The pandemic has not only affected operators and their ability to care for their residents but has also required equity and debt partners to revisit how they look at revenues, expenses and returns. In the latest NIC Leadership Huddle event, hundreds of senior housing and care leaders gathered virtually to hear from industry capital providers. The discussion focused on questions such as: Have capital providers altered their views on underwriting metrics, LTVs, recourse, and rates? Have relief funds provided through governmental programs exasperated or helped expense models? And how will COVID impact the structuring of capital on a go-forward basis?
Facilitator Ann B. O’Shaughnessy, managing director of Healthcare Banking, CIBC, kicked off the discussion by asking Susan Barlow, co-founder & managing partner, Blue Moon Capital Partners, about the several deals her company closed during the pandemic, and how they were impacted. Barlow said Blue Moon had closed about $400 million in debt financing over three deals throughout the pandemic. “The first closing, in April, right in the beginning, was definitely a soul-searching event, there’s no doubt about that…we didn’t know what we didn’t know,” Barlow explained. “We underwrote the equity to account for the risk, we renegotiated the price with the seller…but our lender stuck with us.” Barlow’s group was not asked to make any loan modifications and closed on the portfolio. Barlow added that, “we thought we’d added some protections on the equity side, and it worked out that it was about right. But, at the time we had no idea.”
In another deal which Blue Moon closed in December, during the depths of the pandemic, adjustments were made based on higher expenses, such as labor costs, insurance, and PPE costs. Shortly afterwards, as vaccinations began to take place, lease-up leads started to build. With a deal that Barlow said is due to close in July, lending terms are “very good, relatively speaking.” Barlow noted that all three deals were with the same lender, which, she said, “speaks to the [importance of] having good lending relationships where you know and trust each other going into these kinds of situations.”
Asked about how stabilization has changed, Morgin Morris, senior vice president, KeyBank Real Estate Capital, replied, “The traditional stabilized boxes are kind of gone right now. After 2020, everything is customized. Each deal has a story, and no matter whether performance was strong, our job is to unpack that story and understand what happened at the property in the past year, what the new definition of stabilized looks like for that asset, for that market.” She said they get a lot more granular now, asking questions such as: “Is the facility able to offer shared units? What type of concessions are they looking at? How do they treat companion units coming out of the pandemic? All these are questions we need to dig into a bit more, rather than looking at 85 [% stabilized] as a metric.”
Kathleen P. Ryser, senior director, Seniors Housing Underwriting & Credit, Freddie Mac, agreed that stabilization metrics through the pandemic have changed. She said, “For the first time, in March or April, we started to stabilize an NOI that was less than what had been collected historically, like on a T12 basis, or in 2019.” Ryser said her group started forecasting reduced occupancy and increased expenses, “to come up with an NOI that…was maybe 20%-25% below where the NOI had been.”
Throughout the pandemic, according to Ryser, “We never closed shop. We continued to provide liquidity in the market all throughout 2020.” Today, she sees stabilizing occupancy rates and expenses. “We’re looking at the NIC MAP® data. Move-in and lead activity is telling us that things are going to start improving.” She also noted that Freddie Mac’s senior housing group is having fewer rent collection issues than its larger multifamily group.
The pandemic has also impacted how debt providers look at underwriting. Morris said she’s not looking for “gotcha moments” but is “looking to give clients a reasonable approach to looking at covenants, and taking a reasonable approach as funds came in, whether it was a one-time PPP loan or an ongoing occurrence.” If funds look likely to be sustained over time, such as an increase in a state assistance program, Morris includes them in her “look-forward” analysis.
Asked about how Freddie Mac performed over the pandemic, Ryser quoted hockey great Wayne Gretsky, saying, “we underwrite to where the puck is going, not where the puck is.” She said Freddie Mac adjusted leverage and debt coverage requirements and implemented a forbearance program. “I think we weathered the storm really well,” she said, pointing to a single 90-plus day delinquent loan within Freddie Mac’s $15 Billion portfolio of securitized loans.
On valuations, Morris has seen some changes, such as the delta in underwritten to appraised valuations, which she has seen rise from 2%-5% to 20%-30%. “To me the LTV question, and the divergence, is not likely to go away…we all need to fully understand where the value is derived from,” she said. On that subject, she made the point that operators are “the backbone of maintaining and preserving that value for the owner.” While acknowledging that it is difficult to quantify the value of a great operator, Morris’s group is making an effort to incorporate the quality of an operator into their valuations. She said, “there’s got to be more to the equation than just income, expense, cap rate, and then a bank’s appraisal target.”
Asked about when the industry would fully recover and regain its pre-pandemic momentum, the panelists agreed that, despite positive signs, a full recovery will take some time. Morris said some properties will take longer than others, and pointed to factors such as negative media attention, and rising home values, that she believes will slow full recovery to approximately another 12 months. Barlow agreed, adding, “There’s just a lot of PTSD. If you’re a resident, a potential resident, or a capital markets player, as we come out of this, its going to take some time. But we are seeing the need show up. People that have put off a decision longer than they should have are out in the market. They are touring different communities…the demand is there. I think we’ll see those good operators having success early.”