Senior housing, health-care funding outlook improves.

Forget all that talk about tight credit in the seniorhousing/health-careindustry. Following still another unexpected directional change, the scenario for borrowers has improved measurably in recent weeks, reports Cambridge Realty Capital Ltd., a Chicago-based merchant banking firm, in its annual forecast and 1998 recap for the senior housing/health-care industry.

Cambridge is one of the nation's leading senior housing and health-care lenders. Since 1992, the company has provided more than $600 million in HUD and conventional loans for 140 separate senior housing and health-care facilities.

In the three-month period between Labor Day and December 1, the company closed $45 million in loans for 16 separate nursing home facilities totaling 2,844 beds. Year-to-date closings topped $110 million in 36 separate transactions.

The year began with an exceptionally rosy outlook for health-care lending, but this changed dramatically in mid-August, as health-care REIT stock prices plummeted with the stock market correction and real estate mortgage investment conduits (REMICs), pension funds, insurance companies and other capital sources were negatively impacted by a widening spread between AAA bonds and two-year Treasuries. The spread widened from 65 basis points in the second quarter of 1998 to 220 basis points in late October before reversing course in November, according to Jeffrey Davis, chairman of Cambridge. (A basis point is 1/100th of 1 percent).

"The industry hit an unanticipated speed bump during the months of August, September and October. Fortunately, we were able to able to weather the storm and participate in the most impressive post Labor Day surge in company history," he added.

Almost as quickly as it arrived, the liquidity crisis in the capital markets miraculously improved, as investors bullishly acted on their unsatiable appetite for common stocks.

Davis said there are four major lending programs that senior housing/health-care borrowers can consider. He provides the following outlook for each:

HUD Loans: The Department of Housing and Urban Development (HUD) has been the most active program for project financing in recent months. At one point in September, HUD rates dropped two full percentage points below conventional programs, with significantly better loan terms. The gap has narrowed substantially in recent weeks, but HUD remains a very good bet for borrowers who can consider this option, Davis believes.

"HUD exists to provide capital despite prevailing market conditions. The agency's basic lending tenets have not changed in 30 years," he observed.

HUD's Section 232 and 221 programs offer long-term loans for new construction, substantial renovation and refinancing with long-term (40-year) fixed rates. When the capital markets swooned in late summer and early fall, HUD rates remained an island of calm.

"If working within HUD's guidelines is a possibility, this option continues to make a lot of sense for many borrowers," Davis said.

Mortgage Conduits: Real estate mortgage investment conduits are a security instrument used to combine commercial real estate loans into larger mortgage pools for sale in the secondary market. In recent years, investors have been strongly attracted to the senior housing/health-care industry.

"Significant opportunities for conduits exist in senior housing/health-care," Davis said. "The markets need conduits, and senior housing/health-care conduit loans have performed well. The outlook for this funding vehicle is that they are clearly here to stay," Davis believes.

Although the availability of funds from this source is inexorably keyed to developments in the bond market, a number of conduit lending programs survived a rough ride in the August through October credit squeeze, and have recovered nicely since then.

"We're cautiously optimistic that REMICs will remain a viable funding option for health-care borrowers in the months ahead," Davis said.

REITs: Health-care REITs are primarily used for sale/leaseback financing, development financing and mortgage financing. There are a variety of financing options for each type of transaction.

During the stock market slump that began in August, REIT stock prices plunged 20 percent or more, and commitments that were not fully bound flew apart, as low REIT stock prices made it difficult to fund acquisitions. But this was a temporary aberration. By December, the outlook for REITs had substantially improved, as the stock market recaptured lost ground.

While the broad-based prosperity and investor enthusiasm associated with REIT stocks as recently as six months ago has been tempered at this time, the long-range prognosis is not nearly as bleak at it appeared to be in September.

Traditional Loans: Banks, pension funds, insurance companies and other traditional lenders all were stalled by the short-lived liquidity crisis and now are assessing opportunities against the backdrop of an improved liquidity outlook. However, the long-range trend has been for HUD and the more exotic Wall Street products to command increasingly larger market share gains.

The recent discomposure in the capital markets has once again sensitized borrowers to the realities of unexpected change and the need to adapt quickly to changing situations. However, while it is rarely comfortable, change does create new opportunities, Davis reminded.

"For those who can adapt quickly, there will be multiple opportunities in senior, housing/health-care in the months ahead," he said. "Available capital will continue to create expansion opportunities."