Banks and other lenders will play a deciding role in when the senior care M&A and construction markets return to some sort of “normal.” Transaction activity was quite strong in the fourth quarter of 2020, particularly in December, but will we see that continue into 2021? And investors may have to change how they arrange their capital stacks. We asked Bluma Broner of CIBC Bank USA for her thoughts on lending in 2020 and how her team adapted to the unique crisis facing the industry.
Was your breakdown between acquisition loans, construction loans and refinancings similar to previous years? If not, what changed? And if you know, why?
Between March and December 2020, CIBC closed 45 different transactions, representing a 9% increase in commitments over the same period in the prior year.
About 10% of our new transactions were construction loans.
How have your terms, covenants, rates changed since the pandemic? And is that the same across SNFs and ALFs?
We have always had a consistent model of underwriting and, as such, our covenants have not really changed across the spectrum. The only exception to this is the impact of stimulus funds on the borrower’s financials.
What had been the primary obstacle to agreeing to go ahead on a loan in 2020? Too high leverage? Recent hit to cash flow?
The hardest part has been getting comfortable with the projections and this falls into two camps – expenses and occupancy.
There remains a lot of uncertainty around pandemic-related expenses. We need to dig in and understand the various expenses, whether costs have returned to historical run rates or are still elevated and, if they are, when the borrower expects to return to more normal levels.
Additionally, every operator has had a hit to occupancy. Then the question becomes: how long will it take to return to historical levels or maximum capacity? When we think the projections are too rosy, we try to understand what is happening in the client’s portfolio and their marketplace as a whole. Sometimes this leads to questions on how our clients will adjust if projections don’t pan out. Other times, after doing this analysis, we come to the conclusion that the amount of debt being requested is too high for our comfort, and that is the primary obstacle.
Have you worked with any new clients since the pandemic? If so, how was that experience different than working with previous clients?
Of the new transactions closed, 20% were with new clients to the bank, which I think speaks to our reputation as a lender dedicated to this space. We value transparency and open communication both ways, and pride ourselves on ensuring there are no surprises to the borrower prior to closing. We have worked very hard to leverage virtual meeting tools so that we can build relationships and have good conversations without having to visit in person. That said, we’re all looking forward to the day when we can get back to meeting in person and shaking hands to celebrate a new financing.
What about loans already on your book? How has it been managing those?
We have always dedicated ourselves to building close and long-term relationships. In that vein, we have maintained constant contact with our clients. This has helped the communication flow be consistent and, as such, we have avoided any surprises. We have had numerous conversations with our clients on what is happening and their strategies for the future and the steps needed to get there.
Which sector do you expect to return to some sort of “normal” first? SNFs or ALFs?
Since SNFs are prioritized in the vaccine rollout, I expect them to return to some semblance of normalcy first. However, I still think we are a long way off and I don’t expect that until the second half of 2021 or later.
What does a second round of stimulus mean for owners and operators? Does that change your lending approach?
A second round of stimulus will allow our clients more time and peace of mind to weather the continued ravages of this pandemic. As we have mentioned previously, expenses are still high and it will take some time for occupancy to rise to historic levels.
