Seniors Housing Business

AUG-SEP 2015

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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Page 55 of 87

By Matt Valley Borrowers in need of fnancing to close quickly on the purchase or recapitalization of a skilled nursing or assisted living facility will often opt for a bridge loan as a short-term solu- tion that precedes the ultimate end game — take-out fnancing through HUD. In today's borrower-friendly market, qualifed lenders are increasingly competing for their business. Because it generally takes at least six months to close a 30- to 35-year, fully amortizing HUD- insured loan, the bridge-to-HUD option is an invaluable tool for buyers who need loan pro- ceeds sooner rather than later, says Michael Gehl, chief investment offcer of Housing & Healthcare Finance (HHC) based in Chevy Chase, Md. "If you are dealing with an acquisition, that time frame of six months or more creates uncer- tainty, which is sometimes unacceptable to the seller," says Gehl, particularly when many sell- ers want to close a transaction in 60 to 90 days. Beyond timeliness, another reason a bor- rower may pursue bridge fnancing is that HUD doesn't underwrite loans based on pro forma, but a bridge lender may do so in certain instances, says Gehl. In the skilled nursing sector, for example, buyers are often acquiring properties with the intent of improving their performance opera- tionally. If the borrower has a proven track record of turning around other properties in the region by bringing expenses in line with the rest of the market, then the bridge lender may give some credit to that business acumen. "That difference in cash fow can mean all the difference in the amount of proceeds the bor- rower needs to close on a transaction," says Gehl. M&A momentum A confuence of factors has led to an uptick in bridge-to-HUD lending activity over the last 12 to 18 months at Capital Funding LLC, accord- ing to Erik Howard, managing director of real estate fnance for the Baltimore-based frm. For starters, M&A activity during the past few years has been robust, totaling tens of bil- lions of dollars. Real Capital Analytics reports that U.S. property and portfolio sales in the seniors housing sector totaled $14.48 billion year to date through August, up 32 percent from the same period a year ago. "We expect to continue to see industry consolidation going forward for a number of reasons, including ongoing challenges in dealing with Medicare [reimbursement] for traditional, smaller operators, plus economies of scale," points out Howard. "We think that the industry continues to be a prime candidate for M&A activity." It's also a good time to be a seller with prices rising and cap rates falling, notes Howard. According to Irving Levin Associates, the skilled nursing market set a record for the second year in a row in 2014, reaching an average price of $76,500 per bed, or 4 percent higher than in 2013. The average cap rate in the skilled nursing market fell 60 basis points to 12.4 percent but did not set a record, which was last set in 2007. The year-over-year change was even more dramatic in the assisted living market where the average cap rate dropped to a record low of 7.75 percent in 2014, reports Irving Levin Associates. The average price per unit in the assisted living market soared by 25 percent in 2014 to a record $188,700 per unit. "The demand for product remains high, in particular with the publicly traded REITs as well as some private REITs. So, you've got tremendous demand and low cap rates putting sell- ers in a good position," says Howard. In 2014, Capital Funding provided about $350 million in bridge loans and $300 million in HUD loans, includ- ing loan modifcations, according to Howard. "We're doing higher-leveraged deals and more creative deals in conjunc- tion with an active market that's really fueled our growth over the last 24 months," adds Howard. At HHC, bridge-to-HUD loans represent about 10 percent of the $748.8 million in lending volume the frm gen- erated in fscal 2014 through the HUD Lean mortgage insurance program, says Gehl. "It's defnitely an area for us to grow, and it's part of our business plan. We need to be more active in the space, and it does feed the HUD business," emphasizes Gehl. The challenging part for fnance companies is lining up capital. Because they are not banks, they rely on outside capital such as warehouse lines to fnance their loans. HHC has been successful in attaining this type of capital to provide a bridge product to its clients. Deal size, terms vary The sweet spot for Capital Funding when it comes to bridge loans is $5 million to $20 million, but the deals can run the gamut from $3 million on the low end to greater than $50 million on the high end. In April, Capital Funding provided a $13.9 million bridge-to-HUD acquisition loan to a large California-based private invest- ment group for Braswell's Colonial Care, a skilled nursing facility in Redlands, Calif. At 243 beds, Braswell's Colonial Care is one of the largest skilled nursing facilities in the state. Braswell's Colonial Care offers rehabilitation, memory care, assisted living, independent retirement, post-acute rehabilitation, skilled nurs- ing, long-term care and hospice care. Howard of Capital Funding originated the transaction and Capital Fund- ing served as the agent and co-lender in the transaction. The borrower is expected to go to HUD for the take-out fnancing within 18 months. Although the exact terms differ from one lender to the next, bridge fnancing is typically a three- to fve-year loan product that is LIBOR-based with a pre- scribed interest-only period, up to two years in the case of Capital Funding. While the interest rate is variable, in some cases foors are established to give borrowers comfort that their inter- est expenses won't reprice with day-to- day changes in the 30-day LIBOR rate. (The 30-day LIBOR was 20 basis points as of Sept. 4.) Here's how a lending foor works: Suppose the all-in rate to the borrower is 30-day LIBOR plus 300 basis points, but there is a LIBOR foor of 100 basis points. That means LIBOR can never be less than 100 basis points. The foor of 100 basis points, plus the 300 basis point margin results in an interest rate of 400 basis points, or 4 percent. That rate will remain fxed at 4 percent, so long as LIBOR stays below 100 basis points. "You'd have to have a signifcant move in LIBOR to be able to make that rate actually foat," says Howard. 56 Seniors Housing Business n August-September 2015 n Finance A bridge well-traveled As an intermediate step to securing permanent fnancing through HUD, many owners and operators opt for bridge loans "We expect to continue to see industry consolidation going forward...," says Erik Howard, managing director of real estate fnance, Capital Funding LLC. "If you are dealing with an acquisition, that time frame of six months or more creates uncertainty, which is sometimes unacceptable to the seller," says Michael Gehl, chief investment ofcer, Housing & Healthcare Finance. Continues on page 58

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