Bellwether deal goes awry

Even some cash-rich real estate investment trusts (REITs) are wary and view their capital as precious and figure they can wait for the right opportunity, since property prices could continue to fall.

So it wasn't a shock when Health Care REIT pulled the plug last November on a $643.5 million deal to purchase Arcapita's 90% interest in facilities managed by Sunrise Senior Living. Announced last summer, the deal gave the industry hope. “A breath of fresh air came into the industry with that deal,” says Meredith Oppenheim, senior vice president at property advisor Savills in New York.

But as the economy worsened and interest rates rose, the cost of the deal went up, sources say. Some speculate that Arcapita wasn't willing to negotiate on price and that's why the deal ultimately fell apart. Calls to Health Care REIT for comment were not returned.

“The healthcare asset class, including seniors housing, is where I would want to be lending now,” says Dee McClure, senior vice president at CWCapital in Baltimore.

McClure expects seniors housing to fare better than other property types, despite aggressive underwriting across all real estate asset classes in the last few years. Seniors housing facilities that cater to the frail elderly, such as assisted living facilities and nursing homes, will perform the best, she believes, because the residents need care and have few options.

On the other hand, residents of independent living buildings might delay a move if they can't sell their homes. The more a building serves persons who require care, the more stable the cash flows over the coming years, says McClure.

Select projects shelved

About 25 to 50 new continuing care projects nationwide are on hold for lack of financing, says Dan Hermann, managing director at Ziegler Capital Markets based in Chicago.

The firm works with non-profit operators that typically finance new construction of large, $100 million projects with high-yield bonds. Investors fled that market after the collapse of Lehman Brothers. Since, the cost of construction financing has risen from about 7% to 10%.

How long before the situation improves? Hermann is watching inflows to mutual bond funds. Once that turns positive, interest rates should start to come down. “It will take a number of quarters for this to play out,” he says.

Typical of deals today, KeyBank Real Estate Capital recently closed on a $29 million Fannie Mae refinancing. The 10-year, fixed-rate loans are for three seniors housing properties for San Diego-based Pacifica Cos.

“We will be expanding our agency lending this year,” says David MacVicar, senior vice president at KeyBank's regional office in Seattle. The lender generated roughly $1 billion in new healthcare commitments in 2008, of which about $600 million was allocated to seniors housing. In addition, KeyBank generated about $500 million in seniors housing loans through Fannie Mae and Freddie Mac.

“The healthcare segment [which includes seniors housing] remains strategic to KeyBank,” says MacVicar. But, he adds, the bank is proceeding cautiously by working with experienced operators and focusing on strategic relationships.

For now, many owners plan to concentrate on operations to boost occupancy rates. “That's what times like these are for,” says NIC's Hargrave. Those owners that make it through 2009 should be well positioned for the future, he adds.

One silver lining to the credit crunch and soft economy is the decline in new construction. Starts for assisted living, for example, fell 78% in the third quarter of 2008 from the prior quarter.

That slowdown in new supply should benefit the industry in the long run because demand for seniors housing continues to grow as the population ages, says Hargrave. “There will be a severe undersupply coming out of all this.”

Jane Adler is a Chicago-based writer.

See also: HUD Lean Program expedites loan approvals