Fannie Mae financed its largest seniors housing deal of the year—and third-largest in its history—with a $512.9 million credit facility for Senior Housing Properties Trust.
The deal is one of the largest MBS transactions of the year and represents a growing trend of large credit facilities going through an MBS execution. Fannie Mae also closed a $420 million MBS credit facility for Camden Property Trust on August 20.
Citi originated the deal for Senior Housing Properties Trust and said the transaction illustrated both Fannie’s push into securitization, as well its own balance-sheet strength. “We had to fund the $513 million ourselves, off of our balance sheet, and then we delivered it to Fannie Mae,” says Steven Fayne, a managing director for New York-based Citi. “There are very few lenders in the United States that could do that right now.”
The deal had a blended interest rate of about 6.6 percent and was composed of around $308 million in fixed-rate debt, and roughly $205 million of variable-rate debt, which had an embedded interest rate cap at 9 percent.
Fannie, Freddie Battle It Out
The transaction—for a portfolio of 27 assets spread across 16 states—more than doubled Fannie Mae’s seniors housing production for the year, to about $820 million.
That’s welcome news for the government-sponsored enterprise (GSE), especially since it had lost some market share to Freddie Mac over the past year. This was due in part to Freddie Mac's hiring last year of a new director of seniors housing, Steve Schmidt, who helped the GSE re-engage the market with aggressive pricing and underwriting. Fannie was slow to respond, and several agency lenders have said Fannie took its eye off the ball in 2008. Even up to the second quarter of 2009, borrowers were finding more success with Freddie, say the lenders, who asked to remain anonymous.
Still, Fannie Mae’s underwriting on seniors housing deals has remained fairly steady. The maximum loan-to-value (LTV) remains 75 percent, though the company has instituted underwriting floors this year, even on 10-year deals, just as it has on the conventional multifamily side. The agency is also somewhat choosy in the seniors housing space. “They only want large, proven operators, so they’re very risk-averse to this asset class,” Fayne says.
While the seniors housing sector is somewhat recession-resistant, it isn’t recession-proof—occupancies are down across the country this year. But certain factors inherent in seniors housing serve as a good hedge against downturns.
For instance, there is much less turnover than in conventional apartment communities. The average length of stay for independent living communities is 33.8 months, and 18 months for Alzheimer’s care units, according to the American Seniors Housing Association. So seniors housing operators aren’t inclined to buy higher occupancy levels by lowering rents.
“The length of stay is so long that if you give financial concessions in a big way, you don’t recover them quickly when the market gets better,” says Susanne Hiegel, vice president of structured customer management focused on seniors housing for Washington, D.C.-based Fannie Mae. “Seniors housing is more likely to let occupancy go down some if they can preserve rates.”
While employment and household formation drive the multifamily industry, the seniors housing space hinges more on the health of the single-family market. And as single-family begins to crawl out of its malaise, the fortunes of seniors housing operators are rising. “What we’ve seen through the second quarter is a nice rebound in occupancies,” says Chris Honn, director of Fannie Mae’s senior housing group. “But even as occupancies were drifting downward the past few quarters, collections have been increasing because rents have been increasing.”
While new construction activity has dropped off, Fannie Mae has seen many seniors housing operators add more units, especially Memory Care or Alzheimer’s units. “A number of operators are finding an increased demand at that end of the acuity spectrum, adding specialized wings,” Hiegel says. “A lot of operators are just building them with equity and then taking advantage of our supplemental loan product.”
All in all, the sector has been quiet this year. While Fannie Mae is seeing a lot of loan requests, few are making it to the finish line. “As other financing sources have dried up, we’re seeing a very heavy stream of deals, but we’re just not finding the volume of quality business that we have in previous years,” Hiegel says.