For over a decade, interest rates hovered at all-time historic lows, and refinancings were ripe for the picking. Mortgage loan programs from the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) allowed borrowers across the nation to enjoy successful refinancings, sometimes twice on the same property, while reaping the many benefits of low-cost permanent financings, including low rates, long terms, reasonable payments, and cash-out proceeds to reinvest in the property.
Unfortunately, those days are gone. That does not, however, mean that prosperity is no longer attainable. Those who have been watching the market for longer than the past dozen years understand that valleys inevitably follow peaks, and that the decade-plus of all-time low rates was more of an anomaly than it was business as usual. Those who joined the industry more recently, however, may be a bit shell-shocked, and understandably so. Yet despite the challenging conditions we face, plans persevere, strategies are sustained, and business goes on. Below, we profile successful transactions where seniors housing owner/operators were able to navigate the difficulties of today’s market and find financing success, while simultaneously improving the quality of housing and care for their residents.
One of the more popular financing strategies over the past few years has been to use a bridge loan to acquire a community, thereby providing time and flexibility as the borrower works with their lender to prepare for permanent financing, typically via HUD/FHA, Fannie Mae, or Freddie Mac.
In one example, Lument closed bridge loans totaling more than $78 million to facilitate the acquisition and refinancing of four memory care facilities totaling 311 beds in Texas and Wisconsin. The deal’s sponsor was Silverado, a large and experienced operator of dedicated memory care centers and number 77 in this year’s Largest Provider’s Report. It owns and operates communities throughout California, Kansas, Nevada, Maryland, Texas, Illinois, Virginia, Washington, and Wisconsin.
“I enjoyed working with Silverado to provide funding to fulfill their acquisition and refinancing goals,” said Lument’s Doug Harper, who led the transaction along with Lument’s Casey Moore. “Our financing allowed them to acquire the Barton Springs community, which they had been managing, and to replace high-rate mezzanine debt.”
The four loans were underwritten with a 36-month initial term and one-year extension, with earn-outs for each loan and variable interest rates. The deal also positioned Silverado for permanent financing through HUD/FHA following the bridge loans.
“This added capital is very important to fueling future Silverado growth and development,” said Loren Shook, president and CEO of Silverado.
The total acquisition loan amount, including initial principal and earn out, was $18.6 million to acquire Barton Springs, a 56-bed facility in Austin, Texas. The three refinanced loan amounts for initial principal and earn-out include $21.1 million for Hermann Park, an 80-bed facility in Houston, Texas; $22.5 million for North Shore, an 84-bed facility in Glendale, Wisconsin; and $15.7 million for Southlake, a 91-bed facility in Southlake, Texas.
Refinance When the Time is Right
There are times when a refinance is still the best course of action for a borrower, even if interest rates have risen. It is important to remember that long-term rates are still on the low-end by historic standards, and as such, refinancing remains a prudent strategy in many cases. In one recent example, Lument arranged the closing of a $21.6 million Fannie Mae loan to refinance Eaglecrest Retirement Community, a 102-unit independent and assisted living community in Salina, Kansas.
“We were pleased to secure a loan that provided ample benefits, including refinancing with no prepayment penalty outside of standard yield maintenance, as well as significant earn-out proceeds,” said Lument’s Bill Wilson, who led the transaction.
Jim Klausman, president and CEO of Midwest Health, Inc., which manages Eaglecrest, agreed. “Eaglecrest continues to be a tremendously successful community and our partners at Lument recognized that,” said Klausman. “After reviewing the financial strength of the property, Lument’s team offered us a competitive agreement that made sense for both of us.”
In another example, Lument closed a $31.6 million Freddie Mac loan to refinance Keystone Place at Legacy Ridge, a 160-unit independent and assisted living community in Westminster, Colorado. The Freddie Mac loan features a ten-year term, five years of interest-only payments, 30-year amortization, and a low fixed-interest rate. The loan refinanced two existing Freddie Mac loans totaling $28.2 million and provided almost $3 million in cash-out proceeds.
“Lument’s focus and can-do attitude made a substantial difference for us,” said Brenda Armstrong, Keystone’s general counsel. During the loan process, the community enjoyed a substantial improvement in net operational income, as occupancy rates rose and rent collections increased. Lument subsequently adjusted its underwriting and successfully secured an increase in loan proceeds.
Lument also helped Keystone take advantage of Freddie Mac’s index lock functionality to lock the interest rate more than three months prior to closing, ultimately saving 100 basis points and generating substantial debt service savings. “The loan closed on the first day possible without prepayment penalties, and the final loan proceeds well exceeded our target. We could not be more pleased with the outcome,” Armstrong added. As owner/operators navigate today’s difficult market conditions in what is already a challenging sector, it is important to keep in mind that the current economic distress is not about asset deterioration or a faltering industry. In fact, the senior living sector remains a favorable one in the eyes of investors, as the generation of boomers reaching retirement age is large, well-funded, and will need housing and care services in some fashion in the decades to come. As such, financing plans should continue given the right circumstances, as planning for a bright future begins today.
This article originally appeared in Argentum’s 2023 Largest Providers Report.