Freddie Mac recently announced its new revolving credit facility targeting the seniors housing industry. The government mortgage lender explained that the credit facility offers advantages for seniors housing owners with large development and acquisition pipelines or assets requiring time to stabilize. In an interview with NIC, Steven Schmidt, Freddie Mac’s seniors housing director, discusses why the facility was introduced now, key features of the product and his views on the seniors housing sector.
NIC: In January Freddie Mac introduced its first revolving credit facility focused on seniors housing lending. More typical in the multifamily space, this is a game changer as it’s the first-time one of your credit facilities have been used for the seniors housing industry. Why was now a good time to introduce the credit facility specifically for this sector?
Steven Schmidt: Freddie Mac Multifamily has provided revolver facilities with great success for many years. Freddie Mac has had revolver financing available for seniors housing for five years, but the program never took hold. What has changed and made the seniors housing revolving credit facility so viable today are three things:
- First, we raised the maximum allowable leverage from 65% to 75% loan-to-value (LTV) and we dropped the minimum occupancy requirement for a property
- Second, with the return and continued growth in seniors housing development, there are more experienced owners today with development programs which are active enough to warrant a revolver facility
- Third, with the historically low seniors housing cap rates of today, many investors are seeking value-add as well as core opportunities to boost their expected returns and the revolver can better meet their particular financing needs
NIC: What are some of the key features that make the seniors housing credit facility program attractive to potential borrowers?
Schmidt: The Revolver has attractive terms for owners with development programs and those with a mix of value-add and core seniors housing acquisition programs. The seniors housing Revolver Facility is priced at a competitive floating rate, which is indexed to LIBOR. Unlike most bridge loans in today’s market, the Revolver is non-recourse. So for developers looking to refinance assets off their recourse construction loans the Revolver is a reliable and easy way to achieve that versus waiting to refinance a fully-stabilized community. In turn, this frees up construction lines and equity to focus on future developments.
It is also attractive for investors with value-add and core acquisition programs because the crossed nature of the Revolver allows Freddie Mac to finance properties on a non-recourse basis that are cash-flowing, but not yet fully stabilized. And there is no minimum occupancy required, removing another potential obstacle for refinancing. Finally, as properties in the Revolver stabilize and optimize value, they can be easily refinanced via Freddie Mac’s attractive permanent mortgage securitization program.
Additionally, the Revolver is very user friendly and reliable. The floating rate spreads are locked for 5 years and the loan docs are pre-negotiated, making access to funds reliable and quick. Our first committed Revolver Facility and its first funded loan all closed within 45 days from our initial concept meeting.
The minimum commitment for a Revolver is $50 million, but the first loan required to “seed and close” the committed Revolver Facility can be as little as $10 million. There is no stated maximum size for the Revolver commitment, but we expect most Revolver commitments will be in the $100 million to $300 million range.
NIC: Greystone, a national provider of multifamily and healthcare mortgage loans, was the first to close on the revolving credit facility. How would you describe the response so far from your other seniors housing sellers and servicers since making the announcement?
Schmidt: Our seller/servicers were already aware of the improved seniors housing Revolver program and together we’ve been in discussions with a number of qualified borrowers. Since Greystone’s announcement on the closing of the Oakmont Revolver, we’ve seen interest in the program accelerate with several new borrowers making inquiries. We are very encouraged by the responses we’ve received and look forward to closing more seniors housing Revolvers in the future.
NIC: How has the lending environment changed over the past several years for seniors housing properties? What trends do you see?
Schmidt: The fundamentals of good seniors housing lending haven’t changed all that much. If you stick to borrowers with strong operations, competitive physical plants and locations that are viable for the long term, then loan performance tends to be excellent. Fortunately, due to the quality of data from NIC MAP®, our experienced seller/servicers and our long-term commitment and involvement in the seniors housing industry, we’ve been able to focus on these key items and our loan performance has been excellent. We are seeing more lenders now entering the seniors housing space. It will be interesting to see if they can maintain the same focus and commitment to the industry.
NIC: How do you view seniors housing compared to other commercial property types? Why?
Schmidt: We are focused solely on multifamily lending, which includes conventional apartments, seniors housing, student housing and targeted affordable housing. With a loan performance and profitability track record that we believe is the best in the business, we remain bullish on multifamily and seniors housing versus other commercial real estate (CRE) property types. Having personally worked for a few commercial real estate lenders that financed office, retail, multifamily, industrial and hotels earlier in my career, I prefer seniors housing as a property investment or loan. I believe seniors housing properties with experienced ownership/operations have and will continue to show superior performance, particularly over recessionary periods.
Why? Ongoing capital costs for office, hotel and to a lesser extent, retail are often huge to remain competitive. The tenants in CRE properties can often disappear virtually overnight during recessions with no tenants available to replace them. Seniors housing in contrast, has need-driven residents whose demand will grow as the seniors population continues to grow. In recessions, seniors housing demand may weaken but won’t evaporate. Finally, though seniors housing also needs capital expenditures to remain competitive, the costs tend to be less significant and can lead to a higher acuity mix and increased profits.
NIC: There’s been much talk about new development within the seniors housing industry. Are you at all concerned about the pace of new construction activity?
Schmidt: We are not overly concerned, in general, by the pace of new seniors housing construction because, as expected, during the most recent economic and housing recovery net seniors housing absorption has been increasing and is still outpacing inventory growth. That being said, we believe several metro markets have been overdeveloped and it will take some time for those markets to stabilize. We also think some of the planned construction may be premature as the large spike in the age 80 and over population won’t start arriving for about another 10 years. Of course, the wild card in all of this is the penetration rate. If the seniors housing industry can, through good customer service and customer experience, continue to increase market penetration rates, then the current level of construction can likely be sustained and absorbed.
Seniors housing occupancy levels increased to 89.7%, up 0.4 percentage points from the prior quarter, while the pace of annual rent growth remained unchanged, according to NIC MAP®’s fourth quarter data and reports released on January 10. Current new construction as a share of existing inventory for seniors housing was 2.9%, which is 0.3 percentage points below the previous quarter. However, Chuck Harry, NIC’s managing director, noted that “while construction activity moderated slightly, in part due to a modest decline in construction starts during the fourth quarter, it’s too soon to say if this is a trend or a one-quarter aberration.”
Key findings in the fourth quarter include:
- Transaction volume in the fourth quarter of 2013 was $3.8 billion. This is higher than the 4th quarter of 2012
- Pricing was relatively unchanged from the prior quarter and has been holding up reasonably well within the last few years
- Asking rent growth rates varied with majority IL and majority AL moving in opposite directions. Annual rent growth in IL grew by 20 basis points and slowed by 30 basis points in AL
- Seniors housing annual absorption was 2.2% in the fourth quarter of 2013, compared to 2% in the previous quarter and 2.3%during the fourth quarter of 2012
- Supply headwinds remain in assisted living but they are concentrated in certain markets
For a snapshot of current industry performance in the fourth quarter of 2013, visit the NIC MAP® Key Metrics on the NIC MAP® website. To learn more about individual market performance or how your property performed against your competition, contact John Blumer at email@example.com to schedule an interactive web demonstration.