The Seniors Housing Capital Environment: A Discussion with Steve Wendel
In the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, vice president of NIC MAP®, recently interviewed Steve Wendel, president at Berkeley Point Capital LLC in Boston.
NIC: I understand Berkeley Point re-established its lending platform under new ownership earlier this year. Can you provide some background about your structure now as well as a recent history? If possible, touch on production, HUD versus GSE and other business as well.
Wendel: Yes, that’s true. Since 2004, Deutsche Bank had owned us. On March 9 of this year, we were acquired by entities affiliated with Ranieri Real Estate Partners LP and WL Ross and Co. LLC. We are entering our fifth month under new ownership. We are now private again, as we were before 2004. They purchased the same entity, people, and servicing systems that Deutsche Bank had bought in 2004—Fannie Mae, Freddie Mac and FHA originations, underwriting, servicing, asset management, the whole kit and caboodle. We still have the same senior management team. Jeff Day is our CEO.
In terms of production, we typically originate $3 billion–$6 billion a year; our average if you look at the past six years stood at about $4.5 billion. Our volume has been about 60 percent Fannie Mae in the past two years; probably 30 percent Freddie Mac; and about 10 to15 percent FHA. In the middle 2000s, we had a more even Fannie Mae/Freddie Mac split, but we have become a little weighted towards Fannie Mae for the past couple years and this year.
We are now evaluating our next steps, products and other initiatives, under our new ownership. As a part of our new strategies, we recently have hired two new seniors housing originators, Doug Harper and Don Husi, as growing our seniors business is one of our priorities.
NIC: Representatives from Fannie Mae and Freddie Mac were recently saying that the bulk of their seniors housing business is coming from smaller portfolios or even one or two at a time. Has this been consistent with what you are seeing at Berkeley Point? What is driving this and do you see this changing in the future?
Wendel: I would agree with that statement. We’ve been working on a portfolio of a dozen small properties, but I would say the bulk is two properties here, three there, five there and some single properties, which is different than in the past. We had done pools in the past for the likes of Ventas and Healthcare REIT, but there are more one offs presently.
What I think is driving this is that the large pools, particularly acquisitions, are being done by and financed by the REITs with their unsecured debt financing. To me that is the big change, the large deals aren’t going to Fannie Mae and Freddie Mac for financing, because the REITs’ cost of funds on the unsecured side is so cheap, they just use their own debt.
Oddly enough, this phenomenon is new for seniors housing, but on our multifamily side—our main business, we are probably 80 percent–90 percent multifamily and 10 percent–20 percent seniors housing—the bulk of our business is single-property loans. It’s not unusual for the general real estate sector, but seniors housing has historically tended to trade in pools and I think that is still true.
I think the REITs are going to dominate the large pool space for the foreseeable future. Ventas’s unsecured debt has rates that are comparable with Fannie Mae and Freddie Mac debt, with much more flexibility. I don’t see that changing in the near future.
NIC: Can you provide an update on Berkeley Point and HUD activity? Is volume rising compared to last year? What is happening from your perspective on queue times? Does HUD seem to be funding more or less construction?
Wendel: As of June 26, 2012 HUD Initial Endorsement volume was up both on a dollar basis and unit count basis by around 10 percent over last year, which makes for a great year. HUD’s volumes are continuing to rise slowly. I don’t think we’ll see the explosions in volume we saw between 2007 and 2009–2010, but they do appear to be continuing to increase their volume. In terms of what I call the four product lines—new construction, 223(f) and (a)(7) refis, and seniors—multifamily new construction volume and 223(a)(7) are the only product lines that are actually down a little bit.
I think that is a function of the more conservative large loan limits and the more conservative debt cover and loan-to-value ratios. I think that has caused new construction lending to drop a little bit and I’m okay with that. In the 223(f) sector, the main refinance program, volume is growing and I think will continue to grow. I think there are many properties that are going to need the approach it has to offer.
