Independent/Assisted Living Market

representative of the post-pandemic M&A market.

Nevertheless, the sector has maintained that consistency amid more volatile interest rate changes, global economic trends and, evidently, even during a pandemic that targets the elderly, frail and medically complex. During the Great Recession, the sector saw a moderate increase in cap rate, rising from 12.1% in 2007 to 12.9% in 2008 and peaking at 13.1% in 2010. Other real estate classes were not so lucky. In the years afterward, the consistently high yields that skilled nursing offered drew investors to the sector, helping compress the average cap rate to around 12.0%. Incredibly low interest rates and abundant capital also contributed to the cap rate compression, but not nearly as much as on the seniors housing side.

Then, the risk of owning and operating a skilled nursing facility shot up as COVID-19 cases and deaths rose across the country, unfortunately all too often in the facilities themselves. And the average cap rate followed, increasing 50 basis points from 12.2% in 2019 to 12.7% in 2020 and then to 13.1% based on the trailing-12 months ended June 2021. The average cap rate reflects the SNFs sold during the year, but because non-market cap rates are not included in the average, 2020 deserves a little more explanation.

There were many struggling SNFs that sold in 2020 with negative trailing EBITDA, and thus negative cap rates not included in the average. Facilities with little positive cash flow that yield very small cap rates would also not be included in our calculations, since they were not “cap rate” deals but rather “per-bed” deals. This happens every year but has only exaggerated since the pandemic.

After the average price per unit for seniors housing communities (including independent living, assisted living and memory care) rose 20% from 2018 to an all-time peak of $244,200 per unit in 2019, the market readjusted, dropping the average price per

PARTNER WITH THE MARKET LEADER

Through up markets and down, Marcus & Millichap closes transactions. Our business model was designed to make a market and help our clients create and preserve wealth through a culture of interconnection and collaboration. This gives us unique insights, and our expertise helps our clients make better investing decisions.

$22.4B

TOTAL SALES VOLUME*

$4.5B

TOTAL FINANCING VOLUME

2,000+

AGENTS AND ORIGINATORS

3,918

TOTAL CLOSED TRANSACTIONS

1,178

TOTAL FINANCING TRANSACTIONS

80+

OFFICES IN NORTH AMERICA

Real Estate Investment Sales | Financing | Research | Advisory Services | MarcusMillichap.com NYSE: MMI

Source: *YTD June 2021, Internal Reports

sponsored content M&A and Bridge-to-HUD Lending Continues to Grow Despite COVID-19

Erik Howard – Executive Managing Director of Healthcare Finance | Capital Funding Group

As the industry continues to navigate the effects of COVID-19, it is important to understand current lending trends and options available to owners and operators of healthcare facilities.

COVID-19 had a major impact on the long-term care and senior housing sectors while also presenting significant opportunities, as many traditional lenders pulled back credit both generally, and specifically to the healthcare sector. In keeping with its philosophy of supporting its healthcare clients through thick and thin, and recognizing an opportunity to increase market share in the healthcare real estate lending space, the Capital Funding Group family of companies (“CFG”) forged ahead with its healthcare lending programs.

Capital Funding Group continues to lead the industry with its one-stop shop approach – providing a full suite of lending offerings, all under one roof. CFG takes an entrepreneurial approach to everything it does, creating new opportunities for growth and delivering creative lending solutions.

Executive Managing Director Erik Howard speaks to industry trends, innovations and how CFG helps its clients grow and makes a positive impact on the healthcare industry.

What are the latest trends you are seeing with senior housing and long-term care industry M&A transactions?

We continued to see significant M&A activity during 2020 and 2021, and we are expecting activity to ramp up further through next year. In particular, we will likely see a further increase in relatively smaller/independent operators selling as a result of the increased costs and uncertainty related to COVID, which has been a particular challenge to those companies.

Many long-term care facilities in particular, seemed as though they were not properly equipped to deal with the COVID-19 pandemic. What changes are you seeing within these facilities and what do you expect to be implemented?

We expect an increase in renovation/CapEx activity to improve marketability of facilities and reduce the risk of COVID, such as converting semi-private rooms to private rooms. Additionally, we expect operators to use enhanced technology to help to continue to improve efficiencies, while also making equipment upgrades, such as HVAC systems and state-of-art air filtration systems. The HUD Section 232 new construction/substantial renovation and Section 241 supplemental loan programs are a great way to accomplish these with no recourse and low rates.

As the number of lenders who support the healthcare industry declined due to COVID-19, how has CFG supported its clients through these unprecedented times?

CFG has supported its clients and community through a variety of means, including: • Offering payment deferments during the early months of COVID • Working with HUD in developing the HUD 223D COVID-relief loan, which allows up to 12 months of

HUD debt service to be financed and spread over the life of the loan to free up near-term cash flow • Working with borrowers who experienced challenges achieving financial covenant requirements as a result of COVID • Supporting the development of a first-of-its-kind program – the Jack and Nancy Dwyer Workforce

Development Program, whose mission is to help resolve the effects of systemic poverty and inequality and help resolve the turnover crisis and burnout due to staffing shortages in the healthcare industry by creating a pathway to advance career opportunities in the nursing profession.

What sets CFG apart from other healthcare lenders?

We are experts in healthcare lending and are an unparalleled one-stop shop for a variety of products for the healthcare/seniors housing industry, including but not limited to: HUD financing, short term conventional loans, working capital financing, non-bank finance & equity, and group purchasing discounts for facilities. We have a strong appetite for transactions involving value-add or ‘turn-around’ opportunities and provide creative financing structures for transactions with unique circumstances – finalizing them faster than other lenders. We are strong supporters of industry organizations such as AHCA/NCAL, NIC, and the individual state healthcare associations.

Our CEO Jack Dwyer is actively involved with our clients and in the communities we serve. His entrepreneurial spirit creates new opportunities for growth and creative lending solutions, and we are excited to continue growing and providing lending solutions that help our clients reach their goals – all while helping to improve the lives of others.

25+ Years of Healthcare Financing

With over $2 billion financed in the first half of 2021, Capital Funding Group is the one-stop shop for creative, customized financing solutions.

Creating Personal Connections That Deliver Results

Contact us today

CapFundInc.com 410-342-3155

JUNE 2021 Nationwide Facilities

$665.9MM

BRIDGE-TO-HUD LOAN

JUNE 2021 Skilled Nursing Facility in Indiana

$14.9MM

BRIDGE-TO-HUD LOAN

JULY 2021 2 Skilled Nursing Facilities in Kentucky and California

$40.35MM

BRIDGE-TO-HUD LOAN

CAPITAL FUNDING, LLC AND CAPITAL FINANCE, LLC ARE WHOLLY-OWNED SUBSIDIARIES OF CFG BANK.