Sponsored by:

“On a dollar basis, office delinquents increased by 12 percent, while by comparison, industrial loans increased by just under 5 percent, and multifamily loans by slightly more than 1 percent.” --Mary O'Rourke, senior director at Fitch Ratings, in reference to quarterly report.

HUD Letter Revises Limitations on Lockout Periods

Senior Housing Hopes Recovery Sparks Investor Interest
2003 Floating Rate Lodging Deals on S&P Radar

Hong Kong Properties on Road to Recovery, Moody's Says

Green Park Financial Uses Extend Maturity Option on Multifamily

COMBOG Education Task Force Focuses on CampusMBA Programs

CMBS Delinquency Drops--Except For Office

On loans "which will be the subject of a rent determination under MAHRA, HUD will only permit lockout or prepayment penalty provisions that expire on or before the date that the project-based Section 8 housing assistance contract expires," the Mortgagee Letter said.

While the Mortgagee Letter reads as if all loans with Section 8 contracts are constrained, the Mortgage Bankers Association said discussions with HUD Headquarters staff clarified the revision.

“The current prepayment penalty and lockout policy will apply only to properties with rents that are above market,” said Cheryl Malloy, MBA’s senior vice president of multifamily. “Loans being underwritten at market rents or at below market rents may continue to use current prepayment penalty lockout provisions.”

MBA said if HUD field offices interpret the Mortgagee Letter differently, reference should be made to the first paragraph of the letter where it states "for Section 8 assisted properties which in the future would be subject to a market rate determination and rent reduction. Field offices could also contact HUD headquarters staff in the Office of Multifamily Development for clarification.
(Back To Top)

The senior living industry experienced a 15 percent increase in market capitalization (net profit returns converted to a capitalized investment value) in the past 6 years, according to an addendum of a 1999 study conducted by the National Investment Center for the Seniors Housing and Care Industries, Annapolis, Md. During the same period, the lodging market capitalization dropped by 4 percent, while the multifamily housing capitalization increased 89 percent, the study said. Other findings show that the 15 percent increase since 1999 in market capitalization of seniors housing has been achieved despite falling operating margins and occupancy rates as a result of increases in revenues per occupied unit.

“With the growth of the seniors housing and care industry approaching the size of the lodging industry, it is becoming increasingly clear that this is a real estate class that should not be overlooked by institutional investors,” said Robert Kramer, president of NIC.

Origination volume for health care properties in general dropped 52.8 percent in the past year, from the second quarter of 2003 to the second quarter of this year, but origination volume increased 23 percent from the first quarter to the second quarter, based on statistics from the Mortgage Bankers Association’s Quarterly Data Book for the second quarter of 2004. Health care properties accounted for $402 million in the second quarter, or 1.2 percent of the total origination dollar volume for property type.

The health care sector, with an average loan amount at $5.7 million, surpassed industrial property at $4.9 million average loan size. Health care also accounted for 1.7 percent of total loans compared with hotels at 0.9 percent, MBA’s Quarterly Data Book said.

Loan volume placed in the second quarter of 2004 was down 33 percent from the previous quarter to $336 million, according to the NIC Key Financial Indicators .

The loan volume collected by NIC represents the quarterly lending activity of the top 12 lenders (non-REITs) that make permanent debt or short-term debt investments in seniors housing and care, including Fannie Mae, Freddie Mac and several of the larger banks.

Anthony Mullen, research director at NIC, believes part of the decline in loan volume during the second quarter 2004 can be attributed to increasing competition throughout the lending spectrum to senior housing.

“We are seeing more and more banks, especially regional and smaller ones, enter or re-enter seniors housing and long term care,” Mullen said. “But we’re also seeing REITs and more institutional investors getting involved, and taking away some of the business reported by the lenders we track.”

Mullen added that there could have been a temporary lull in lending activity during the second quarter, because there were few mergers and acquisitions happening at that time.

“The good news is that assisted living and skilled nursing have at least stayed steady for several quarters with just a little movement up and down on the delinquency and restructuring side,” Mullen said.

Permanent debt delinquencies for assisted living rose from 6.15 percent last quarter to 6.28 percent in the second quarter. But skilled nursing experienced a decrease, going from 10.9 percent to 8.92 percent, NIC's research said.

Although occupancy in assisted living facilities remains below other seniors housing sectors, pricing trends improved and operating fundamentals appear to be improving. The assisted living sector recorded its greatest improvement as occupancy increased more than 200 basis points to 86 percent, according to Marcus & Millichap Research Services, Phoenix, Ariz.