For the (a)(7)s, the other refinance program—HUD portfolio refinance—volume is actually starting to drop, as a lot of the HUD refinances of their own portfolio have already been done. Seniors housing volume is on the rise. The LEAN program volume is up close to 50 percent and it is mostly refinance volume. Seniors and multifamily refinance are the two categories that are showing the greatest growth. What I would say is that on the seniors’ side, under HUD leadership, they have reduced their timelines and have created a very effective seniors lending program. From what I know, the queues are between minimal and gone now.
On the seniors housing side, deal times are in the six months or less range for refinances. New construction may take longer. I think you are seeing deal time lines that are still longer than Fannie Mae and Freddie Mac, but they are not a year anymore. Under Marie Head’s leadership, HUD is actually starting to bring the LEAN techniques over to the multifamily side. We are starting to see the LEAN techniques reduce the multifamily wait times, which have gotten to be as long as or longer than the seniors housing loan wait times. I think HUD is really using their management tools pretty well. While I’m bullish on HUD because I run the program at Berkeley Point, I think they are doing the right thing to get these timelines down.
HUD is focusing less on construction; they are willing to do construction deals, but they have to be solid deals. HUD is worried about construction supply risk. I think it is fair to say the default and delinquency rates on construction loans, while very low, are higher than they are for the permanent refinance loans.
NIC: At NAREIT in June, there was chatter about the case for lower seniors housing cap rates. Are you seeing any evidence of this in deals you are looking at? What is the spread now and in recent history between apartment and seniors housing cap rates?
Wendel: I do think that similar to multifamily we are starting to see a bifurcation in cap rates for seniors housing between Class-A properties in the coastal markets and the rest. The REITs’ cost of capital is very low and because they are targeting coastal Class-A properties, cap rates are as low now as I can remember. That’s not dissimilar to the multifamily market, Class-A cap rates are 100 basis points –200 basis points lower than Class-B and Class-C cap rates.
I think similar factors drive both. Big institutional investors are only interested in certain types of properties in certain markets, but if they are interested they have a lower cost of capital, therefore they’re willing to buy at a lower cap rate. Independent cap rates are compressing. Assisted and Alzheimer’s might be trending downward slowly, but it is not a rapid decline.
There is a relation between cap rates and the 10-year Treasury. In my opinion, the spreads between apartments and seniors housing cap rates are toward the high end of recent times. I do think apartment cap rates have come down generally in tandem with the 10-year Treasury. I think seniors housing cap rates, even for Class-A properties, have come down more slowly. I think the spread between seniors housing and multifamily cap rates is at the high end of the historical range.
Seniors Housing Recovery: Is It Widespread?
Across the top 31 metropolitan markets (MAP31), seniors housing occupancy has been in modest recovery since establishing a cyclical low during the first quarter of 2010. As of the first quarter of this year, seniors housing occupany in MAP31 rose by 130 basis points from its low; however, this represents only about one-quarter of the occupancy lost during the recession.
While MAP31 has been recovering, there is a wide variance in the recoveries across the specific metropolitan markets. There are only three metropolitan markets—Cleveland, Las Vegas and San Jose—that regained all the occupancy that was lost during the recession, with occupancy rates in these markets above their respective pre-recession peaks. On the other end of the spectrum, there are several markets that have barely begun to participate in the recovery. The metropolitan markets that remain near to their respective cyclical lows are Cincinnati, Chicago and Philadelpha.
While Cleveland, Las Vegas and San Jose are each above their respective pre-recession peaks, this does not imply each of these markets is at a healthy occupancy level. Although, Cleveland and San Jose are at 91.9 percent and 92.9 percent, respectively, Las Vegas’s occupancy rate is only 84.9 percent as of the first quarter of this year. While Las Vegas’s occupancy rate is now above its pre-recession peak, it is still among the lower occupied metropolitan markets in MAP31.
Cincinnati, Chicago and Philadelphia are the metropolitan markets in MAP31 nearest to their respective cyclical lows. Among these markets, Cincinnati has experienced minimal traction with its occupancy declining to 1,060 basis points. Chicago and Philadelphia had established their respective cyclical lows and have been bumping along those lows since mid-2009.
