The Seniors Housing Lending Environment:
A Discussion with Tony Mullen
|
|
In the eleventh in a series of dialogues with key players regarding the current lending environment
in the seniors housing and care industry, Michael Hargrave, Vice President - NIC MAP®, recently interviewed
Tony Mullen, Senior Fellow, NIC.
As a borrower, have loan availability and loan terms changed again with the recent events in
the financial and stock markets? Can you give us an idea as to the availability of capital for construction
loans and possible terms?
Mr. Mullen: Loan availability for construction loans for seniors housing and care properties
has contracted significantly. New construction starts in the fourth quarter of this year will likely
be off 80%-90% from the fourth quarter of last year, and I expect this severe contraction will continue
for 5-8 more quarters. Virtually all of the national and large regional banks have either stopped construction
lending completely or will fund only the largest and very best clients, and then only due to a significant
relationship they don’t want to damage.
The most important loan attribute which has changed is the percentage of equity required. In the past,
we could do 15% of project cost (25% of project value) in equity, but now it will be very close to 25%
of project cost (35% of project value).
This is a significant hurdle for most small- or mid-size developers, and will force many more joint ventures
with private equity groups and mezzanine lenders in order to fund the additional equity requirement.
These joint ventures are difficult to structure, require large investments of time and decrease the
upside to a developer by a significant amount. Only the very best projects will proceed over the next
18 months due to the scarcity of debt and the cost of equity. The weighted average cost of capital is up
substantially.
Assuming one has the necessary equity commitment, the larger local banks, which stayed clear of home
building loans and buying CMBS paper, are the best source for construction loans.
I do expect more developers will look at government programs and tax credits, but these require great
patience and limit the types of properties that can be developed, and they will not expand their capacity to make a significant
difference.
|
Can you talk about move-in rates and how they have or have not been impacted with the downturns
in the economy and housing market? What are your views on discounting to spur move ins and do you think
it’s a strategy that developers should be employing? Are there more effective ways?
Mr. Mullen: Remarkably, move-in rates have held up through the last three quarters,
and I expect they will continue to stay near their average of the last three years, which should prove
the “needs-driven” element of the business. Average occupancy has slipped 2%-3% from the peak, but when
you compare the loss in revenue for our industry compared to most others, it is incredibly positive
for our industry. It should be noted that the median occupancy rate for IL and AL properties is still
at 94%. Unfortunately, Sunrise got itself into a serious liquidity problem at a time where it was still
trying to aggressively grow both the main business and the new business ventures, and the resultant
fall-out from such a large decrease in its stock market value so quickly will be a temporary psychological
setback for the industry.
I believe the stock market is overreacting to the other senior housing companies and those stocks will
come back if and when the general stock market comes back.
The evidence that discounting rates produces more net move-ins in a local market is non-existent. There
is some limited evidence that if a prospect is considering more choices than your community, you might
influence them to choose your community with a discount. But I believe this is best done on a case-by-case basis.
Professional selling works much better. The evidence is overwhelming that we do a poor job of selling
in our industry, and once a community reaches stabilized occupancy, there is little selling that occurs.
In fact, many communities fail to call prospects back for days, if at all. Consistent, professional,
relationship-based selling is extraordinarily successful, but my experience over 23 years is that very
few communities actually do this. Most corporate groups believe this goes on, but the vast majority
of mystery shopping tests prove that it is just not true. We must confront the “brutal facts” if we
are to solve this serious deficiency.
While construction levels are still above 2% and 4% construction to inventory for IL and AL, respectively,
the number of starts has declined materially in recent months which will likely lead toward declining
construction levels. What do you see as the consequences of declining construction levels?
Mr. Mullen: Declining construction levels will ultimately be healthy as it will allow
existing communities to increase occupancy over the next several years, especially if professional selling
is employed. Even without decreased new construction, there are more than enough potential customers
that inquire, visit, but don’t move (but would with the right sales professional); and there are far
more that would become prospects if they were educated as to the benefits and if the image of our communities
(at least independent living) could be tipped to a more positive image.
