PHOENIX — Higher interest rates that have made it harder for many providers to find capital from traditional sources are also motivating more real estate investment firms to move into lending.
But diversifying financial products and services isn’t necessarily attractive to all REITs working in the skilled space, experts cautioned during a panel discussion at the eCap West summit held here earlier this week.
While Sabra and CareTrust REITs have both embraced mortgage lending — especially as a pipeline to future acquisitions — Omega, the nation’s largest owner of skilled nursing facilities, isn’t eager to loan to anyone except a few choice, existing partners.
“You don’t get to own your real estate for the majority of our core business,” said Vikas Gupta, senior vice president of acquisitions for Omega, which has about $10 billion in real estate in the US and UK, with about 80% of that portfolio in nursing homes.
While his REIT will “dabble” in real estate mortgages for current operators, Gupta said that for those who want capital to buy their real estate, “sometimes REIT financing isn’t the best option for you.”
“The skilled industry has evolved a lot in the last couple of years, and Omega has evolved with it,” he told the audience at eCap, which drew about 450 attendees to its three-day networking event.
But even in today’s market, giving operators purchase options is a stretch for Omega, Gupta added.
“We don’t want to do it because, ultimately, we’re taking two steps forward and one step back as a REIT that’s trying to grow,” he added. “But for current operators, there’s always a way to structure things that works for us. It could be a purchase option through a [joint venture], or a purchase option that creates value for both of us. There has to be something to it.”
Benefits for both sides
And indeed, there is something in mortgage packages for REITs.
During the last eCAP Summit in February, CareTrust CFO James Callister explained the reasoning behind his company’s increased interest in loaning to skilled nursing owners. For CareTrust, it’s a good way to not only collect payments with interest but to build relationships with owners/operators that may eventually want or need to offer real estate to the REIT.
With the right operator, it’s also an additional way to make money in a more difficult buying environment.
But REITs also operate from the goal of buying good assets and holding them.
Elliott Mandelbaum, managing partner at Eagle Arc Partners, said firms like his have to avoid a situation in which they’re left holding onto lesser-performing facilities because the operators later decide they don’t want to exercise the purchase option.
Eagle Arc is a real estate investment firm but also has two separate operations groups, one in Texas and another in New England. On Tuesday, Mandelbaum said the company was markedly more open to giving operators purchase options than Omega.
“One of the things we pride ourselves on is that, because we’re private and we’re not publicly traded, we can be more flexible, whether it’s financing or buying to stabiliize your turnaround buildings, but also to provide purchase options,” he said.
“In today’s interest rate environment, we’ve done more of that. Historically, as a real estate or propco investor, it was a much simpler business: You buy an asset, you find a strong tenant, you lease it to them at an 8 1/2 , 9 yield and you borrow at 4 or 5% and you’re making [strong] returns. But the math doesn’t work so well now. There’s only so much rent you want to charge your tenant. You want them to have that flexibility.”
Interest rate reversal?
But if interest rates begin to tick lower later this year or early next, that could undermine the incentive to lend as real estate investment companies return to their more traditional strategies.
Whether that will happen, however, remains to be seen.
“I’m not an economist, but short-term rates may go down, so it won’t be like this forever,” Mandelbaum predicted, adding that long-term rates would likely stay elevated. “For bank or bridge loans, that will help. But in terms of the permanent take-out, this is probably the new normal.”
Kevin Harbour with Oxford Finance, a healthcare finance company with about $6 billion in assets, said he remains in the “higher-for-longer” camp when it comes to rate setting.
“We may get one cut between now and the next eCap, but I don’t think there’s going to be massive movement in the next 12 months.”
Tami Antebi is senior vice president and head of national healthcare lending for BHI, the US arm of Israel-based Bank Hapoalim. Her portfolio includes about $1 billion in loans, most of that in bridge-to-HUD deals.
She said she was a little more optimistic, predicting one or two cuts over the year ahead.
With inflation still closer to 3% than the Federal Reserve’s annual target of 2%, the Fed announced earlier this month that it was holding a key rate-setting metric steady for the seventh straight time and predicted just one cut in 2024. Three cuts had been foreact in March.
