Seniors Housing Business

JUL 2018

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

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30 www.seniorshousingbusiness.com Seniors Housing Business n July 2018 By Matt Valley As lenders in HUD's Lean program enter the homestretch of fiscal year 2018, all indications are that they are on pace to approach or pos- sibly even surpass last year's financing total of $3.4 billion. The healthcare mortgage insurance program serves as an important vehicle for borrowers seeking long-term, fixed-rate debt to refinance or acquire residential care facilities, including skilled nursing and assisted living properties. Michael Gehl, chief investment officer for North Bethesda, Maryland-based Housing & Healthcare Finance, anticipates a 10 percent increase in loan volume for the HUD Lean pro- gram as a whole in fiscal year 2018, which ends Sept. 30. His projection is based on the num- ber of deals that have already closed through the first half of this fiscal year, plus outstanding HUD commitments and applications received. "Digging into the numbers a little bit further, there are a number of portfolio transactions and transactions with large dollar amounts that have helped drive that overall loan volume," says Gehl, who expects Housing & Healthcare Finance to close about $300 million in loans through the HUD Lean program in fiscal 2018. Among the highlights in the data: • The average deal size of 232/223(f) loans — new loans to the HUD mortgage insurance pro- gram used to acquire or refinance skilled nurs- ing and assisted living facilities — was $12.3 million during the first half of fiscal year 2018, up from $10.5 million a year ago. That's a 17.5 percent increase in deal size, Gehl points out. • About two-thirds of the 153 initial endorse- ments made by HUD during the first half of fis- cal 2018 were for skilled nursing facilities. The rest were for either assisted living communities or some other form of residential care. • The amount of construction financing for new ground-up development and additions to existing facilities has risen slightly, but still only accounts for about 10 percent of annual deal volume in the HUD Lean program. Most HUD-insured loans are used to either refinance or acquire properties. "Those numbers don't surprise me. I think it' shaping up like a typical year," says Josh Rosen, senior vice president with Capital One Multifamily Finance, who leads the company's seniors housing and healthcare practice and is based in Chicago. "HUD has always been used much more for existing properties in the healthcare space, whether it be for refinancing or acquisitions. Development has always been way behind with regard to HUD and the borrower's level of interest," adds Rosen. Fly in the ointment One wild card this year has been the move- ment in interest rates. In late April, the yield on the 10-year Treasury note breached 3 percent for the first time since 2014 and stood at 2.9 percent as of June 25. That's up about 50 basis points from the start of the year. Because HUD financ- ing is inextricably linked to movements in the 10-year Treasury yield, the sudden increase was a wakeup call for borrowers, says Rosen. There was a one- to two-month span earlier this year when interest rates for HUD jumped 75 to 100 basis points, explains Rosen. "We haven't had an increase like that in several years." As a result of the rising 10-year yield, the interest rate on a HUD loan to refinance or acquire a well-stabilized property has climbed from approximately 3.5 percent to 4.25 percent. "There is no way to say for sure, but you could see a 5 percent rate by next year," says Rosen. Many borrowers who may have been on the fence about refinancing through the HUD Lean program are now motivated to act. Their mind- set is "let's get this done," says Rosen. Because it takes six months on average to close a HUD loan, a significant number of loans in the deal pipeline won't be completed until fiscal year 2019, according to Rosen. "I think if rates continue on the trajectory they are on now, you are going to see next year be a much bigger year for HUD than the past couple of years," says Rosen. Chris Fenton, principal on the seniors hous- ing team at Chicago-based PGIM Real Estate Finance, believes that borrowers are not so sen- sitive to the interest rate changes that it will affect their strategy. HUD Lenders Seek Repeat Performance n Finance An active bridge financing pipeline plus large portfolio deals keep hopes alive for total deal volume to reach $3.4 billion again in fiscal 2018. The HUD Lean mortgage insurance program is on pace this fiscal year to nearly match or even sur- pass the $3.4 billion of deal volume notched in fiscal year 2017. But that figure pales in comparison to fiscal year 2013, when the HUD Lean program closed 766 loans for a total of $5.82 billion. Many borrowers took advantage of extremely low interest rates early on that year to refinance their existing HUD loans, known as a 232/223(a)(7) loans. Annual Lending Volume Number of Loans Closed Source: HUD Office of Residential Care Facilities Ebb and Flow of HUD Lean Program $6 Billion $5 Billion $4 Billion $3 Billion $2 Billion $1 Billion $500 Million $0 Annual Lending Volume Number of Loans Closed 1,000 900 800 700 600 500 400 300 200 100 0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 $5.82 Billion $4.2 Billion $2.7 Billion $2.84 Billion $3.4 Billion 766 484 291 287 310

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