Seniors Housing Underwriting Adapts to Market Shifts
In challenging markets, Freddie Mac’s mission-driven role is particularly critical, and we are committed to serving as a countercyclical provider of liquidity, stability and affordability in a housing market that meets the complex needs of some of our country’s most vulnerable residents – older adults.
Freddie Mac’s latest Seniors Housing Report demonstrates divergent trends in the sector: occupancy rates continue a post-pandemic recovery while new supply eases, but the higher inflation environment has created an additional headwind through rising expenses and interest rate risk. As a result, we have made important shifts that allow us to continue to support our mission while responsibly managing risk.
Listening to the Market
At the onset of the pandemic, the major issue confronting the market for seniors housing properties was the uncertainty of move-ins. The primary issue has now shifted to the uncertainty of where interest rates and expenses are heading.
Contributing liquidity, stability and affordability to the housing market for older adults is at the core of our work. Our mission means Freddie Mac will remain open to do business even — and especially — when others are pulling back.
To meet current needs while recognizing the challenges of the seniors housing segment, we have recently made the following underwriting changes:
- Trended payroll and other variable meal/care-related expenses to develop pro forma net operating income for loan sizing
- Increased required minimum debt coverage ratios (DCRs) for properties located in smaller markets where rent and care reimbursement increases lagged and for properties with lower margins due to higher share of memory care units
- Implemented floor capitalization rates based on investor surveys to help determine valuation coupled with a 5- to 10-bps reduction of Loan-to-Value (LTV) maximum ratios to provide a cushion for rising interest rates
- Established lower interest cap rates for floating-rate loans to provide a higher cushion for the funding of its replacement escrow during the loan term
- Adjusted origination DCRs/LTVs by evaluating the refinance risks to capture pre-pandemic and current state occupancy levels
Steady Loan Performance
Since September 2009, Freddie Mac has securitized nearly $21 billion of seniors housing loans in our flagship K-Deal® program, responsibly transferring risk to the private sector. Throughout the history of the program, only two seniors housing loans have resulted in a loss.
By the summer of 2021, nearly all forborne amounts that lingered from the pandemic were paid off. In August 2022, we saw an increase in seniors housing delinquencies, in part caused by higher interest rates and increasing costs due to inflation, at a time while occupancies were still recovering. Assisted living properties with higher staffing needs and independent living properties structured with floating-rate debt felt the greatest impact.
However, when we examine our portfolio closely, the majority of our sponsors continue to pay their loans, including the monthly escrows for interest rate caps to protect floating-rate loans against sustained high index rates and possible future index rate increases.
Our Seniors Housing team has made market-based underwriting adjustments to responsibly manage risk while enabling Freddie Mac to continue to purchase sound, new seniors housing loans, helping us provide liquidity for older adult housing and meet the demands of our country’s upcoming demographic shifts.
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William Buskirk, Senior Vice President, Multifamily Chief Operating Officer
2023 Multifamily Midyear Outlook
Sara Hoffmann, Director, Multifamily Research