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Lenders to Borrowers: For the Right Deal and the Right Partner, We Will Get It Done!

Lenders to Borrowers: For the Right Deal and the Right Partner, We Will Get It Done!

Lenders to Borrowers: For the Right Deal and the Right Partner, We Will Get It Done!

In late 2019, Skilled Nursing News reported on the financial vitality of the industry, noting that “the Department of Housing and Urban Development’s Section 232 program for skilled nursing facilities and other institutional care sites logged $3.7 billion in total initial endorsements during fiscal 2019, which ended September 30.” This represented an increase of more than 4% over the previous year–fiscal 2018. Many concluded that the rise in HUD loans since 2016 was a positive sign that the industry remained strong and profitable.

Skilled Nursing News also stated that “from 2016 to 2019, the volume in HUD loans grew extensively with 85% percent of volume in skilled nursing facilities, rehabs, and additions.”  Other funding sources, namely bridge loans fill the gap for short-term transactions such as acquiring an asset. Bridge loans are popular because they take months instead of years to close which enables facilities to move projects forward and allows borrowers to decide whether to obtain longer-term loans.

Skilled nursing facilities frequently offer the highest cash flow return and with lenders making more capital available, operators were keen to line up deals. Attractive interest rates, solid performance and eager investors eyeing strong returns helped fuel mergers-and-acquisitions activity. Even smaller facilities benefitted by adopting new payment models and other improvements to enhance their operations which were reflected in their star ratings.

Then Covid-19 hit—a black swan event that continues not only to roil the economy and underpinnings of societies around the world but also may cause a major transformation of the Nursing Home industry.

The New York Times database which tracks Covid-19 information observed that 41% of all fatalities were nursing home-related with 62,000 residents and workers dying from the coronavirus at nursing homes and other long-term care facilities in the United States. Furthermore, as of July 30th, the virus has infected more than 362,000 people at 16,000 facilities.

The industry has taken a massive hit exposing numerous failings. Will lenders still consider providing funding to the industry?

We asked Joshua Rosen, SVP at Walker & Dunlop, for his thoughts on the current crisis and the financial repercussions. At Walker & Dunlop, one of the largest commercial finance real estate companies in the U.S., Mr. Rosen focuses on healthcare and senior housing, and is responsible for originating loans through the U.S. Department of Housing and Urban Development (HUD) and the company’s proprietary bridge lending program. Over the course of his career, he has managed or participated in over $2 billion worth of transactions.

ECAP:  As a lender, what positives do you see in this current market and what are the challenges? 

JR:  Covid-19 is an unprecedented event that no one could have foreseen or prepared for. It was sudden and quick and no one was at fault. Skilled Nursing facilities are prepared for outbreaks of the flu but not for something like this.  From a financial or lenders’ perspective, deals are still getting done. In a post-Covid-19 world however, lenders will be more conservative and selective, looking very closely at (safety) protocols and benchmarks.

Nevertheless, now is still a good time to secure funding. Money is cheap to borrow as interest rates are at historically low levels. As long as Covid-19 protocols and conditions are being met, lenders will work with clients to find solutions. 

As far as challenges go, it’s the Mom and Pop operators/owners with one or two facilities who will exit the business. The pressure, stress and investments needed (in infrastructure, technology and operations) may not be feasible for them. Consolidation will take place and they will likely be acquired by the larger, better capitalized regional players who are scooping up more rural assets and becoming stronger in some regions.   

ECAP: In the wake of COVID-19, what type of loans will factor in the future recovery of nursing home facilities? 

JR: The types of loans out there will not change. Everything is on a deal by deal basis. Skilled nursing homes will remain very profitable for the right provider and for the right investors.

ECAP: How will the 232 initiative — administered through HUD’s Federal Housing Administration arm — which allows qualified borrowers to secure loans of up to 40 years for the acquisition, refinance, or renovation of skilled nursing and other senior housing facilities, including assisted living properties, be affected and/or managed in the aftermath of COVID-19?

JR: Scrutiny will be greater; HUD will be asking more questions about the current census and the Covid-19 status at each facility throughout the deal process. There will be mandated conditions. Lenders will want to know protocols are in place for each facility and will require updates on a consistent basis since inspections are not currently viable for safety reasons. Lenders will also want assurances, such as plans for handling any future pandemic or contagious diseases— to prevent the impact facilities are experiencing now.   

ECAP: Do Lenders expect Skilled Nursing Facilities (SNFs) to rethink their business models? 

JR: There will certainly be operational changes and expenses will rise but the business model will stay the same; long-term operators will continue to seek long-term financing.   Everyone is trying to provide a safe environment for residents, hire qualified staff, establish protocols, and restructure relationships with hospitals. Measures like these will hopefully limit fallout allowing operators to reemerge as market leaders.  

ECAP: What takeaways do you have for operators/providers?

JR: Nursing home finance is still available; bankers and private finance companies are still lending. Yes, lenders will be more selective (and look more carefully at expense ratios) and balance sheet deals will still be challenging but for the right deal and the right borrower, we will get it done as will the industry. The key is to partner with borrowers who are well-capitalized, committed to the seniors housing space for the long-term and dedicated to overcoming situations like Covid-19. We believe those players who are well-positioned and well-capitalized will come through stronger than ever.

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