By Matt Valley
PHILADELPHIA — Despite industry-wide improvement in operating performance, many senior living providers are still finding it difficult to secure bank financing. Kathleen Shields, founder and president of Health Financing Consultants, said there are three root causes of the problem, starting with insufficient cash flow.
“Operators have done a good job of pushing through [rental] rate increases in order to keep up with inflation and higher interest rates. So, the margins are normalizing and getting a little bit better. But banks are looking for historical cash flow of at least six months, if not 12, at coverage levels that they’re comfortable with. And I’m not hearing 1.25 anymore [for the debt-service coverage ratio]. I’m hearing more like 1.4,” explained Shields, a panelist at the InterFace Seniors Housing Northeast conference, which took place Dec. 4-5 in Philadelphia.
Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.
“It depends on the lender, but you do need to have a track record of historical cash flow that supports your request, and that’s not easy,” emphasized Shields.
The other two main reasons that borrowers are fighting an uphill battle with banks, according to Shields, are the erosion of the tangible net worth of borrowers stemming from the COVID-19 pandemic and the challenging regulatory environment that banks find themselves in today.
Joining Shields on stage at Live! Philadelphia Hotel were panel moderator Ari Adlerstein, senior managing director at Meridian Capital Group; Ken Assiran, managing director, Capital Funding Group; Michael Blackwell, vice president, seniors housing and healthcare, Lument; and Chuck Hastings, president and CFO of Juniper Communities.
The daylong conference, which attracted approximately 240 industry professionals, featured six panel sessions, plus a special presentation on value-based care and a keynote address by Andrew Carle, adjunct faculty member at Georgetown University and president of Carle Consulting. Carle spoke on university retirement communities as an emerging niche.
A Borrower’s Perspective
While he’s less pessimistic than he was a year ago about the state of the lending market, Hastings of Juniper Communities said borrowers are still facing resistance from debt providers, particularly commercial banks.
“When I was up here [on stage] with you last year, I told the story that we were out to market for a loan on a stabilized, cash-flowing, relatively pretty building. And when we approached our 19th bank, we got a term sheet. So, I was extremely pessimistic last year,” said Hastings, adding that his pessimism now is somewhat tempered.
Juniper owns and operates 29 senior living communities across four states — New Jersey, Pennsylvania, Colorado and Texas. Juniper’s portfolio has a resident capacity of 2,300, with 1,750 employees, according to the company’s website.
“We’re still a little worried about where [interest] rates are going to go,” said Hastings. “[Federal Reserve Chairman Jerome] Powell said the other day that he’s going to take his time lowering rates, which was not great to hear. And then I read the other day that [Donald] Trump is talking about making some changes to Freddie and Fannie. We’re more optimistic than we were a year ago, but I think we’ve still got some headwinds on the banking side.”
On Dec. 18, nearly two weeks after the InterFace conference, the Fed lowered the federal funds rate 25 basis points to a target range of 4.25 to 4.5 percent. It was the Fed’s third rate cut over a three-month period.
The Fed’s actions have led to a drop in the Secured Overnight Financing Rate (SOFR), which currently stands at nearly 4.5 percent, down from 5.3 percent in mid-September. That’s significant because SOFR is the benchmark used to set interest rates on short-term, floating-rate loans in commercial real estate.
The bad news for borrowers is that the U.S. 10-year Treasury yield has risen from approximately 3.7 percent in mid-September to nearly 4.7 percent today. The 10-year yield is the benchmark used to set the pricing on permanent, fixed-rate loans.
President-elect Trump tried unsuccessfully to privatize Fannie Mae and Freddie Mac during his first term in office, and it remains to be seen whether he will try again. The concern from some real estate professionals is that the privatization of Fannie Mae and Freddie Mac could lead to higher mortgage rates because the loan guarantees these two government-sponsored enterprises (GSEs) provide would end.
Victim of Circumstances
Another complicating factor that has prevented lenders from loosening the purse strings for seniors housing borrowers is that the broader commercial real estate market is showing some signs of stress, said Adlerstein.
“A lot of the banks that we do business with have large multifamily books, large office books, CRE (commercial real estate) books. Despite all the headwinds that our industry has faced, we’ve actually been pretty resilient compared to certainly office, hospitality — and multifamily has taken some big hits today. So, a lot of our banks are on the sidelines. In spite of our industry, they’re just on hold.”
Depository requirements frequently pose a roadblock for seniors housing borrowers, Adlerstein noted. Suppose a borrower with a strong balance sheet and a portfolio that is performing well is seeking a $20 million loan. Beyond requiring the borrower to open an operating account for the financed property, many banks today are requiring additional deposits of at least 10 percent of the loan amount. Such a requirement can be problematic for a borrower with an extensive property portfolio.
A Banking Conundrum
“We use Chase Bank as our cash management platform, and it’s always driven me crazy that Chase Bank doesn’t lend to our space,” said Hastings. (A cash management platform is a software system that helps businesses automate and streamline their cash flow management processes.)
“We’ve been told by the folks that we deal with that [JPMorgan Chase & Co. CEO] Jamie Dimon specifically doesn’t want to touch seniors housing, [which he] perceives it to be too risky. You guys know the lending space far better than I do, but if at some point Chase Bank could ever get into the business, I think others will follow.”
Assiran of Capital Funding Group acknowledged that many banks are facing either increased regulatory scrutiny or balance sheet issues, but he’s hopeful the tide will turn in 2025 and 2026 and that more lenders will be back in the marketplace.
“Certain types of loans are still very difficult to put in place, especially construction loans. But I think that’s slowly changing and will continue to change,” said Assiran.
The silver tsunami — the robust aging population — is one of the seniors housing industry’s biggest strengths going forward, Assiran pointed out.
The first baby boomers, of which there were 4.4 million in 2024, will turn 80 this year. The U.S. Department of Health and Human Services estimates that 70 percent of people turning 65 today will require long-term care services.
“The data, the demographics are going to be there, and things will change,” Assiran said, referring to the state of the industry and the lending climate. “The whole question is when. If I were to hazard a guess, I would say sometime in 2026.”
What’s Ahead for the Agencies?
Adlerstein asked Blackwell of Lument what the outlook for Fannie and Freddie is in 2025. Blackwell expects lending activity from the agencies to “still be a little slow” in the near term. “It’s been really important that Fannie get re-involved. I think that helps Freddie quite a bit to be able to work with each other.”
In 2023, Fannie Mae allocated approximately $500 million to seniors housing compared with over $52 billion for the multifamily housing market. (The figures for 2024 weren’t available as of press time.) For context, Fannie Mae’s total lending for seniors housing in 2022 was $1 billion.
In today’s lending climate, the agency loan products work best when the 10-year Treasury yield is approximately 4 percent, said Blackwell. Since Sept. 18 — the day the Fed began cutting the federal funds rate — the 10-year yield has risen from about 3.7 percent to close to 4.7 percent.
“If we can get into that plus or minus 4 percent range, I do think that you’ll start seeing [the agencies] get back to those benchmark levels (a debt-service coverage ratio of 1.30 or 1.40, and 65 to 70 percent loan to value),” said Blackwell.
In terms of the potential privatization of the GSEs, Blackwell said that Trump is bullish on bringing that to fruition, but it’s not clear how long that process might take to complete.
“What I would say is that there obviously is a benefit to everybody for that to happen. Fannie is a significant holder of seniors housing assets in this country right now, and so anything that we can do to get [the agencies] better underwriting metrics is only going to benefit capital.”