Erickson Retirement Communities has proven that you can rapidly expand the size of the market (often
called increasing the penetration rate) by education and through offering good value for the dollar
(although separating the impact of education from good value has yet to be done).
The futures of the independent living and assisted living segments are very bright for those who care
about serving people over 75 and who are committed to professional selling. I believe the size of the
market will grow, because people who do move are very happy living in our communities, and the image
will indeed start to become more positive over time. Coordinated industry efforts to improve the image
will accelerate this process. I expect the penetration rate of 75+ households for independent living
to move from 5.3% to 6.3% over the next 10 years (absent a 1930s type depression). This would result
in a significant increase of 30% in the size of the market, when demographic growth (which is still
modest) is combined with the increase in the percentage of 75+ households who choose this lifestyle.
Look for an interview with Tom Kirby, Senior Vice President, Acquisitions & Valuations, HCP, Inc,
in the December edition of the NIC Insider.
|
|
From the Research Director's Desk
by Lawrence J. Horan, Ph.D., NIC Financial Research & Analysis Director
|
In the previous issue of From the Research Director’s Desk, we discussed how
the asset deflation occurring in the housing, stock and credit markets is affecting the demand for seniors
housing and care. Since then, we have heard from publicly traded firms that the third quarter was a
difficult one for the seniors housing and care (SHC) industry and that the outlook for future quarters
has eroded. According to one owner of more than one billion dollars of SHC properties, a tradeoff between
rate increases and occupancy is emerging in some markets. This new development has caused some operators
to comment that it will be difficult to maintain occupancy and rate growth in future quarters.
As NIC MAP® subscribers know from the data to which they subscribe, occupancy rates have been declining for
over a year in independent and assisted living properties. Some independent living and assisted living
operators have taken actions to reverse the occupancy rate declines at their properties and reported
occupancy improvements in 3Q08. However, these actions hurt net operating margins at many of these firms
due to increased expenses for advertising, marketing, sales and incentives.
The forces behind these developments, which we discussed last month, appear to have taken a turn for the
worse. Housing demand appears to have dropped since the financial crisis worsened on September 15.
The weekly index of mortgage applications for the purchase of a home published by the Mortgage Bankers
Association, which appeared stable at near 400 prior to September 15, has fallen 25% since that time.
This further decline in housing demand has been corroborated by a number of industry participants that
cited a sharp drop in demand for houses after September 15. The decline in the stock market over the
last two months and the continued drop in home prices have hurt SHC demand, particularly at entrance-fee
CCRCs, according to one publicly traded operator that cited frozen entrance-fee transactions that took
longer to close or were lost. Another commented that some SHC residents have moved out and into the
home of an adult child.
The decline in general economic activity has worsened in the last two months. This worsening of the
economic environment has made consumers more fearful and cautious, and this may affect some considering
the more discretionary segments of SHC. Some data points showing the worsening of the economy include:
- Nonfarm Payroll Employment has fallen 1.2 million since the beginning of this year. Over half of the
decline (651,000) occurred in the last three months. 240,000 payroll jobs were lost in October alone.
This acceleration in the decline of payrolls is cause for concern.
- The Conference Board’s Consumer Confidence index fell to an all-time low in October. The Conference
Board has been conducting this survey since 1967.
- Retailers posted the weakest same-store-sales in October since at least 2000, with many firms reporting
results below already-reduced expectations, as consumers stayed home.
- Retail sales reported by the Commerce Department fell a record 2.8% in October versus September including
a 5.5% decline in auto sales.
- Auto and light truck sales are so low that GM, Ford and Chrysler are asking for $50 billion in government
aid.
These conditions are causing many in the SHC industry to hunker down. New SHC projects are being cancelled
or postponed. Operators are expecting margins to be squeezed and are taking appropriate actions to contain
costs while maintaining occupancy and quality of care.
There will be an end to these difficult times as the Federal Government, through numerous entities, is
doing all it can to turn the situation around. It has made a record $3.8 trillion available to unfreeze
capital markets and there are signs of a thaw.
- The TED spread as tracked by Bloomberg, which is the difference between the London Interbank borrowing
rate and US Treasury bills, has been shrinking. Prior to the credit crunch which started in August 2007,
the spread was less 50 bps. It spiked to over 400 bps in mid-October 2008 after the failure
of Lehman Brothers and was only 209 bps on November 14.