“We have witnessed price appreciation in this sector and believe growth will remain moderate as the market continues to work through the last of the distressed inventory and until strong occupancy growth translates into healthy revenue gains,” James Holt, senior market analyst at Marcus & Millichap Research Services.

Marcus & Millichap Research Services and the NIC said $12.2 billion of debt was placed in senior housing from the second quarter of 2003 to the second quarter this year. Assisted living facilities accounted for 44 percent or $5 billion of the total debt, followed by independent living (30 percent or $4.2 billion) and skilled nursing facilities (24 percent or $2.8 billion).

In the past 12 months, cap rates favored sellers for assisted living and skilled nursing facilities. They dropped 10 basis points to 10.8 percent for assisted living facilities and 120 basis points to 12.9 percent for skilled nursing homes, the research said.

Marcus & Millichap reported revenue increases from senior housing facilities owned and operated by Sunrise Senior Living, with an 8.6 percent increase in the revenue in the past year. American Retirement Corporation’s portfolio showed a 6 percent increase in monthly revenue and Capital Senior Living Corp. had a 7 percent increase in revenue across its portfolio within the past year.

Benchmark Assisted Living, Wellesley Hills, Mass., closed this month on eight of 11 properties this month, representing about $117 million in investment. The first phase of a $148 million recapitalization on the 11 property portfolio delivered investment returns to AEW Capital Management, Boston, Mass., investing on behalf of AEW Partners II, a real estate opportunity fund. The remaining three properties in New Hampshire and Maine will close following the completion of state licensing procedures.

AEW Capital Management, Benchmark’s initial investor, formed a joint venture in 1997 with Benchmark to acquire the 11 properties, totaling 756 units, located in Massachusetts, Connecticut, Rhode Island, New Hampshire, Maine and Vermont.

Ali O. Al-Ghannam of the international real estate department at Kuwait Finance House, an international investor, said New England has several of the most attractive senior housing markets in the country.

KFH participated in Benchmark’s recapitalization through an Ijara lease structure. Legg Mason Real Estate Services, Philadelphia, Pa., served as the investment advisor to KFH for the transaction. GMAC Commercial Mortgage, Horsham, Pa., provided $105 million for Benchmark’s asset acquisition.

KFH has more than $11.5 billion in assets with $3 billion of real estate investment in the United States and other investments in Europe and the Middle East. KFH’s partners and clients include Citigroup, Airbus and Chicago’s First Industrial Realty Trust.

Marcus & Millichap said average occupancy rates across all senior housing property segments, with the exception of Continuing Care Retirement Communities (CCRCs), remain highest in the northeast region followed by the west north central region.

“Occupancy is improving in the assisted living sector and the addition of new services in the independent living sector is helping to draw residents,” Holt said. “Skilled nursing is on its recovery path, benefiting from increased Medicare reimbursements.”

Marc Davidson, principal and head of AEW’s Partners Group, said its eight-year partnership with Benchmark helped AEW to receive and deliver strong returns to its investors.

Marcus & Millichap expects transaction velocity to increase and value to remain on the rise as more institutional investors with access to inexpensive capital enter the market and place upward pressure on price expectations for sellers.

“We expect that further improvements in operating performance over the coming year will lure more investment dollars to the market, and renewed interest from institutional investors should fuel further price appreciation,” Holt said.

The holdback, however, could be owner-operators interested in expansion with a higher cost of capital. Holt said higher costs could impede their ability to successfully bid on assets offered for sale.

“Notwithstanding, peering into 2005, the market and associated investment opportunities will look much healthier than in recent years,” Holt said.
(Back To Top)

2003 Floating Rate Lodging Deals on S&P Radar
MBA (10/21/2004) Murray, Michael

Several 2003 vintage floating-rate transactions, mainly lodging properties, are performing below expectations, based on partial 2004 financial operating results evaluated by Standard & Poor’s, New York City.

The ratings agency identified six transactions containing a total of 11 underperforming loans, four multifamily loans and four lodging loans. Lodging collateral makes up the bulk of the total trust principal balance (84 percent), with multifamily (14 percent) and office (2 percent) comprising the remainder. Some of the hotel collateral's major markets (San Francisco and Orlando) have experienced material rebounds, but they are coming off significant lows, hampering speedy recoveries. The lodging collateral on radar is "fairly geographically diverse," with 15 states represented and St. Thomas, V.I., Standard & Poor’s said.

Overall, "North American CMBS rating activity was overwhelmingly positive, as the 205 upgrades pushed the year-to-date total for 2004 to 378, well beyond the 301 reported for all of 2003," said Roy Chun , analyst at Standard & Poor's.

