KeyBank and Welltower capitalize on their long relationship

August, 2022

Randall Shearin:

Hello. I'm Randy Shearin for Senior's Housing Business. I'm here speaking to Meredith Houseworth of KeyBank Real Estate Capital to discuss the company's unitranche deals. Thank you for joining me, Meredith.

Meredith Houseworth:

Thanks, Randy. Great to be here.

Randall Shearin:

For a little background, in 2021, KeyBank established new unitranche loan program with Welltower Incorporated to create a healthcare real estate fund totaling 750 million dollars in lending capacity. Meredith specializes in healthcare, specifically seniors housing. Meredith, can you tell us a little bit about the nature of Keybank's unitranche loan program and its focus first on mortgage financing for the senior's housing industry and skilled nursing facilities.

Meredith Houseworth:

Sure, I'd be happy to. Thanks Randy, I appreciate it. So interestingly enough, we started thinking about the unitranche venture in 2018, 2019. The industry was really in a very different spot at that point. Think the finances had gotten pretty aggressive, and while Key has had and has a lot of arrows in its quiver, including the balance sheet of strong syndicated finance platform Fannie, Freddie, HUD and Lifeco, the unitranche program really would allow key to provide higher levered financing solutions that generally were not available to clients via a traditional bank market.

And so at the time we sought out a partner, and Welltower was really a natural fit. We shared long-term relationship. We knew the company and the decision makers really, really well and felt that we had a similar thought, thought process and desire to invest in not only the senior space, but also the skilled space, which was really important to us. And so as everyone knows, the space looks very different today. The pandemic certainly hit the space pretty hard. And after putting the unitranche platform on the back burner for, you know, several months in 2021, we felt like it was a good time to dust it off and to introduce the venture back to the market.

So in 2021, the need had really shifted, though. It was no longer an aggressive lending environment. The need had shifted to, you know, more of a runway to stabilization. The space was struggling, still is, with occupancy and expense ratios. And so today, many of the assets just needed more of a runway. So while we started developing the unitranche concept at a very different time in the industry, I think the unitranche product provides just as much, if not more of a valuable financing solution today to the client.

Randall Shearin:

That's good. Your program blends senior and junior debt pricing and turns into a single first lien debt facility. What's the impact on borrowers with that?

Meredith Houseworth:

There's actually a lot of people who haven't heard or worked with the term unitranche, and effectively it's a single financing that replaces the multitranche debt approach, blending the senior and med structure, as you said, Randy, into a single loan, but providing the benefits of a fully levered med structure. It really simplifies it. Simplifies and reduces the cost of the execution for the client via single financing structure so that there's a single loan agreement, one reporting package. There are no intercreditor agreements. Overall, it's a more cost efficient and straightforward financing solution for the client.

And aside from cost and ease, I would also note that when working with Key and Welltower, the client's working with companies that understand the industry in are long-term investors in the space. We're all ... We're both very much client and relationship driven, which is very, I think, critical to the execution for the client. We know the revenue drivers, we know the submarkets, we know the expense challenges and whatnot. So I think that that really provides a good resource for the client. And another important item I think to note is that while it's a new venture for Key and Welltower, we really wanted to make sure it was a seamless execution upon delivery for the client. So we spent a lot of time prior to the launch of the fund discussing amongst ourselves standard structural points to make certain that we saw eye to eye. You know, we worked through term sheets, potential loan agreements. So we didn't want to be negotiating amongst ourselves when delivering for the client. So I think that, you know, when we provide a level of execution and a certainty of execution to the client as well as a team.

Randall Shearin:

How does your unitranche, loan program compete with debt funds that have been pretty active in the market?

Meredith Houseworth:

Sure. So we all know that the space is, you know, in a different spot today than it has been. And over the last few years, you know, many in the industry, many of the assets have lost occupancy. And so there's a slew of assets that just need runway and the traditional banks can't always meet the needs. And in some cases, they're just fatigued, and historically the debt funds have served some of this need, but the unitranche program competes pretty well against the debt funds. We have slightly different approaches to pricing. I think that our expertise in the space and the submarkets, I think we really can price the risk well. I think that we're, we're more competitive.

Also, you know, Key and Welltower are known investors in the space and have been for decades. We've worked together for decades. We have a reputation that's really important to uphold. And when we're working with clients, it's that same relationship group, you know, same relationship bankers that execute for the balance sheet that are gonna be working with the clients. And I think that that relationship focus is a really big competitive advantage with the, with the debt funds.

Randall Shearin:

Mm-hmm.

Meredith Houseworth:

But aside from where, you know, where we come from, and our sincere interest and expertise in the space, I think we've really found a good niche and we're willing to help bridge the, the lease up and turnaround of the assets and take some more turnaround risk given on our understanding of the industry and firsthand knowledge of the submarkets. And we can more accurately price the risk and provide an effective and efficient product to the client.

Randall Shearin:

What types of clients do KeyBank's offerings attract, and what specifically interests them about this type of product?

Meredith Houseworth:

So, you know, as I was saying earlier, it certainly provides a more flexible piece of capital for the borrowers who are looking to, you know, for a longer runway until stabilization. And there's really no specific box that the deals need to fit in. There's just no magic to it. Some of the clients have found that, you know, their conventional bank relationships were fatigued after COVID. And this program was delivered at a time that provided a level of capital with a flexible structure to provide that necessary runway to stabilization. So it's really for a client that's in need of flexible financing and, you know, with a risk profile that exceeds that of a traditional bank.

Randall Shearin:

Good. Geographically speaking, where are you seeing the most acquisition in development in seniors' housing?

Meredith Houseworth:

So one thing that this ... the unitranche program doesn't really provide for is, is construction and development. Now, that said, we certainly see a lot, you know, our fair share of development opportunities from a balance sheet perspective. And again, that is the same team here at Key. And, and so we're seeing a lot of the development opportunities in the primary markets right now. And it's, you know, with the costs of construction and whatnot, you know, it certainly has curved. But right now we're seeing a lot of refinances, and I think that just with the interest rate environment, things have slowed down a little bit. But, you know, the unitranche program is executed from coast to coast. We're actually looking at a deal in California right now. So I should say New York to Nevada, but, we are really seeing the primary market executions across the United States.

Randall Shearin:

That's great. Thank you very much for joining me today, Meredith.

Meredith Houseworth:

Thank you, Randy. Nice to talk to you.