If transaction volume is an indicator of industry health, it’s shaping up to be a good year for seniors housing.
Transactions totaled a record $166.2 million in April at Lancaster Pollard & Co., a firm that provides financing solutions for seniors housing, health care and affordable housing properties. Lancaster Pollard closed 25 transactions last month, representing the best month ever for the 24-year-old company. The deals were for properties spread over 11 states, including Ohio, Mississippi, Alabama, Virginia, Illinois, Kansas, Kentucky, North Carolina, North Dakota, Pennsylvania and Oklahoma. Twenty-three of the transactions were for seniors housing properties.
“April was a very robust month,” says T. Brian Pollard, president at Lancaster Pollard, based in Columbus, Ohio. “We expect the second half of the year to be extremely busy.”
Seniors housing and health care properties have performed better than other real estate classes during the downturn, notes Pollard. And he predicts continued growth for the sector based on the increasing numbers of older people who need services.
Pollard expects his firm to close $1 billion in transactions this year. The company has been expanding, opening a new office in Los Angeles in 2009, and its sixth office, in Philadelphia, in 2011.
Low interest rates are spurring transactions. Most of the Lancaster Pollard transactions in April refinanced skilled nursing facilities, says Pollard. He adds that owners have taken steps to improve the efficiency of their operations and control costs such as payrolls. They also face the challenge of lower reimbursement rates from Medicare and Medicaid as government budgets get squeezed. “The cost of capital is hard to control,” he says. But if property owners can refinance and get a low-rate long term mortgage, then they can focus on operations.
At the same time, owners are using refinancing as an opportunity to take out some cash for renovations. “Owners feel competitive pressure to modernize their properties,” says Pollard.
Many properties are being refinanced through government agencies, such as the FHA, and the government-sponsored enterprises, including Fannie Mae and Freddie Mac. Interest rates are in the 3.0 percent range. Loans are non-recourse and fully assumable, with terms of 30 to 35 years. “If you can lock in the interest rate, you can enhance the value of the property,” says Pollard. Five or six years from now, another buyer might be willing to pay more for the property because of the financing.
For now, low interest rates are helping to drive up property values. Flush with cheap capital, REITs are buying a lot of properties which is also pushing up values, Pollard says.
Regency Nursing Care Residence recently refinanced its debt through the FHA Sec.232/223 (f) program. Family-owned and operated, the skilled nursing facility is located in Springfield, Ill. The building was constructed in 1991 and has 99 beds. The HUD refinancing enabled the borrower to restructure the existing debt into a long-term, fixed-rate, non-recourse loan. Funds were also made available for renovations.
In this case, Lancaster Pollard obtained a 30-year $6.7 million refinancing, including $500,000 for improvements. A replacement reserve deposit of about $700,000 was established for other improvements. The refinancing paid off an existing mortgage and set up one long-term debt payment.
The demand for refinancing has led to a backlog of applications at the government agencies. But over the past nine months, HUD has implemented a few strategies to accelerate loan approvals.
In one case, Pollard says, a loan that had been awaiting approval for seven months was finally approved two months earlier than originally anticipated. “The loan was underwritten quickly,” adds Pollard. The original mortgage had an interest rate of 6.0 percent. The new HUD loan has a rate of 3.5 percent, plus one-half a percent for mortgage insurance. The term was extended from 20 years to 35 years.
“The new loan substantially reduced the owner’s debt service,” says Pollard.