The 2003 transactions that contain large loan(s) exhibited negative operating trends since issuance, and the ratings agency said it would review these loans and others to determine the reasons for the fall off in operating results and loan performance relative to rating expectations at issuance. Local market conditions, property renovations, and tenancy issues are several factors that could impair a property's performance in the short-term, the ratings agency said.

As interest rates remain low, debt service coverage ratios (DSCRs) maintain generally strong levels, and potential problem loans might not appear on the servicer’s watchlist, the ratings agency said. However, if interest rates rise or loan maturity approaches, operating could continue to weaken and payment problems could materialize. Rating adjustments could become necessary if a loan's collateral experiences additional stress, or if other extraneous events occur to affect operating revenue, Standard & Poor’s said.
(Back To Top)

The ratings agency maintains a positive outlook on the retail leasing sectors in Hong Kong for 2005 as it expects that the credit rating outlook for most real estate investment companies in Hong Kong to remain stable, supported by the market uptrend.

"On the credit front, negative rental reversion, which we expect to end towards [the second half of 2005], along with the upward interest rate cycle, will partially offset improvements in cash flow due to rental rises," said Clara Lau, a vice president and senior credit officer at Moody’s and author of the report.

The report, "HK Commercial Property Market: Offices and Hotels Turn Corner, while Positive Retail Rental Trend to Continue,” said office rentals would experience upward pressure over the next two years based on limited supply and [rising demand] driving down vacancy rates.

However, actual rental performance could vary at different sub-markets, with Central and Tsim Sha Tsui demonstrating the more favorable outlook.

"The pricing power of landlords, particularly regarding Grade A space, is rising and we expect the vacancy rate in Hong Kong's leading business district to fall to single-digit levels," Lau said.

The report showed that office rental in Central Hong Kong jumped 17 percent in the second quarter of 2004 from the third quarter of 2003

Lau said the strong performance of the retail sector would continue to support retail rental growth, along with steady growth of tourism inflows, particularly from the Mainland and the broadening of the “Individual Visit Scheme.” Lau said the retail sector could also receive a boost when Hong Kong DisneyLand opens in 2005.

"More importantly, better economic and job prospects have enhanced consumer confidence and boost domestic consumption, the major component, or 60 percent, of retail sales," Lau said. "Coupled with low supply, overall retail rents will continue rising."

The report noted swift recovery in the hotel sector from SARS. The occupancy rate rebounded to 80 percent in August 2003 from a 20 percent low. The report said hotel operators would maintain their regained pricing power as continued growth in inbound tourism ensures that new supply scheduled for the next two years does not reach surplus levels.

Lau, however, cautioned that property companies seeking to expand or make forays into the hotel business need to consider the impact on overall cash flow stability.

"Hotel income is less predictable and highly susceptible to trends in tourist arrivals," Lau said.

Lau referred to several reasons that support Hong Kong’s recovery in the commercial property sector, including constraints on new supply, the improved Hong Kong and global economies, and China's continued economic growth. Hong Kong and Mainland governments launched various economic initiatives to lend further support toward recovery, the report said. Some of that support includes a widening in the Closer Economic Partnership Arrangement and a new policy to facilitate Mainland investments into the territory.

The report said that a spread-out lease expiry, a diversified tenant profile, careful planning of refinancing needs, maintenance of good liquidity sources, and appropriate management of interest rate exposures are essential to support Hong Kong property companies' ratings during the current reinvestment cycle.
(Back To Top)

Green Park Financial provided $4.88 million in acquisition financing for The Bluffs Apartments, a 200-unit, garden-style multifamily property situated about 50 miles northeast of Austin in Temple, Texas. The Bluffs Apartments, built in 1983, underwent a partial renovation from 2002 to 2003. The community contains 20 buildings with a mixture of one-, two- and three-bedroom units situated on 17 acres two miles northwest of downtown Temple

Hunter McGrath of Quantum First Capital, Dallas, Texas, originated the acquisition loan, underwritten to an 80 percent loan-to-value (LTV). The borrower has the option to extend the maturity date of the loan for an additional one-year period. During this extension period, interest will accrue at 2.4 percent over LIBOR. The loan was rate locked and closed in 35 days, Green Park Financial said.

The apartment complex contains a central leasing office and clubhouse facility with an outdoor pool and Jacuzzi, a playground, two community laundry rooms, and five BBQ areas situated throughout the property. The Bluffs also contains a recreational area complete with a full-court basketball court, sand volleyball court, and fitness center.

Meanwhile, Green Park Financial closed a $5.3 million loan for the refinancing of Mulberry Drive Apartments in Whittier, Calif.

