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Greystone's next CRE CLO backed exclusively by health care facilities

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Greystone is tapping the securitization market to finance $300 million of bridge lending to health care-related properties, according to rating agency presale reports.

The initial pool of collateral for the commercial real estate collateralized loan obligation consists of 20 floating-rate mortgages secured by 25 health care-related properties totaling $249.2 million. The lender has 120 days after the Greystone Commercial Real Estate Notes 2018-HC1 closes to put another $50.8 million of funds to work acquiring additional mortgages.

All of the loans in the initial pool are secured by properties that are currently generating cash flow, but are in a period of transition with plans to stabilize and improve their value. For skilled-nursing facilities specifically, Greystone originates loans that are intended to be refinanced with a loan guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration, according to DBRS.

Any loans acquired during the ramp-up period must satisfy eligibility criteria, including a weighted average rating factor set by Moody’s Investors Service. And new loans cannot put the overall pool of collateral out of compliance with concentration limits.

Greystone’s first CRE CLO, completed in March 2017, was backed exclusively by multifamily commercial mortgages, but the company also focuses on health care, which accounted for $1 billion of its $9.5 billion in total lending last year.

Since 2004, Greystone has not had any losses on any of its bridge loans for skilled health care facilities, according to Moody’s.

The rating agency noted that Greystone’s health care lending benefits from its sister platforms that include its equity ownership of skilled nursing facilities (it provides sale-and-leaseback financing to operators), its real estate advisory arm, its development arm and its skilled-nursing operator.

The CRE CLO market has heated up considerably over the last year and a half, and Greystone appears to be taking advantage. Its new deal also has a longer reinvestment period, three years, compared with two and a half years for the 2017 transaction.

DBRS sees the strong outlook of the skilled nursing facility sector as a strength. These facilities traditionally have a high payor mix of federal- and state-funded programs, Medicare and Medicaid, respectively, and rates for both have been increasing since 1999. “Considering that the average age of patients moving in into [skilled nursing facilities] is in the low 80s, with an increase in shorter-term high-acuity hospital recovery stays, the largest growth in this cohort is yet to come and will continue to rise until 2034,” the presale report states.

There is increasing demand for shorter stays, which often comes with higher acuity, for those recovering from surgical procedures. These patients use skilled nursing facilities in lieu of costlier in-patient hospital stays. Because of the need to take in patients who have short-term rehabilitation stays, skilled nursing facilities may often be associated with nearby hospitals to provide a continuum of care to the patients. The higher the acuity of care, the higher the reimbursement for those services associated.

The sector also has some unusual risks, however. Medicare and Medicaid reimbursements are subject to annual review, and the facilities that receive them are subject to ongoing state inspections.

And while there is natural demand for these facilities, given the aging population, there is also a push by the states to control their Medicaid spending, thereby limiting new supply, according to DBRS. “Many states have what is considered a Certificate of Need, which serves to control the new supply. These dynamics also allow the states themselves to control the amount of funding via their respective Medicaid programs,” the presale report states.

Both DBRS and Moody’s expect to assign a triple-A rating to the senior tranche of Class A notes to be issued in the deal; DBRS alone is assigning an AAA to the Class A-S notes, an AA to the Class B notes, an A to the Class C notes, and a BBB to the Class D notes.

JP Morgan Securities is the placement agent.

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