Seniors housing and care M&A has slowed down considerably, which will not surprise anyone, and an abundance of caution on the buyers’ part has had a lot to do with that. But perhaps more so has been the reaction of the lenders, many of whom have taken a wait-and-see approach before lending millions to support acquisitions, new developments and even refinances.
However, deals are still getting done, with even a mini M&A boom at the end of March into early April, so a number of lenders had to have signed off on those deals fully aware of the economic and practical realities of the current crisis. So how have these lenders adapted to the current environment? Well, we asked three experts from Meridian Capital Group: Ari Adlerstein, Ari Dobkin and Josh Simpson.
1. Have you seen interest rates stabilize in the last two weeks? And do you expect them to move much in the next couple of months?
There has obviously been a lot of fluctuation in the market over the last few weeks. We can’t say that we’ve seen rates stabilize as the markets are still changing daily, but for the most part, we haven’t seen any dramatic increases. On average, we’ve seen an increase in spreads of 25 to 30 basis points compared to pre-COVID-19 pricing. No one can say for certain, but as the majority of our lenders are still active and the landscape remains competitive, we believe interest rates will remain relatively low.
2. What deals (if any) are banks going ahead with right now and why?
We’re keeping in constant contact with the various lenders we work with to understand their current appetite. For the most part, the prevailing response from banks is that they are proceeding with caution. We’ve found that several lenders who initially pressed the pause button to focus on asset management and devote resources to their existing portfolios are starting to resurface and are ready to look at new deals again. Clearly there are exceptions, but the majority of our core lenders are still in the game. One notable exception is cash-out refinancing; we are not seeing competition for these situations in the short term and are advising clients to be patient for 30 to 60 days to allow the market to more fully recover.
3. How have terms changed in the last month? From debt service reserve fund requirements to interest-only terms, etc.?
As previously mentioned, we are seeing a small increase in pricing in addition to lenders proposing lower leverage levels. But given that we still have options, the deals we are signing up look pretty similar to what we were signing up a few weeks ago. The exception is the agencies who have pulled back in the interim and are requiring a debt service reserve where they otherwise wouldn’t. We haven’t seen a real change in interest-only periods to date.
4. What does a borrower have to do / show to get bank financing right now?
As can be expected, banks are looking for strong borrowers with a proven track record and an ability to weather the storm (i.e., sufficient net worth and liquidity). Thus, banks are less likely to stretch for a newer operator or a deep turn around deal. Borrowers should expect to sign more personal recourse than what was previously customary for a given lender.
5. How has your due diligence process changed?
Our due diligence process hasn’t changed fundamentally. We always strive to work with teams that care more about relationships and reputation than a specific deal. So, if it’s challenging, but for a sponsor we have a track record with and that we believe in, we’ll work that much harder to make sure we figure out a solution. When the markets are good, we know we add value, and when the markets face challenges, like today, working alongside a trusted advisor is more valuable than ever.
6. For M&A, who are the buyers out there? And what sort of properties are they looking at? Senior living, skilled nursing? High quality / stabilized, or older / lower quality / turnaround opportunities?
We’ve found that most of the deals in our pipeline on the M&A side are proceeding, but slowly. With that said, we closed several deals just last week, including a SNF asset that was exposed to COVID-19, but both the buyer and lender got comfortable enough to proceed. The usual suspects are still looking at deals, but we see buyers that have historically been outside of our industry sitting on the sidelines for a bit before jumping into the fray. We believe this is true for both SNFs and in the private pay world. Also, core deals at very low cap rates are more likely to be on pause, but value-add deals, especially those at below replacement cost, are still very much sought after.
7. Does geography (distance from major metro areas / hotspots) matter more now?
Just as it relates to COVID-19 outbreaks in existing assets. The coasts have obviously been hit harder thus far, and so those deals are receiving more scrutiny. We have deals in middle America where management to-date has seen no impact from COVID-19, so those deals are easier to pursue.
8. How much have values been impacted already?
It’s too soon to tell. Most of the deals we closed last week were not impacted. However, two of the deals with confirmed cases were both awarded seller credits for the added risk. Buyers will certainly be cautious over the next few weeks.
9. What has been the hardest hurdle to clear to get deals done? Finding financing? Getting approvals?
If you hire Meridian, the financing isn’t an issue! But in all seriousness, it hasn’t been finding financing. There are things that are usually simple but given the restrictions of COVID-19 are tough, such as final site visits, third parties, title, etc., or census taking a hit.