Seniors Housing Business

FEB-MAR 2018

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

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Capital Corner 12 www.seniorshousingbusiness.com Seniors Housing Business n February-March 2018 in Healthcare Lending The expertise and products to meet your needs: • Tax-exempt Bond financing • Working capital lines of credit • Bridge-to-HUD lending • Taxable term loans • Construction loans • Equipment leases • A/R lines of credit Kim McMahon Mike Taylor Head of Healthcare Lending Michael Mason Diana Poole Donald Woods Gerri Ann Bagdonas Rachel Nelson Ken Sinha Get connected. Learn more at FirstMidwest.com/commhealthcare Lender Moves Cautiously on Development in Texas Why KeyBank's John Randolph is more bullish on financing existing product. By Taylor Williams Besides offering a business- friendly regulatory environment and ample land for development, Texas enjoys torrid job and popu- lation growth. That combina- tion gives the Lone Star State the demographic appeal that virtually all developers covet. Development of product in the Texas seniors housing space — where the relationship between developer and operator is as close as that between the hammer and nail — has been a beneficiary of these circumstances. "Overall, the general health and stability of the Texas economy is driving a growing interest from the seniors housing market," says John Randolph, who serves as vice president of Cleveland-based KeyBank's healthcare group. "This holds particularly true in terms of population growth, median income and household values." Seniors Housing Business asked Randolph to elaborate on the fac- tors that are shaping the debt and equity market for seniors housing product in Texas. What follows are his edited responses: Seniors Housing Business: There are concerns that the Dallas mar- ket is moving toward being over- built. What is KeyBank's current strategy as far as development financing in this market is con- cerned, and how does it match up against operating strategies for other major Texas markets? Randolph: There's a significant amount of activity occurring in Dallas. According to recent NIC Map data, Dallas is the fourth- most active market for volume of new construction behind Chicago, Atlanta and New York. Houston comes in at No. 6 on that list. That means there are two major mar- kets in Texas where we're seeing a significant amount of activity on the construction side. When it comes to how we approach development financing in this market, we look for some form of uniqueness in the project and what competitive advantage that translates into. We underwrite the risks based on who the opera- tor is, their background and how well capitalized they are. SHB: Compared to 2017, do you expect your production of seniors housing loans to increase, decrease or remain the same in 2018? Randolph: Generally speaking, we anticipate our seniors housing loan production to increase rela- tive to 2017. We currently have a very robust pipeline, which is ahead of where we were this time last year. Due in large part to the strong demographics in the Texas market, we're seeing more capi- tal move into the space. Much of this activity stems from the efforts of investors and developers that want to get in front of the loom- ing increase in the number of Baby Boomers entering the market. SHB: Occupancy rates for skilled nursing facilities are at historic lows. How active is KeyBank in this space at present, and does the firm anticipate major changes in its loan pro- duction for this segment of the market in 2018? Randolph: There's certainly been an impact on occupancy rates as the skilled nursing market is generally experiencing a shorten- ing in the average length of stay. Additionally, and equally concern- ing, is the stress on project level net operating income (NOI), as some of these properties are fac- ing labor shortages and reimburse- ment pressures. From KeyBank's perspective, however, we're not typically pric- ing or structuring our deals any differently. However, there may be a change in loan terms from other capital providers that had previ- ously been more aggressive on proceeds and structure. Without question, the seniors space is an operator-driven busi- ness, so we spend a lot of time underwriting and understand- ing who the operator is, as well as the quality of care they provide and their reputation in the mar- ketplace. This allows us to better assess overall risk in any given opportunity and to be more rele- vant to our clients' needs. SHB: How have specific loan terms and structures for skilled nursing assets changed over the past few years? Randolph: For HUD in particu- lar, because its terms and under- writing requirements are fairly programmatic, there's a risk in over-advancing on a bridge loan. If a borrower's goal is to ulti- mately obtain permanent HUD financing, and there's a decline in NOI while a loan is being pro- cessed, then there may not be enough value to pay off the exist- ing bridge debt to complete the HUD execution. What we may see is advance rates on interim bridge financings coming back to more reasonable levels. n John Randolph KeyBank

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