SNF Lending Competition Heats Up as ‘Core Group’ Returns After a Year on the Sidelines

While types of financing available to nursing homes have remained relatively consistent throughout the pandemic, the number of lenders has fluctuated, capital providers have said.

In recent months more competition has come back into the skilled nursing marketplace, VIUM Capital Senior Managing Director Tony Ruberg told Skilled Nursing News, with larger players ready to be active again after an inward focus on asset management in 2020 and early 2021.

“It’s back to the core group of competitors that we’ve seen for many years, those that have always had a health care specialty or a group that specializes specifically in the space,” Ruberg said.

Institutional funds linked to real estate investment trusts (REITs), private equity and family offices have come back into the health care space, Ruberg said, but clients tend to more frequently serve lower acuity residents in assisted living and independent living.

“SNFs are still a very complex operating business. I think it gets disguised as a real estate play sometimes, but in reality, it really comes back to the core operations on the ground,” Ruberg said. “It’s only getting more complex, not less so.”

While Columbus, Ohio-based VIUM was formed at the onset of the pandemic, its leaders have more than 60 years of collective experience in seniors housing and health care. Ruberg said the group took the opportunity to fill a funding void left by more established names taking a ‘wait and see’ approach.

VIUM closed on 25 transactions totaling more than $750 million in its first year, including bridge, FHA/HUD and tax-exempt bond financings. About 75% of Vium’s transactions are in the SNF space, Ruberg said.

Lenders wary of SNF acuity

Lenders are exercising more caution upon reentry, meaning potentially more business for established lenders like Capital Funding Group (CFG) and VIUM in the SNF space.

“We went in to support the sector the best way that we could and had record years both in 2020 and 2021,” said Erik Howard, executive managing director of business development and marketing for CFG.

CFG financed more than $3.8 billion in 2021, doubling the company’s 2020 annual financing goals. Financing included 70 bridge loans and 85 Department of Housing and Urban Development (HUD) loans, CFG said in a statement.

In 2021, CFG expanded its business and diversified its portfolio into the multifamily and seniors housing sectors, a “natural extension” of existing presence in the long-term care industry.

Bridge loans are among three main capital sources available to the industry: accounts receivable financing and permanent financing are the two other common sources of skilled nursing funding.

HUD loans are a subset of permanent financing – operators and owners seek this type of financing once their facilities are relatively stable, Howard said. HUD has continued to be a great partner to the industry over the past two years in a “very challenging” underwriting environment.

“If there were any notable changes in the lending dynamic and landscape over the last couple of years, one of those would be our real significant presence in that bridge space to fill the gap, with many lenders that either went away or just sat on the sidelines,” Howard said.

HUD loans, Ruberg added, have “embraced their role” in the capital markets and really leaned into the industry through COVID.

The dependability of such loans continues into 2022, with transactions like Walker & Dunlop’s $77 million refinance of two skilled nursing portfolios in Utah and California. The Cascades and Rollins-Nelson portfolios total 10 SNF properties with 848 units.

“Usually these bridge loans are expensive. Your interest rate cuts in half when you go to HUD which is cashflow savings for the owners that are having to pay people and do everything else to run the properties,” said Kevin Giusti, managing director for Bethesda, Md.-based Walker & Dunlop. “HUD did what it was supposed to do, being there in tougher times.”

Walker & Dunlop used HUD financing, a regional bank and a finance company to refinance the Cascades portfolio and worked with the Rollins-Nelson borrower to refinance an existing HUD loan.

‘Silver tsunami’ to replace PRF liquidity

The government’s response in 2020 and 2021 in support of nursing homes revealed to lenders the industry’s importance to the care continuum overall, Howard said, while reiterating what established lenders have known all along.

Financial support tied to the pandemic won’t last forever, though – Howard believes occupancy gains and the ‘silver tsunami’ that’s still coming will replace liquidity injections via Provider Relief Funds (PRF).

Lenders like VIUM have invested in leadership with deep connections to policymakers; such connections evolved from adding value to being a crucial part of decision making, with PRF carrying some operators through the worst parts of the pandemic.

The team brought on Scott Tittle last fall, former executive director of the National Center for Assisted Living (NCAL).

“Part of the reason we brought him on board was to just have a voice and an advocate for the industry,” Ruberg added. “I know some other folks out there who have made similar investments to try to have their finger on the pulse.”

Ruberg, who has been in banking for 20 years and focused on health care for seven years, said he hasn’t seen a more difficult underwriting landscape due to uncertainty surrounding pandemic relief in the SNF industry.

Operators that historically have had success in securing financing will continue to get funded, Ruberg added.

Pandemic ‘shock’ wears off, inexperienced lenders return

Lenders new to the health care space and nursing home industry have also returned in recent months at a lower leverage, after the initial shock of the pandemic sent them running back to industries with which they had a better understanding.

Leverage refers to loan proceeds – if a buyer trying to purchase a facility for $10 million only gets a loan for $6.5 million, or 65% of the purchase price while historically banks have provided a loan at $7.5 million, or 75% of the purchase price, that lender is utilizing lower leverage.

“There were some folks out there that maybe didn’t realize that when they first dipped their toe in the water. They thought it was just an extension of other types of commercial real estate, and it’s really much more of an operating business that happens to be secured by real estate,” Ruberg said.

The trend isn’t anything new to the skilled nursing space, according to CFG’s Howard.

Baltimore, Md.-based CFG has seen these shocks before, with similar reactions from inexperienced lenders. The lender has been working in the SNF space for more than 30 years.

“During those periods, if you go back to the financial crisis in 2010, you go back to even 9/11, you go back to 1997 when they changed the underlying reimbursement system for Medicare, what we find is that those lenders that may not know the space very well … when these types of shocks happen, they can move very quickly toward the door, toward the exit,” Howard said.

Howard has seen some of these lenders come back into the space in the last 12 to 18 months, but at a lower leverage, and are limiting their activity to a handful of industry borrowers. Banks that would normally lend 75% to 80% are now lending 60% to 65%.

“The capital, while appearing to be back to where it was even early or before the pandemic, I don’t think the resources are still there for borrowers the way they were prior to the pandemic,” said Howard, primarily referring to short-term financing like a bridge program.

Jeffrey Davis, chairman and CEO of Chicago-based Cambridge Realty Capital Companies, said private lenders come to mind when picturing new capital sources rushing the SNF space.

“I think the private lenders have given the banks that run for their money at this point, but the banks are still a good source of capital for some of these deals,” Davis said. “[Private lenders are] more flexible than any of the agencies are, especially when it comes to skilled nursing facilities and to a lesser extent, senior housing. They primarily do existing refinances.”