Amos Smith of Johnson Capital, Irvine, Calif., originated the loan for the 58-unit, garden-style multifamily property. Financing also went through the Fannie Mae 9+1 Extended Maturity product. With this option, the borrower was able to lock in a fixed rate for a nine-year term, with the option to prepay at par anytime during the tenth year, while the loan floats over LIBOR.
(Back To Top)

• Development and implementation of the Path to Diversity program, providing diverse commercial mortgage professionals with educational sponsorships and internships.

• Creation and delivery of CampusMBA’s Retail and Office Underwriting classroom-based course which had 47 students in its first offering this year. The program incorporates a fast moving case study format utilizing expert instructors.

• Creation and delivery of CampusMBA’s Multifamily and Industrial Underwriting classroom-based course which had 33 students in its first offering this year.  The program incorporates a fast moving case study format utilizing expert instructors.

• Delivery of various audio programs led by industry experts on topics ranging from the future of commercial mortgage banking to terrorism insurance.

• Development and creation of commercial investment focused CD-ROM-based training courses with titles that include: Advanced Commercial Real Estate Valuation and Investment and Introduction to Commercial RE Investments.

• Development and creation of technology focused CD-ROM-based training courses with titles that include: eMortgage Security Standards and Issues: SISAC and PKI, XML and XHTML in eMortgage Technologies, and Walking through the SMART Document Specification.

• Updates on many different courses, including the highest selling commercial product, Introduction to Commercial Real Estate Finance print-based course.

• Creation and delivery of a classroom course focused on commercial sales.

• Development and delivery of CampusMBA’s Environmental and Property Inspections classroom-based course.

• Launch of the Welcome Home program (www.welcomehomegi.com),  including a Web-based course learning track on commercial mortgage lending. This program provides opportunities for commercial/multifamily organizations to bring in new bilingual talent who are former military professionals.

• Implementation of a newly designed Certified Mortgage Banker (CMB) designation program graduating many Commercial CMBs and representing top industry professionals.  There are 24 candidates for Commercial CMB in February.

• Continued work with five universities on the long-term strategic development of commercial courses and degree programs.

“CampusMBA has made great strides in creating and providing educational resources for the commercial/multifamily membership,” said Dan Thoms, vice president of MBA education and business development. “We continue to examine the trends of this community, and look forward to developing additional new and innovative commercial courses, products, and programs to meet those needs.”
(Back To Top)

Fitch Ratings, New York City, reported an overall 14-basis point decline in its U.S. CMBS loan delinquency index from 1.42 percent at the end of August to 1.29 percent at month-end September. At the same time, however, the ratings agency noted a substantial increase in office delinquencies. In the course of the past month, eight new office loans totaling $78.6 million were added to the delinquent list. The two largest loans were both in California, a $24.3 million loan in San Mateo, Calif. and a $15.2 million loan in Santa Clara, Calif.

“On a dollar basis, office delinquents increased by 12 percent, while by comparison, industrial loans increased by just under 5 percent, and multifamily loans by slightly more than 1 percent,” said Mary O'Rourke, senior director at Fitch Ratings.

But Patrick Corcoran, head of CMBS research at J.P. Morgan Securities, New York City, said long leases keep the office sector from performing better on seasoned deals. He said that while multifamily properties have short leases that expire as occupancy drops and rents firm up, office leases made five or six years ago could find higher rents than the ones made from 1998 to 1999 after they expire.

Despite industry concerns over the past three years about the office sector and stressful cash flow dynamics, Corcoran said office deals are still strong assets.

“Office has done much better than people expected,” Corcoran said.

O'Rourke said Fitch was "pleased" to see that the overall dollar balance of delinquent loans in CMBS transactions has continued to drop, but the ratings agency continues to be cautious in evaluating the outlook in the office loan sector. she said.

“Fitch believes delinquencies in [the office] sector are likely to continue through the remainder of this year and into next but we expect the pace of the increases to taper off,” O’Rourke said.

O'Rourke also noted that both hotel and health care loan delinquencies continued to decline. And, while there were two new hotel defaults in September, totaling less than $3 million, 13 loans totaling $56 million came off the delinquent list. Hotel delinquencies dropped by nearly 9 percent. The decline in healthcare delinquencies was by nearly 10 percent, and retail delinquencies were down by 3.4 percent.

The current loan delinquency rate would increase to 1.53 percent if only seasoned transactions were included in the calculations. That rate is 13 basis points lower than the seasoned delinquency rate of 1.68 percent reported on August delinquencies, Fitch said.
(Back To Top)