The big are getting bigger in the seniors housing space, and it’s forcing the government-sponsored enterprises (GSEs) to re-think their approach to the sector.

When healthcare REIT Ventas closed on its $3.1 billion acquisition of Atria Senior Living Group last month, it created the largest owner of seniors housing in the nation, at more than 1,300 assets. In February, Ventas also announced that it would acquire Nationwide Health Properties in an all-stock deal worth about $5.8 billion.

These are just the latest in a series of seniors housing mergers and acquisitions, including last year’s $6.1 billion acquisition of HCR ManorCare by HCP, and this year’s $2.4 billion acquisition of Genesis HealthCare by Health Care REIT.

“It looks like we’re heading toward just one,” joked Ken Bowen, president of Columbus, Ohio-based lender Red Mortgage Capital. “The REITs have the capital, they’ve got access again to the unsecured financing market and the corporate bonds, so they’re taking advantage of their favored financial position in the capital markets to grow.”

Red Capital helped facilitate the Ventas/Atria deal by processing assumption requests on more than $600 million in Fannie Mae financing it had closed for Atria. “It’s unusual the high volume of assumption requests lately,” Bowen says. “It’s just part of this consolidation trend.”

Red, historically a Fannie Mae and FHA lender, has a group that focuses on seniors housing. Last month, Red received a Freddie Mac license to round out its agency offerings. And unlike Freddie Mac's conventional business, where lenders are designated specific geographic areas, the company's senior housing lenders are free to originate deals anywhere throughout the nation.

GSE Changes Imminent
The problem for the GSEs is that many large seniors borrowers don’t need them right now—they’re able to access the private unsecured debt markets. Yet it’s those same large experienced borrowers that the GSEs target through their sometimes-rigid program requirements.

For instance, one requirement of the GSEs’ senior housing programs is that the borrower must have five other similar assets to qualify. Fannie Mae holds the line pretty tightly on this requirement—if you only owned two or three other assets, you’re out of luck. 

“It’s a limited pool—to qualify, you’re talking about some of the big public companies, but those companies have their financings almost entirely in place for the foreseeable future,” says Don King, who leads GSE production for Boston-based agency lender CWCapital. “If Fannie and Freddie want volume, they’re going to have to open up the credit box a little bit. And they’re thinking about it—the box in the Fannie Freddie seniors world is in the process of changing.”

King doesn’t expect any sweeping changes but believes that the GSEs need to take a more common-sense approach. For instance, a couple of years ago, CWCapital was trying to get a low-leverage (less than 50 percent LTV) seniors housing loan done through the GSEs. It was the only facility owned by the operator, but they had owned it for 30 years, a long and strong track record. The GSEs just said no. “There are good deals out there owned by people that don’t own a whole bunch of them,” King says.

Other Sources
There are, however, other capital sources that aren’t quite as rigid. And as those sources grow more competitive, borrowers will have more options outside of the GSEs.

Bison Financial, a small brokerage in St. Petersburg, Fla., was recently trying to find a cash-out refinancing loan for an independent living seniors housing deal. Fannie and Freddie didn’t want it because the borrower didn’t own five other similar facilities. The FHA didn’t want it because the agency doesn’t allow cash-out refis in its Sec. 232 programs.

So Bison found a home for the loan on the conduit market, scoring a CMBS loan of 5.5 percent fixed for 10 years, non-recourse, with a 25-year amortization. And the borrower was able to take some cash out.

“With CMBS, you don’t have these absolutes, this idea that something’s either black or white,” says David Repka, a principal at Bison Financial. “With CMBS you can structure around things and have some degree of flexibility in putting together transactions.”