As those with elderly parents will attest, there is a significant shortage of seniors housing in Canada – a shortage that may worsen as the baby boom generation matures. First National is well aware of the demand for this type of housing stock and as Brian Kimmel, our Assistant Vice President, Commercial Financing discusses in this interview, our company is ready to provide capital and specialized expertise to help the sector grow to meet the onslaught of demand.
Brian, who is providing seniors housing in Canada today?
There are two main providers. The first is government. Every province funds long-term care facilities but they don’t provide sufficient funds. Lack of supply is a common denominator across the country. As a result, the private-pay sector has taken up the slack and those private providers are booming and experiencing almost exponential growth.
So the private sector is charging ahead because the public sector is falling behind.
That’s true, one could argue that governments are abdicating their responsibilities to seniors because they just don’t have the budget capacity to meet demand. Just recently, underfunding became an election issue in Nova Scotia but it’s a factor in all provinces and it spells substantial growth potential for private operators who in future years are going to dominate the market. Private operators have also taken steps to stimulate demand by developing lifestyle housing.
What do you mean by lifestyle housing?
There are degrees of this but over the past 20 years, we’ve seen the rise of what I would call 5-star accommodation, with all sorts of activities, opportunities for socialization and levels of care. There is an incredible range of options and as a result, you can now receive as much or even more care in private homes than you ever could in government-funded, long-term facilities.
That sounds good.
It is, the problem is affordability. It’s the number one issue in seniors housing. The reason government-funded long-term care is attractive is because it’s highly subsidized whereas living in a private retirement residence can be out of reach financially to many seniors. It’s also expensive to provide the level of services and care people want. If you are a developer, you are pretty much forced to build facilities for the small percentage of Canadians who can afford rent of $3,000 plus a month. The industry has struggled with this issue and is trying to develop a model that is more affordable.
Quebec has taken a novel approach to this problem.
Yes, in Quebec, private operators provide seniors with apartments with limited services and by doing that, they are able to get rents down to as low as $1,200 a month. As a result, there are three times the number of seniors living in retirement residences in Quebec than in Ontario.
But those homes don’t address seniors who have a need for more care.
Correct, they also aren’t great for those whose health deteriorates because it forces them to find other accommodation, often when they are quite elderly.
You mentioned Ontario – what are the options here?
In Ontario, there is a continuum of private care, meaning you can move in today as a relatively healthy senior and as the years go by and you need more care, it’s available right in your residence. You never have to move. It’s a better model, but it’s more expensive. And the real tragedy is when seniors run out of money and need more care, the only option is to go on a waiting list for a government-funded long-term care facility.
Is the waiting list long?
Anywhere from one to three years. And that wait is only getting worse given the pace of growth in the seniors’ population. We’re going to have a crisis at some point and the only ones who are responding to the problem today are the retirement home operators.
Does First National only engage in providing mortgage financing to private-pay providers?
No, we lend to both sectors across Canada but if you look at our mortgage book today, it’s heavily weighted to private providers because there just isn’t much building going on in the government-funded segment.
So from a business perspective, is First National prepared to help fund the expansion of private homes?
We’re not only prepared to do so, we’re very well situated to address the growth needs of the sector because we’ve been involved in providing mortgages to it for over 25 years. First National was one of the first Canadian lenders to develop a specialty in seniors housing and today we are one of the most experienced service providers.
When you say service provider, what does that mean?
We provide capital but we also consult. For example, because of our broad network, we often provide advice to developers who want to enter the seniors housing market and need information and insight into what is a very capital-intensive industry. We also help developers find retirement home operators to partner with because seniors housing is not just a real estate investment, it’s also a business operation.
What about consultations with existing customers?
We consult with clients on a number of scenarios. Sometimes they want to divest properties or acquire certain assets and because of our significant contacts in the industry, we can assist with both scenarios. Our core consultations take place in debt management. For example, a purchaser may acquire 20 or 30 properties and ask First National to structure and manage the associated debt, find new debt or navigate the CMHC-approval process. This is our area of specialty.
How does CMHC factor in?
CMHC finances seniors housing and has been active for decades. Back in the early 1990s, CMHC was the dominant source for our business and for the seniors housing sector generally because at that time, the big banks and insurance companies just weren’t participating. Today, conventional financing is more prevalent in the sector than CMHC but in any event, for developers and operators, it really pays to have First National at their side. We are by far the most experienced seniors housing lender in Canada.
Does First National do conventional as well as CMHC lending?
We do both and we’re perhaps one of the few lenders in the country to offer that range of funding choices. Diversification of funding is one of our strengths because we can assess the borrower’s needs, and make a recommendation on which financing route is best for any given situation. Back in the 1990s, we were probably doing 100% CMHC, then that switched to perhaps 75% conventional financing and now we’re expecting to see the pendulum swing back to more CMHC as a result of new CMHC rules that afford greater flexibility.
What does greater flexibility mean?
In late 2016, CMHC decided to apply close to market cap rates so it will now underwrite newer retirement homes in urban centres at cap rates as low as 7% and as low as 8.75% for funded beds. That replaces their previous minimums of 9% and 11%, respectively. In addition, corporate, limited partnerships and REITs can now borrow up to 85% LTV compared to 75% before and CMHC allows amortizations up to 40 years, 10 years longer than before. There is also a new construction loan program that for qualifying new retirement and long-term care homes means the borrower could access financing of up to 95% of the cost at a reduced insurance premium.
Why has CMHC taken these steps?
My view is it wants to recapture some of the seniors business it lost over the past few years and believes it has a social responsibility to lend to the sector. It also understands that on purely commercial terms, this is a good business to be in and part of their mandate is to make money for the federal government.
Many lenders engage in seniors housing now. How does First National differentiate itself?
Beyond being able to provide a variety of conventional and CMHC funds, our strengths are experience and knowledge. We know the players, we know the industry and we can guide our clients to achieving the best structure for any transaction. Along with that is our service. We never stop servicing our clients.
Demand for seniors housing is booming, we’ve got a pending crisis of availability and the private sector, with First National’s full support, is going to be part of the solution.
To learn more about the services First National provides to seniors housing developers and operators, call Brian at 416.593.2916 or email him at firstname.lastname@example.org