To find information about your market’s recent performance, visit NIC MAP.
MAP Local Gets a New Look
NIC MAP is upgrading MAP Local with enhanced functionalities that will improve the way you search for properties. For the next 30 days, you can view these new upgrades and take a test drive before the current version of MAP Local is replaced.
Login to www.nicmap.org, click on “MAP Local V2 Beta” in the dropdown menu under “Local” to view these new enhancements that provide an improved user experience.
With MAP Local V2, you’ll be able to utilize the interactive map to search local properties and much more.
See what new MAP Local V2 can do for you!
Announcing 22nd NIC National Conference Keynote Speakers
Again this year, the NIC National Conference, September 19-21 in Chicago, will feature renowned industry leaders from the financial and seniors housing and care sector.
Robert J. Shiller
Noted Yale economist and U.S. housing market expert, Robert J. Shiller will deliver the opening comments and participate in a Q&A session with Robert G. Kramer at this year’s conference. The discussion will focus on the current state of and outlook for the residential housing and commercial real estate capital markets at the national and individual market level in terms of return to stability and the expected cost of capital. Mr. Shiller is one of the most far-seeing political economists of our time, known the world over for his brilliant forecasts of financial bubbles—both the internet bubble in 2000 and the US housing bubble in 2005—and his penetrating insights into market dynamics and how human psychology drives the economy. He co-created the most widely quoted home price index in the country (the S&P/Case-Shiller Index) and is a best-selling author, including his newest book, Finance and the Good Society, in which Mr. Shiller argues that we need more financial innovation, as finance is among the most powerful tools of society for solving our common problems and increasing the general well-being.
Hear from a Washington insider with unique insight into the post-acute and LTC sectors. Former Centers for Medicare and Medicaid Services (CMS) Administrator Tom Scully, General Partner with Welsh, Carson, Anderson and Stowe (WCAS), the largest private equity investor in healthcare, and Senior Counsel with Alston and Bird, LLP, is uniquely positioned to understand the current winds of dramatic change in healthcare driven by state and federal government actions and market-based reforms and what they mean for post-acute care, LTC and seniors housing providers. Come hear a Washington insider and key advisor to private equity discuss the impacts of the Supreme Court decision, the upcoming national elections and the continued budget pressures on Medicare and Medicaid.
Recent Events (June 2012)
Mass-ALFA Business Symposium—Breakfast with NIC
In partnership with the Massachusetts Assisted Living Facilities Association (Mass-ALFA), NIC hosted a Business Symposium on industry and economic trends in senior living with particular focus on the New England market on Wednesday, May 30.
Michael Hargrave and Chuck Harry provided insight on the economic future of senior living.
- Trends in occupancy rates and average monthly rents
- Demand side metrics such as absorption
- Areas of the U.S. in recovery and areas facing downward pressure
- Sales transaction trends in prices, cap rates, and sales volumes
- Supply and demand during the remainder of 2012
Get the Mass-ALFA presentation »
Seniors Housing Investment Briefing for Institutional Investors
The National Investment Center for the Seniors Housing & Care Industry (NIC) hosted “Investing in Seniors Housing Briefing” for institutional investors in San Francisco on May 22, 2012.
Jointly sponsored by the National Investment Center for the Seniors Housing & Care Industry (NIC), The Institutional Real Estate Letter (TIREL) North America and Real Capital Analytics (RCA), the briefing provided an overview of the seniors housing sector performance and outlined the opportunities and challenges associated with seniors housing property investments. The briefing was moderated by NIC’s president Robert G. Kramer and was well attended by more than 30 senior executives of investment firms, real estate development, pension funds, and healthcare management firms.
- Brian Beckwith, Chief Executive Officer, Formation Capital
- Tim Fox, Executive Vice President, Senior Resource Group
- Chuck Harry, Director of Research& Analysis, NIC
- Raymond J. Lewis, President, Ventas, Inc.
- Bill Pettit, President, Merrill Gardens
Get the Investor Briefing presentation »