Refinancing debt can allow operators to have budgetary breathing room.
What a difference a summer makes. On Memorial Day, interest rates were at unprecedented lows while Fannie Mae, Freddie Mac and the Department of Housing and Urban Development were busily underwriting skilled nursing and senior housing transactions.
By Labor Day, interest rates were on the rise and the public sector funding agencies were under fire.
Still, no one is setting off any alarms yet. While the developments over three months have raised concerns about potential interruptions to what has been a stable and steady long-term care financing mechanism, they didn't catch industry observers completely off guard. Over that time, people such as Mark Parkinson, president and chief executive officer of the American Health Care Association/National Center for Assisted Living, were telling skilled nursing and senior housing operators to keep an eye on interest rates and “take a look” at refinancing options while conditions were still favorable.
“Regardless of what your financing is, if you haven't refinanced in the last couple of years, you really ought to take a look at it,” he said in July as interest rates were nudging upward. “I've had members tell me that they have managed the impact of state and federal budget cuts by refinancing their debt and really harnessing their resources.”
In mid-August, President Obama announced that his administration would be considering closing Fannie Mae and Freddie Mac to guard against another mortgage crisis of the kind that caused the economic collapse in 2008. But even though the agencies' residential portfolios suffered, they (along with HUD) have been the most consistent underwriters for senior housing and skilled nursing financing in the five years since the recession began. With their potential closure, combined with the rise in interest rates, the industry's access to low-cost, accessible financing now appears to be at risk.
While Parkinson admits the future looks uncertain, opportunities are still currently available and worth investigating, he says.
“It's not clear what a potential overhaul of Fannie Mae and Freddie Mac would have on the long-term care profession, but it signals that providers should remain aware of what's going on in the market as well as their financial options,” he says. “For instance, we don't know how long interest rates will remain low. So, this is the time for providers to look into possible refinancing to help save precious resources.”
Len Lucas, senior director for LoveFunding, has been closely charting interest rates and says HUD rates hit their all-time low in the fall of 2012. Prior to that, investors in HUD “paper” — Ginnie Mae securities — had an artificial floor rate of 3%. Still, rates managed to break that barrier and fall to below 2.5%, he says.
“Today, rates may seem high by comparison, but even a 4% rate for a 35-year fixed-rate, non-recourse loan is a bargain,” Lucas says. “A loan like this gives owners of properties heavily dependent upon either a government-controlled reimbursement system or the vagaries of the home sales markets comfort in keeping one's operating expense number from moving around. That is still an attractive rate and people should feel compelled to take advantage of it while they can.”
There are signs that senior housing and skilled nursing operators are feeling a greater sense of urgency to refinance, agrees Imran Javaid, national head of lending in senior housing and long-term care for Capital One.
“We have actually seen a rush of acquisition activity as well as a rush of refinance and bridge to HUD activity,” Javaid says. “A lot of clients see the rise in long-term rates as a potential missed opportunity.”
Plus, some operators who have buildings that are “close to stabilization but not yet fully ready are trying to start the clock ticking” on a bridge to agency funding or are considering selling because they recognize that cap rates will eventually follow a consistent rise in long-term rates, Javaid says.
Among investors there is a “great demand across the interest rate spectrum for high-performing asset classes, which definitely includes independent and assisted living,” says Michael Vaughn, senior vice president of FHA Finance Healthcare for Walker & Dunlop. This indicates that even if Fannie Mae and Freddie Mac are relegated to diminished roles, “other lending platforms will develop to pick up the slack.”
Even so, Vaughn believes any Congressional action on Fannie Mae and Freddie Mac “is years away.” Both multifamily and the senior housing portfolios have been the agencies' biggest and best performing products and are in no jeopardy of disappearing, he says.
“The options, should the decision be made to dispose of the portfolios, could be wide ranging, including just letting them run off over time,” Vaughn says. “They could also be sold as rated securities, which is already the case with much of their new production.”
Don Kelly, director of Healthcare Real Estate for CapitalSource, contends that if the Fannie and Freddie portfolios were put up for sale, private sector investors might be willing to buy loan paper that has shorter duration remaining at “acceptable rates,” though some buyers could shy away from newly minted seven- to 10-year loans in the 3.5% to 4.5% range, depending on their comfort level with those rates.
Overall, Kelly says he will be closely watching how the Fannie and Freddie situation plays out in the coming months.
“It will be interesting to see the political and academic perspectives between those who support such a shutdown and the pushback from certain constituencies against doing so,” he says. “I would not expect a definitive course of action to be implemented in the very near future.”
Even if the unexpected comes to pass and the agencies are shut down promptly, Kelly believes it would not have a truly negative impact on the senior housing and long-term care industries.
“There are many other capital choices in today's environment, though perhaps not at such a low rate,” he says. “Many capital providers such as finance companies, banks, life insurance companies and pension funds would likely step up to fill the void at an appropriate risk-return balance. To date, many of these capital sources have not been able to consistently compete on both price and structure with Fannie and Freddie.”
Then there's HUD
No discussion of public financing options for long-term care operators is complete without mentioning HUD — perhaps the most reliable source of low-cost capital for the industry since the 2008 meltdown. Continually active the past five years, this year has been no exception, though sequestration budget cuts have trimmed the number of days that offices have been open.
HUD has endured the interruption — casually referred to as “Friday furloughs” — without much difficulty. Yet doubts have arisen about its future as well, as some federal legislators are reportedly questioning its relevance and competitive advantage on interest rates compared to private sector lenders.
As with Fannie and Freddie, HUD hasn't suffered any losses with its long-term care portfolio. The HUD Lean program came about after the financial crisis prompted the agency to change some aspects of the 232 program to make it more viable, such as covering the debt service ratio on minimums, decreasing loan-to-value from 85% to 80% and doing away with the previous valuation system that used proprietary earnings as a factor. The result is a low-risk program that has attracted huge volume.
“The story developing at HUD is how much traction there is with an effort by some in Congress to close it,” Lucas says. “If that were to happen, the victim will be the market-rate multifamily and the winner will be skilled nursing because 70% of skilled nursing residents are on Medicaid. Sooner or later, people in government will realize that if HUD 232 is taken away, the private sector will come in at a much higher rate and put more pressure on requests for reimbursement. This will actually cost the government more money.” n