- Commercial paper, the main short-term public market source of capital for businesses, plummeted after
September 15 in all three categories: nonfinancial, financial and asset backed. Recently, all three
categories have started to rise.
- Commercial and industrial loans at large weekly reporting banks are on the rise again after trending
down for a couple of months.
- Credit is available for “investment grade” companies in the corporate bond market but it is expensive.
Prior to the credit crunch, investment grade corporate bonds traded approximately two percentage points
above comparable U.S. Treasury bonds. That spread is now closer to six percentage points.
Although the thaw has begun, a crisis in confidence remains in the credit markets. It will take months,
maybe years, to rebuild confidence so that spreads above U.S. Treasuries return to normal. The fact
that a global recession is underway will not help matters.
|
|
|
Debt Metrics Remained Strong During the Second Quarter
|
Loan volume was up 68 percent from the first to the second quarter to $1.55 billion, according to the
NIC Key Financial Indicators™ (KFIs). However, when compared year over year, the second quarter results
were unchanged.
Loan performance in the second quarter of 2008 was also strong, with 99.5 percent performing and just 0.5
percent restructured or delinquent. This matched the all-time high reported in the fourth quarter of 2007,
since NIC began collecting this data beginning in 1999.
"Similar to other commercial real estate asset classes, seniors housing had not yet seen any significant
deterioration in loan performance," said Robert G. Kramer, president of NIC. "In terms of loan volume,
one must remember that these data results predate the disruptive market activity and tightened credit
markets that took place in September 2008. We'll be looking closely at the impact from those conditions,
when our fourth quarter data comes in toward the end of March next year."
Other key highlights for the second quarter of 2008 include:
- Occupancy rates for independent living and CCRCs declined slightly from the previous quarter. Compared
to the second quarter of 2007, the mean occupancy rate was down 250 basis points (bps) for independent living
and 200 basis points for CCRCs.
- "It's revealing to put the data in historical context by comparing the current decline in occupancy
to previous periods," said Michael Hargrave, Vice President - NIC MAP®. “For example, for independent
living, there was a 650 bps drop from the fourth quarter of 1999 – when occupancy was at 94
percent – to the fourth quarter of 2002, when it slid to 87.5 percent. In comparison, the mean occupancy
stood at 93 percent during the third quarter of 2006 and went to 89 percent during the second quarter
of 2008, a milder 400 bps drop."
- Occupancy rates for assisted living remained relatively flat year over year. "When looking historically
at this sector," said Hargrave, "the mean occupancy rate fell from 89.5 percent in the fourth quarter
of 1999 to 83.5 percent in the first quarter of 2003, a 600 bps decline. Most recently, the
occupancy for assisted living was again at 89.5 percent during the third quarter of 2006 and it dropped
to 88 percent during this second quarter, which is only a 150 bps drop."
- The mean capitalization rate for independent living rose 20 bps to 7.8 percent, compared to
7.6 percent in the first quarter. The spread ranged from a low of 6.6 percent to a high of 8.75 percent.
Likewise, assisted living saw a 20 bps increase, rising from 8.8 percent to 9.0 percent. This
sector had cap rates ranging from a low of 7.0 percent to a high of 12.2 percent. The mean capitalization
rate for skilled nursing stayed virtually flat at 12.7 percent. Interestingly, it went down for CCRCs,
although that could have been a statistical anomaly due to a low sample size in the previous quarter.
The KFIs, posted free of charge at www.nic.org/research/kfi/, represent
the longest-running compilation of same-store data collected and made available to the industry. Each
quarter, the nation’s leading senior living lenders, owners/operators and appraisal professionals report
their key financial and performance data to NIC. The loan volume represents the quarterly lending activity
of major national lenders (non-REITs) that make permanent and short-term debt investments in seniors
housing and care, including Fannie Mae, Freddie Mac, and several of the larger commercial credit companies
and banks.
|
|
|
NIC 2009 Western Regional Symposium Update:
|
A New President, a New Congress:
What Will it Mean for Seniors Housing & Care?
|
Just Announced: Leslie V. Norwalk, former Acting Administrator for the Centers for
Medicare and Medicaid Services (CMS), will be the featured speaker at the Opening Lunch March 11, 2009
at the NIC Western Regional Symposium.
