Financing Senior Living Developments in 2019 – Underwriting is Key
By Emily Taube
The population of Americans 65-and-over is projected to nearly double over the next 30 years, according to the U.S. Census Bureau. Baby Boomers (those born after World War II) began turning 65 in 2011, and by 2029, the remainder will reach age 65, and will account for more than 20% of the total U.S. population.
Moreover, survivorship rates for not only the Baby Boomers, but for the general population, have shown consistent improvement for several decades. For example, in 1972, the average life expectancy was 80.2 years. By 2017, it was 85.4 years. It is currently estimated that about one out of every four 65 year olds will live to be 90 years old, and one in 10 will live past the age of 95, according to the Social Security Administration, Retirement & Survivors Benefits: Life Expectancy Calculator, 2019.
This projected growth in the 65-and-over age group as a whole, as well as the increased longevity of the same, has created a growing demand for seniors housing.
As a result, the seniors living and care industry is experiencing a rebirth of sorts. As Baby Boomers begin to retire, the expectations of aging are being redefined, in that more is expected from retirement and the lifestyle that accompanies this phase of life. In response, senior living communities are upgrading existing facilities, expanding the care offered at the facilities and developing new active, vibrant and in many instances, “high-tech” living environments to keep pace with the expectations of the resident base.
However, these upgrades come at a substantial cost, and access to capital is of key importance for all seniors housing providers. As a result, both traditional and alternative forms of financing and investment opportunities are on the rise, and the health of the senior housing industry and the effect the same will have on the lending environment is a topic of much speculation.
Historically, investment in seniors housing properties has yielded returns higher than most other major real estate asset types. According to the National Council of Real Estate Investment Fiduciaries, 2018 property index results show the total return for senior housing investment on real estate on a 10-year basis was 10.52%, well above the overall property return of 6.09% and multi-family real estate returns of 6.10%.
However, the Federal Government’s rate hikes have impacted the yields on three and five-year bonds, which some predict will have an impact on mezzanine loan volume, due to increased interest rates.
Additionally, and ironically, despite the growing population of Baby Boomers, a burst of development in seniors housing over the last few years has recently resulted in a supply in excess of demand and has reduced occupancies in seniors housing to all-time lows.
Thus, although seniors housing fundamentals are still strong and lenders still continue to put money into the space, the current climate shows that many lenders are tightening their real estate lending practices, particularly on construction loans, bolstering their underwriting practices, and are also being a bit more discerning as it pertains to those with whom they’re doing business when it comes to seniors housing opportunities.
Simply put, not all seniors housing developments are created equal, and it goes without saying that owners and managers are not created equal. Thus, the current marketplace is putting a premium on established, credible sources, and experience is key in this sector relative to a lender’s decision relative to seniors housing opportunities.
For example, savvy lenders and investors are not just looking at numbers and projections, but are also taking into consideration things such as the borrower’s experience as an owner/operator, and whether that owner/operator has a proven track record and strong sponsorship. Indeed, lenders are largely steering away from new entrants on the operating side, and for those equity providers that are looking to deploy capital in this sector, partnering with experienced operators that have a track record in the asset class is of paramount importance.
Moreover, reliance on just a balance sheet or financial records from a potential borrower is not sufficient in seniors housing lending. Other key factors now being evaluated during the underwriting process as “high priority” are: location, strength of the management team, available equity, historical financial performance and cash on hand, occupancy levels, administrative or regulatory issues, compliance by the owner/operator with certain policies and procedures for resident practices, incident investigations and claims management procedures, litigation or claims against the owner/operators or facilities, budgets and overall credit support available, definable exit strategies and quality real estate collateral.
Additionally, many lenders won’t consider opportunities without an actual site visit and evaluation and/or independent appraisal of the real estate and/or operations of the particular development at issue. Finally, lenders are also reporting that they strongly prefer situations in which the owner/operator has some personal stake in the investment.
At the end of the day, irrespective of whether capital sources want to be involved in seniors housing and are willing to deploy funds into the sector whether the timing is right or not, lenders and investors should not do a deal just to do a deal. Instead, smart underwriting by lenders and investors is the key to preventing over-development and over-lending in this sector.
CREDIT: Emily Taube is a partner in Burr & Forman’s Creditors’ Rights and Bankruptcy as well as its Commercial Litigation practice group.