Fannie Mae and Freddie Mac saw big declines in their seniors housing volume in 2010, but spurred by improving fundamentals in the sector, both GSEs have grown more flexible to help drive volume this year.
Fannie and Freddie are pricing standard 10-year seniors housing mortgages in the high-4 percent, low-5 percent range, as of mid-November. Loans backed through the Federal Housing Administration’s (FHA) Sec. 232 program are even lower, featuring rates in the low-4 percent range.
In September, Freddie Mac made some changes to its seniors program, which fell 26.5 percent in volume last year, to $661 million. The company broke from its regional model—where lenders could only do deals in specific states—and approved a dozen lenders to originate seniors housing loans anywhere in the nation.
Lenders say that the regional distinction proved to be a nuisance. Any time they wanted to follow a borrower to another borrower’s turf, they’d have to get a waiver to do so. “Because it’s such a specialized product, to have people focus on just a regional basis was not very efficient,” says Todd Goulet, senior vice president at Cleveland-based KeyCorp Real Estate Capital. “A seniors owner tends to be more national.”
Bending the Guidelines
One of the complaints leveled against the GSEs is that their underwriting standards can be too rigid. For instance, seniors housing borrowers need to own five assets to qualify for a loan, which in the past would shut out many good operators with smaller portfolios.
But agency lenders say that the GSEs are more interested in the quality of the borrower than the quantity of their portfolio. “They’re willing to look at specific opportunities that are less than five properties on a case-by-case basis,” says Doug Harper, director in the seniors housing and health care division of Columbus, Ohio-based Red Capital. “We have to make sure the borrower is experienced, that the sponsor is somebody that can weather any sudden downturns.”
For the right deal, occupancy standards are another area of potential flexibility. While Fannie Mae wants to see 90 percent occupancy over the past 12 months on an independent living facility, it’s not an absolute standard. Fannie—which saw a 36 percent decline in its seniors volume last year to $640 million—is willing to make exceptions to the rule.
“If everything lines up appropriately, they’d be willing to go below 90 percent for the right opportunity,” Harper says.
But there are trade-offs to consider when deciding which agency is the best fit for your deal. The FHA doesn’t have that five-asset rule, but it focuses on needs-based housing and isn’t a player in the independent living space. The GSEs, on the other hand, focus on independent living, and generally won’t do a deal that has more than 20 percent of its net operating income coming from skilled housing.
While borrowers can achieve up to 80 percent leverage through the FHA, the agency won’t do cash-out refinancings. The GSEs will do cash-out refis, but their leverage tops out at 75 percent. And timing is everything. It may take up to a year to close an FHA deal, while the GSEs, in contrast, can close in about 60 days.
Driving the willingness for flexibility is a boost in fundamentals that seems to have stabilized this year. After hitting a low of 87.1 percent occupancy in the first quarter of 2010, the seniors housing sector has incrementally bounced back, with occupancy now averaging about 88.1 percent, according to market-research firm National Investment Center (NIC). Still, that 100 basis point improvement is only a fifth of what the sector lost after hitting a high of 92 percent in early 2006.
But the positive absorption, however slow, has driven some rent growth. The independent living sector has seen year-over-year rent increases of 1.8 percent, while assisted living has registered gains of 1.1 percent, according to NIC.
The investment side has heated up as well. The seniors housing industry saw $28.6 billion in transactions from September 2010 to September 2011, with about $21.6 billion in activity in the second and third quarters of 2011 alone. “We certainly hope that momentum will be maintained,” Harper says. “In the big picture, the Baby Boomers are just starting to turn 65 this year, so long-term there’s a tremendous amount of opportunity. In the short-term, volatility is kind of the norm these days.”