Despite COVID, HUD Funding Remains Lifeline for Skilled Nursing Operators

Mostly positive news continues to make headlines when it comes the United States’ recovery from the COVID-19 pandemic, including that related to the conditions and census at skilled nursing facilities.

Like all facets of operations during the past 14 months, senior living was hit hard, including its lending environment involving U.S. Department of Housing and Urban Development (HUD) programs.

Two leaders in this space – Jeffrey Davis, Jeffrey Davis, Founder & CEO, Cambridge Realty Capital; and Jason Smeck, Director, Seniors Housing & Healthcare, Lument, said lenders remain several months away from getting anything close to normal. They laid out what could help them return there.


“The onset of the COVID-19 pandemic has created unprecedented impacts to the seniors housing and healthcare industry,” Smeck said. “In many ways, the FHA Section 232 program is ideally suited to create market stability in times of short-term disruption.

“To HUD’s credit, they have not made sweeping programmatic changes that would result in higher debt-service coverage ratios and lower loan-to-values. HUD leadership is taking a measured, thoughtful approach to their program and recognize the important role that they have in this industry.”

Davis said the lending community needs data points that give comfort to underwriters and lenders’ projections before things return to closer-to-normal conditions. He said there needs to be a period of six months where the virus and its variants are under control and the number of positive cases is falling.


“But as we move forward today, statements being made by the Centers for Disease Control (CDC) and masks policies still do not create the kind of environment lenders need to be aggressive in their lending,” Davis said.

Smeck said signals of a more “normal” loan environment include the elimination of COVID-related underwriting exhibits and protocols.

“We believe that the industry in many ways has turned a corner in the fight against COVID, but staying in that position will require continued diligence on the part of operators and continued acceptance of vaccinations,” he said. “We will continue to closely monitor property performance in our loan portfolio as well as new applicants.”

IRR Program Made a Difference

In the months prior to the pandemic, HUD had an Interest Rate Reduction (IRR) program that became very popular when the U.S. Federal Reserve Chairman Jerome Powell flooded the market with funds and the 10-year Treasuries hit 60 bps, Davis said.

“This program took off,” he said. “HUD lenders could reduce their interest rates with simple underwriting, and this was very helpful to the borrowers. The government started to fund operators, but you could not put that funding support into your pro forma. It was a one-time payment, a boost during tough times, it wasn’t reflective of ongoing revenue and didn’t help with refinancing. IRR loans are easier to do, but they are still with challenges.”

A Spike in HUD Applications

Smeck offered these data to define the past 12 months of lending that demonstrate activity pre-COVID and since the onset of the pandemic:

  • For all of FY 2019, ending Sept. 30, 2019, HUD received 347 applications.
  • For the period Oct. 1, 2020 to April 2, 2021, HUD received 298 applications.

Much of the current growth is due to volume (131 applications in past six months, 131 received in full FY 2020).

HUD is on track to issue approximately 29 percent more commitments in FY 2021 than in FY 2020 and 38 percent more than in FY 2019 (pre-pandemic).

Smeck said HUD has not made any loan adjustments to its program during the pandemic and it continues to operate with the same loan parameters as were in place pre-pandemic.

“However, from a process standpoint, HUD has added review steps that allow it to monitor financial performance, census, payor quality mix, COVID infections and infection control practices,” he said.

Letting Go of Government Support

Davis said the industry would benefit from eliminating the need for financial support from the government, “because having it is an indication that things are not okay. Operators need to be able to stand up on their own. Using 12-month trailing numbers to underwrite loans is the norm, but no one is doing that right now.”

Pre-Covid, traditional underwriting looked at the trailing 12 months for revenue and expenses.

“There is nothing to compare to what happened since Covid,” he said. “With Covid, a lot of volatility was introduced.”

Operators need a situation where families feel comfortable about entering the communities, Davis said.

“Families listened to the media and became very hands-on about the care that their loved ones were receiving,” he said. “It did not matter what the operator told them or how much effort they put into keeping the staff and residents happy. Revenue began to decrease and expenses (for supplies) started to go up. Things were difficult financially for operators for about two to four months in 2020 or longer.

“The vaccine is a game-changer, but we’re waiting to see if it has traction at home and elsewhere. Some SNF staff members simply do not want to take it. Some operators are trying, but most are still learning on how to mandate it. Properties that will do okay through all of this are those that have put extensive safety protocols in place with testing. You have to be able to convince staff and families that your communities are safe.”

Overcoming Challenging Circumstances

Smeck said that “under extremely challenging circumstances, operators have adjusted to our new world incredibly well, and we have seen dramatic reductions in infections in communities since vaccines started to roll out. We are very encouraged by what we have seen.

“However, even with infection numbers dropping, skilled nursing facilities still have faced lower admissions and reductions in quality mix. It will take time to rebuild census to pre-pandemic levels, and it will require some return to normalcy in society overall.

“We anticipate that census and quality mix challenges will remain through late summer to early fall. We believe that HUD will continue to monitor infection levels and impacts on census until those timeframes.”

Written by Paul Bergeron

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