Last week, a report from NIC (National Investment Conference) dropped covering the fourth quarter (2023) lending activity in senior living. As in prior quarters, capital access remains challenged.
Data for the report came from 17 lenders, including banks, commercial real estate services, financial services companies, government sources, investment management firms, and real estate investment trusts. The report is available here: NIC_Lender_Survey_Report_4Q23
Since 2022, capital access/lending markets have softened and demand for credit while strong, has not materialized in many closed loans due to higher interest costs.
Most of the lenders reported a continued focus on existing client relationships versus developing new credit clients. However, per the report, the fourth quarter saw a modest uptick in new applications and resulting approvals suggesting that the lenders continue to find some favor in senior living credit, albeit with reservations. What is evident is that higher rates have changed credit amounts/loan to borrower levels in order to meet debt service coverage criteria.
The fourth quarter of 2023 saw a decline in new permanent loans (70% reduction). This compares to a modest uptick in volume in the third quarter. Persistent higher rates and inflationary pressures (rising operating costs) continue to negatively impact lending and borrowing behavior. Nursing care loan volumes remain suppressed.
Mini-perm or bridge debt volumes increased slightly in the fourth quarter of 2023. Nursing care volume remained higher than senior living volume, though the level still was lower than pre-pandemic levels. Short-term debt options are fewer in number and more costly with more restrictions (lower amount to value, more equity contribution, repayment guarantees). Borrowers are having to adjust to the new reality of tighter conditions with higher rates, likely into 2025.
One of the positive impacts of tighter capital markets/credit access is constraint on new construction. With new construction lending and starts still well below pre-pandemic levels, existing projects have benefitted via stable demand converting to increased occupancy. Newer units are not providing a source of supply sufficient to fulfill existing demand. New starts remain at levels not seen since 2015. Nursing home starts remain effectively zero and while senior housing ticked up a tiny bit, the amount is negligible compared to pre-2019 levels.
A small bright spot in the report is the decline in senior housing delinquent loan balances – down by 13% from the previous quarter. Nursing care however, had a slight delinquency increase. Delinquencies as a share of total loans dipped to 4.1% compared to 4.4% in the prior quarter. Total foreclosures for the quarter were $17.2 million. Overall, delinquency rates remain significantly elevated compared to pre-pandemic levels. Despite increases in occupancy in the sector, higher costs and higher interest rates on floating debt for some organizations, become too much of a burden to service via operating cash flow.
Readers should recall that this “depressed” trend has existed for the past year and likely, will continue for periods to follow. In late 2023, Fitch (ratings agency) issued its outlook for the Life Plan sector calling conditions in the sector, deteriorating. Inflation remains “sticky” high leading no indication that the Federal Reserve will cut interest rates in any measurable, impactful amount, soon. Core commodity costs also remain high and increasing period to period along with labor cost increases and administrative costs (insurance). While the sector has seen some room on increased rates, the likelihood of being able to sustain above inflation rate increases for much longer is waning. Reimbursement via Medicare and Medicaid has not kept up with inflation increases, particularly for health care providers, where labor remains a significant challenge.
The NET? Current capital access conditions will remain as is for likely, the balance of 2024 and into 2025.