Finance
Financing the future of senior living
The United States population aged 75 and older is expected to double by 2050, and with a severe lack of senior living inventory, owners and operators are under increasing pressure to meet the growing demand for affordable, high-quality care. Addressing this challenge head-on requires a strategic financial approach, strong partnerships and operational improvements.
Current financial obstacles
The senior living sector has faced significant financial headwinds as it has recovered from the pandemic, with communities already managing high labor costs and narrow margins. With $19 billion in debt maturities due in the next two years and rising long-term interest rates — up 70 to 80 basis points in recent months — these pressures will continue to be top of mind for providers.
There is good news, as occupancy rates have steadily improved for 14 consecutive quarters across the sector, but converting those gains into stronger operating margins remains challenging. Labor expenses, driven by the need for skilled caregivers, are among the largest budgetary strains. Nearly half of the senior living inventory is more than 25 years old, underscoring the need for capital improvements to stay competitive.
At the same time, senior living professionals are struggling to finance new developments, deepening the already pervasive inventory issue. Those conditions may leave owners and operators wondering, “What can I do today to ensure long-term success for my business?”
Strategies for resilience and growth
To overcome those challenges, senior living professionals should explore creative financing solutions based on individual objectives. A key benefit of the sector is that, because of its valued place in society as an essential component of all communities, a myriad of both public and private financing options are available to support owners.
Considering the pros and cons of all available structures, then multi-tracking the options that are the best fit as long as possible, becomes even more important during challenging financing markets. For example:
- The US Department of Housing and Urban Development loans can offer long-term, low fixed rates for refinancing but have rigid eligibility requirements and take longer to process.
- Agency (Fannie Mae and Freddie Mac) financing can provide faster closings and better debt service ratio underwriting metrics, but loan-to-value sizing parameters, paired with limits on skilled nursing facility beds and certain payer types, can be more restrictive.
- Finance companies, on the other hand, can allow for more creative underwriting structures and higher leverage, but borrowing costs are usually higher.
- Lastly, traditional banks also have structuring flexibility and can lower variable interest rates, but guarantees are more prevalent. Property Assessed Clean Energy financing can be paired with finance company or bank debt to improve the capital structure.
Regardless of the financing path or paths chosen, improving the financial performance of the subject community will aid those efforts. Value-based care models are emerging as one practical way to accomplish this. Adopting value-based care requires aligning with broader healthcare systems and making operational changes to support collective goals. Strategies such as regular care coordination meetings, onsite medical teams and tailored Medicare Advantage plans already are showing promise in reducing healthcare costs and differentiating operators in the marketplace while allowing the senior living provider to share in the resulting expense savings.
Looking ahead
Despite the challenges, the future of senior living remains promising. Demographic trends indicate sustained demand, but new inventory growth has slowed significantly. Only 29% of construction projects began within the last year, the lowest rate in a decade.
High demand and low inventory conditions create a favorable environment for owners and operators who can secure funding to build new communities or modernize aging properties, establish healthcare partnerships and embrace innovative care models. Those senior living sponsors will be well-positioned to meet demand and set new standards for quality and efficiency. Interest rates moving lower would certainly help as well!
Kevin Laidlaw is managing director at NewPoint Real Estate Capital.
The opinions expressed in each McKnight’s Senior Living guest column are those of the author and are not necessarily those of McKnight’s Senior Living.
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Banks have had a stellar first quarter. The major U.S. banks raked in nearly $50 billion in profits in the first three months of the year, The Guardian reported.
That was largely due to Wall Street bank traders, who profited from a volatile stock exchange, Reuters showed.
But even without the extra bump from stock trading, banks are doing well when it comes to interest, the same Reuters article found. And some banks could stand to benefit even more from this one potential rule change.
Morgan Stanley thinks it could have a major impact on Citi in particular.
Upcoming changes for banks
To understand why Morgan Stanley thinks things are going to change at Citi, you need to understand some recent bank rule changes.
Banks make money by lending out money, which usually comes from depositors. But people need access to their money and the right to withdraw whenever they want.
So, banks keep a percentage of all money deposited to make sure they can cover what the average person needs.
But what happens if there is a major demand for withdrawals, as we saw during the financial crisis of 2008?
That’s where capital requirements come in. After the financial crisis, major banks like Citi were required by law to hold a higher percentage of money in order to avoid major bank failures.
For years, banks had to put aside billions of dollars. Money that couldn’t be lent out or even returned to shareholders.
Now, that’s all about to change.
Capital change requirements for major banks
Banks that are considered globally systemically important banking organizations (G-SIBs) have a higher capital buffer than community banks as they usually engage in banking activity that is far more complicated than your average market loan.
The list depends on the size of the bank and its underlying activity, according to the Federal Reserve.
Current global systemically important banks
A proposal from U.S. federal banking regulators could drastically reduce the amount that these large banks have to hold in reserve.
Changes would result in the largest U.S. banks holding an average 4.8% less. While that might seem like a small percentage number, for banks of this size, it equates to billions of dollars, according to a Federal Reserve memo.
The proposed changes were a long time coming, Robert Sarama, a financial services leader at PwC, told TheStreet.
“It’s a bit of a recognition that perhaps the pendulum swung a little too far in the higher capital requirement following the financial crisis, making it harder for banks to participate in some markets,” he said.
Natasha Luscri and Luke Miller consider themselves among the lucky ones. The couple recently bought their first home in the northwest suburbs of Melbourne.
It wasn’t something they necessarily expected to be able to do, but some good fortune with an investment in silver bullion and making use of government schemes meant “the stars aligned” to get into the market. Luke used the federal government’s super saver scheme to help build a deposit, and the couple then jumped on the 5 per cent deposit scheme, which they say made all the difference.
“We only started looking because of the government deposit scheme. Basically, we didn’t really think it was possible that we could buy something,” Natasha told Yahoo Finance.
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Last month they settled on their two bedroom unit, which the pair were able to purchase in an off-market sale – something that is becoming increasingly common in the market at the moment.
Rather perfectly, they got it for about $20-30,000 below market rate, Natasha estimated, which meant they were under the $600,000 limit to avoid paying stamp duty under Victoria’s suite of support measures for first home buyers.
“They wanted to sell it quickly. They had no other offers. So we got it for less than what it would have gone for if it had been on market,” Natasha said.
“We didn’t have a lot of cash sitting in an account … I think we just got lucky and made some smart investment decisions which helped.”
It’s a far cry from when the couple couldn’t find a home due to the rental crisis when they were previously living in Adelaide and had to turn to sub-standard options.
“We’ve managed to go from living in a caravan because we were living in Adelaide and we couldn’t find a rental with our dogs … So we’ve gone from living in a caravan, being kind of tertiary homeless essentially because we couldn’t get a rental, to now having been able to purchase our first home,” Natasha explained.
Rate rises beginning to bite for new homeowners
Natasha, 34, and Luke, 45, are among more than 300,000 Australians who have used the 5 per cent deposit scheme to get into the housing market with a much smaller than usual deposit, according to data from Housing Australia at the end of March. However that’s dating back to 2020 when the program first launched, before it was rebranded and significantly expanded in October last year to scrap income or placement caps, along with allowing for higher property price caps.
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