To get a sense of what is going on in the capital markets in this immediate post-COVID-19 world, we turned to Alec Blanc of Monarch Advisors for his own thoughts.
How has the lending environment changed from the beginning of the second quarter to now?
Overall, there is less debt capital available than there was prior to the COVID-19 crisis. Many lenders have paused any lending activity in the sector. Notably, most of the mortgage bank bridge lending programs are on hold right now. Most of the remaining lenders have tightened their criteria for new client acquisition, leverage, and underwriting. We are also seeing some widening of credit spreads, probably in the neighborhood of 50 to 75 basis points. And some lenders, especially the major permanent lenders – HUD, Fannie Mae and Freddie Mac – are requiring debt service reserves of nine-18 months in most cases.
We’ve heard that local and regional banks have been some of the more active lenders during this period. Have any other sources returned to the scene?
It’s generally been my experience that the local and regional lenders are the most active, either directly or through government backed programs like SBA or USDA. A few finance companies, debt funds and mezz/unitranche lenders are also willing to offer quotes for the right situations.
What do you think it will take for remaining lenders to come back to this sector?
Great question! It is still a complicated situation, but my view is that uncertainty, primarily regarding valuation and, to a lesser extent, cost of capital at certain lenders is what drove most capital out of the market. Therefore, to bring the capital back, that uncertainty needs to decline. I think that will primarily happen through growth in deal volume. More deals create more data points so lenders can have more confidence in the market.
For the loans that have closed post-COVID-19, how long of a period have lenders underwritten for until seniors housing operations return to normal? What about skilled nursing?
Difficult to say because we really haven’t seen enough volume yet. If we take HUD and the GSEs as indicative, the way they are structuring their reserve requirements suggests the window is at least a year. I think that applies to both senior housing and skilled nursing.
How have terms changed for properties that are not stabilized, either because they are new, underwent a recent renovation/expansion, or have seen a recent dramatic decline in census and cash flow?
Again, I don’t think there is enough data to provide a reliable answer. Because of the uncertainty around lease up in the COVID environment, these are some of the most difficult requests right now.
If a building has not yet had any COVID cases, does that make it a much more likely property to finance?
Yes, all other things being equal. Regarding COVID, the level of impact in a geographic market and an operator’s ability to effectively articulate their COVID and infection control policies and management practices are also significantly important.
How about if they did, but are now COVID free?
Hard to say. If there is an advantage it would be much smaller than the previous situation.
For the acquisition financing market, do you see lenders playing a part in seniors housing and care values decreasing and cap rates rising?
Yes and no. Obviously, it is buyers that generally drive valuation. However, the constrained debt market also means fewer buyers and therefore lower prices and higher cap rates.
Are secondary markets, which are less populated, more attractive to lenders now than the major top 30 markets?
I have not seen this kind of impact. Other factors like demographics and lender familiarity still drive geographic preference more than population density.