During the worst of the pandemic, seniors housing and care providers were under intense stress as they did everything possible to keep residents and staff safe. As a result, refinancing or other capital projects were understandably an afterthought for many organizations throughout the past year. In situations where a provider wanted to pursue some type of financing, it was often an uphill battle, as financial institutions scaled back activity in the healthcare sector and waited to fully understand the fallout of the pandemic before issuing loans.

Fortunately, that dynamic has started to change, as the successful vaccine rollout largely eliminated COVID-19 outbreaks in senior living communities across the country. As a result, occupancy has started its rebound, providers’ fiscal outlooks are brightening, and lenders are loosening requirements. This return to normal, combined with a continued attractive interest rate environment, means many providers are now starting to rev up capital projects that had been idled, whether they be refinances of existing indebtedness, strategic acquisitions, or new construction. Below, we identify five best practices operators can follow to ensure they stay prepared to pursue their financing objectives in a post-pandemic environment.

1. Monitor Interest Rates

Understanding the current interest rate environment and whether rates are trending higher or lower provides important perspective when preparing for any financing. A low, yet rising interest rate environment could signal that locking in long-term financing promptly is advantageous. Tracking the U.S. 10-year Treasury is a good way to stay informed about rate trends. It is important to keep in mind that there is a spread component to most seniors housing and care interest rates, meaning there is typically a rate add-on to the base rate, such as the 10-year Treasury which can move higher or lower independent of the base rate’s movement. As such, the 10-year Treasury is a common benchmark for answering the question: “What are rates doing?”

Throughout the month of May 2021, the 10-year Treasury averaged 1.62%, trending down slightly in June to the 1.52% range by mid-month. Although that is well off the low of 0.52% on August 4, 2020, current rates remain very attractive from a historical perspective. The average 10-year Treasury rate for the past 10 years was 2.01%. The further you go back, the better current rates look, as the average for the last 20 years was 3.11%. In the early 1980s, by contrast, the 10-year treasury was over 15%.

Predicting the movement of interest rates can be a dangerous game, but the general market consensus is that interest rates will slowly grind higher in the years ahead. The market has already priced in half of a 25 basis point rate hike by the end of 2022, essentially allowing the Federal Open Market Committee (FOMC) to remain patient. Despite the gradual uptick, rates should remain appealing for the foreseeable future, although a “the sooner, the better” approach certainly has its merits.

2. Adjust Historical Financials

All seniors housing and care providers should analyze historical financials to examine the impact of COVID-19. Lenders will be interested in understanding normalized performance, so understanding the pandemic’s impact on both revenue and expenses is key. 

On the revenue side, direct impacts to income related to personal protective equipment (PPP) or grant revenue should be noted, as this revenue is generally going to be excluded from underwriting for financing purposes. Depending on the lender and loan program, most direct COVID-19 expenses can be removed. However, some level of COVID-19 related expenses are expected to remain as part of “business as usual” operations, thus dividing expenses into those that are one-time in nature versus those that are expected to be recurring moving forward is an extremely important step.  

3. Develop a Supportable Forward-Looking Proforma

Developing an all-encompassing, forwarding-looking proforma is a crucial step when preparing for a financing. A proforma is essentially a budget that predicts future financial performance, and considering the substantial amount of noise embedded in 2020 financials, doing so in an accurate, detailed, and supportable manner has become increasingly important.

The supporting justification for improvement to both revenues and expenses is perhaps the most important part of developing an accurate proforma. The most common examples of justifications include comparisons to performance prior to 2020 and the use of annualized recent performance. Other justification examples include facility-specific indicators, such as tour statistics, deposits-on-hand for senior living, and hospital discharge data for skilled nursing facilities.  

4. Encourage Vaccination

Seniors housing and care borrowers should expect to be asked by lenders about vaccination statistics for both residents and staff. High vaccination rates (above 90% for residents and above 50% for staff) will provide lenders comfort that a serious COVID-19 outbreak is unlikely, which could result in better loan terms. As such, providing vaccination incentives to staff in the way of bonuses or merit increases could be well worth the short-term cost. 

5. Adjust Timing and Underwriting Expectations

Borrowers should expect extended financing timelines in the near term. The degree of the extension will depend on the source of capital, but at a minimum there will likely be a more exhaustive “Q&A” process as lenders assess the pandemic’s impact on the subject facility. In addition, many of the agencies and government lending programs have implemented COVID committees, meaning there is an extra review step added to the underwriting process. 

If the subject facility has experienced a material decline in financial performance (on an adjusted basis), borrowers should adjust expectations for loan underwriting metrics. In addition, if the facility is still recovering from the impact of the pandemic, as many facilities are, lower loan-to-values and higher debt service coverage requirements could be in the cards.

When preparing for financing in this post-COVID environment, a good place to start is with a thoughtful consideration of the five elements above. With thorough preparation informed by lessons learned from COVID, coupled with a keen understanding of current market conditions, providers can position their organizations to take advantage of current rates and ensure their next financing is a successful one.