures at the national level have made it more of a challenge to score refinancing. “Nationwide, we’re down about 6 percent or more on occupancy, and that’s translating … to 25 to 40 percent NOI drops. So (refinancing loans) aren’t penciling very easily,” Schmidt stated on the panel. “You had to have a very low-leverage loan going into (the pandemic) to have a loan which could be refinanced today at cash neutral.”
Falling deal velocity
Although Freddie Mac noted that deals continued to move forward in the second quarter, the third quarter looks to be far less active. Investor appetite appears to be shifting toward higher-end properties, a difficult task given that approximately two-thirds of today’s senior housing stock was built prior to 2000, according to a National Real Estate Investor/NIC study from September.
Pricing expectations for stabilized senior housing communities may not be fully realistic, either, said Kayne Anderson Managing Director Brian Cannella. He also noted that “it’s very hard to underwrite lease-up (deals) right now, given the uncertainty of how quickly you can fill up.” That includes not only signing leases but also physical move-ins, as many senior citizens could “(feel) like they could be prisoners in their own space” due to visitor restrictions, limited on-site activities and more.
Some optimism for recovery
However, the panelists agreed that, despite ongoing challenges both on the operational and investment sides, senior housing assets should have a bright future—at least long term. There is a feeling that occupancy is either at or near a bottoming-out stage, with some signs of growth on the horizon. Borrowers and operators able to build trust with residents and their families through regular communication and procedures are likely best positioned to realize occupancy gains.
Schmidt points to the development of rapid COVID-19 testing as one potential tipping point for future occupancy gains. “People are nervous about catching COVID in a congregate setting like senior housing,” he said.