Join us as Ms. Norwalk provides her outlook on how the policies of the new administration and congress
are likely to impact seniors housing and long term care. Benefit from her years of managing the day-to-day
operations of CMS as she reviews the likely future for regulation, reimbursement and reform of financing
and delivery systems from her unique perspective.
CLICK HERE to register now!
Sponsorships are still available! Please contact Elisa Freeman
for more information.
|
|
|
Executive Circle Conference Call
|
|
What is the Outlook for Seniors Housing & Care in 2009?
|
What is the relationship between residential housing fundamentals and seniors housing fundamentals?
Both independent and assisted living properties established recent occupancy peaks in the 1st quarter
of 2007. Since then, both independent living (IL) and assisted living (AL) occupancies have trended
downward. IL occupancy is down by 240 bps and AL by 180 bps. This downtrend
has coincided with the largest decline in the history of the Office of Federal Housing Enterprise Oversight
(OFHEO) and S&P Case-Shiller home price indexes.
What does this tell us about the prospects for independent living and assisted living? Join us for our
upcoming Q1, 2009 Executive Circle Conference Call, "The Outlook for Seniors Housing & Care in 2009," to
find out. In preparation for the call, the NIC Research team has partnered with industry experts from Red Capital
Group to conduct research on the relationship between the residential housing market and seniors housing
and care fundamentals. We have also arranged for one of the nation’s leading economic forecasters to
provide his analysis of, and outlook for, the US residential housing market.
Moderator:
Dr. Lawrence Horan, Ph.D., NIC Financial Research & Analysis Director
Panelists:
Richard DeKaser, Senior Vice President and Chief Economist, National City Corporation
Dan Hogan, Director, Research, Red Capital Group
Casey Moore, Managing Director, Red Capital Group
Participate on this call to learn answers to these and other questions:
- What is the relationship between residential housing and seniors housing and care fundamentals?
- What is the outlook for property level rate growth in 2009?
- Which markets have seen a significant impact on occupancy and rate growth, and which markets have seen
a modest impact?
- What is the outlook for residential housing in 2009? Are we likely to see further price declines, or
are we headed to recovery?
- Are there still residential housing markets that are overvalued and, therefore, at risk for future price
declines? Which markets are undervalued and, therefore, present prospects for price increases?
Set your investment strategy off on the right foot in 2009!
Registration for the call costs as little as $275 per office. NIC offers two easy ways for you to register
for this call:
- Join the NIC Executive Circle now!
NIC Executive Circle members receive access to four quarterly conference calls on crucial industry issues
per year, historical NIC Key Financial Indicators™ data, discounts on NIC MAP® reports, and access
to other NIC Research exclusively for members.
|
|
Seniors Housing & Care
Industry Calendar |
|
November 2008:
- 17-20 Erickson School - “Development of Seniors Housing & Care," Baltimore, MD
- 19-21 NAREIT Annual Convention, San Diego, CA
December 2008:
- 2 3Q08 NIC MAP Subscriber Conference Call, 11:00 a.m. EST
- 8-9 Advanced Sales & Marketing Summit for Seniors Housing, Assisted Living and Nursing Industries, Naples, FL
- 10-12 Erickson School - “Financing the Nonprofit Enterprise," Baltimore, MD
January 2009:
- 8 NIC Executive Circle Conference Call
- 12-13 ASHA Annual Meeting, Monarch Beach, CA
- 13 NIC Executive Committee & Conference Planning Committee Meetings, Monarch Beach, CA
- 20-23 NAHB International Builders Show, Las Vegas, NV
- 26-27 AAHSA Leadership Summit, San Francisco, CA
Click here to suggest adding an event to this calendar.
(denotes NIC Events) |
|
|
|
|
If you are interested in
advertising in the
NIC Insider Newsletter,
please contact
Gary Infante at
webmaster@nic.org.
|
|
