EXPERT OPINION: A Conversation with Steve Ervin

July 24, 2012

In this “ Expert Opinion” interview, Steve Ervin, Senior Vice President of Berkadia, discusses HUD, refinancing, acquisitions, future goals, and more.
 

Steve ErvinWatch the video      Read the transcript

Stephen J. Ervin co-heads the Seniors Housing and Healthcare Group at Berkadia. He is responsible for oversight of origination, underwriting, quality control and closing of loans related to all aspects of Seniors Housing and Healthcare including independent living facilities, assisted living facilities, skilled nursing and hospitals through Fannie Mae, Freddie Mac, HUD and Berkadia’s proprietary loan program. Prior to joining Berkadia, Mr. Ervin ran the HUD group for Walker & Dunlop and Column Guaranteed and successfully built that group from the ground up to financing over $1 billion HUD loans with a focus on the healthcare sector.   He is an active participant in many HUD associations. He is a member of the HUD Eastern Lenders Association, MBA’s Multifamily Steering Committee and the Committee on Healthcare Finance. Prior to joining Column, he held positions as Deputy Chief Underwriter for Love Funding where he was responsible for oversight of all underwriting operations. Mr. Ervin has also worked as a contractor to HUD’s multifamily division and Ginnie Mae while working for Ervin and Associates and Phoenix Ventures. Steve started his career at Ernst & Young after graduating from Georgetown University with a bachelor's degree in accounting.

Contact Information:

Stephen J. Ervin
Senior Vice President
Berkadia
7500 Old Georgetown Road
Suite 1275
Bethesda, MD 20814
Phone : (301) 202-3575
Steve.Ervin@berkadia.com

 

Watch the video of the interview: 

 

Read the interview transcript:

Steve Monroe
Everyone is out there looking for debt of some sort in seniors housing and care. The market has gotten very strong, and we hope there’s more money out there. Sitting with me today I have Stephen Ervin, the Senior Vice President of Berkadia, and they definitely want to put out a lot of money and arrange financing for people in senior housing and care. Stephen, you put together a solid team in the last six months at Berkadia. Are you still adding personnel? 

Stephen Ervin
At this point we’ve made remarkable progress, growing the team and doing actually well beyond the original expectations, when I was brought on last August 1st. We’ve been very happy with the team that we’ve put together, and I believe that we’re probably at a point right now where we aren’t searching for additional growth, but we are looking for any kind of strategic acquisitions of talent that we can get: people in the right markets, people in the right places. Berkadia in general has a very strong program to try and hire more mortgage banking talent. At this point we have a very aggressive goal, and the seniors housing will be a piece of that. We’re also going to backfilling—we have enough top-end talent. We now are going to be hiring support staff and underwriting talent in order to continue making sure that my staff can actually sleep at night. Because I have enough deals coming in that we have a lot of work. We’re at 14 people right now, by the end of the year we’ll probably be closer to 20.

Steve Monroe
Speaking of goals, what is the goal for Berkadia now in the seniors housing and care lending space?

Stephen Ervin
When I was hired the clear directive was to make us a leader in the products in which we want to play, which are primarily the government-guaranteed, and GSE lending products. We want to be a leader in Fannie, Freddie and HUD—number one if possible, but I don’t want to be number one at the cost of doing good deals. So we’ll define leader in our own terms within all three of those platforms. In order to do that, one of the key points was we have a proprietary lending program that we roll out to our very strong clients, who can bring multiple deals back to us in exchange for us doing certain things for them. We’ve deployed, thus far, nearly $100 million under that proprietary lending program, which started this year. Our first loan was made in February. So we’re starting to really utilize that money and we expect to use that proprietary program to allow us to continue to deliver on the GSE and HUD takeouts. We will be able to grow those businesses. We won’t be playing in the asset-backed space. That’s just not what we do.

Steve Monroe
So when you say proprietary you’re talking about balance sheet lending? 

Stephen Ervin
I am specifically speaking about Berkadia’s balance sheet. Berkadia has allocated several hundred million dollars of balance sheet, just the general products. We’ve deployed, I believe, about $300 million to $350 million so far since last October, a substantial chunk of that being seniors housing and seniors will continue to be an important piece of that ever-growing proprietary balance sheet capacity.

Steve Monroe
That’s good, because I think the industry needs more and more balance sheet lending out there, so hopefully you can grow that. Are you looking at a certain split in your business between independent living, assisted living, skilled nursing or does it not really matter? 

Stephen Ervin
We haven’t focused on a defined split. If we ever get significantly out-of-weight one way or another, we will likely balance that from the balance sheet standpoint. From a Fannie, Freddie and HUD standpoint, obviously more of HUD is going to be skilled nursing, and the assisting living that Fannie Mae and Freddie Mac don’t otherwise like. The independent living, assisted living are all going to go to Fannie Mae and Freddie Mac. At this point I’m really coming out about half and half—AL, IL and [ALZ], and then skilled nursing. About half and half, both on the balance sheet side, as well as on the GSE-related side. It seems like a fair split to me, but we’re not actively looking one way or the other. It’s just a matter of that’s the way the deals will come in and that balance works for us. But if it ends up two thirds, one third, one way or another, that will be fine, and we’re agnostic either direction.

Steve Monroe
How about we put the balance sheet side of business away for a minute. When you look at your GSE business, is it in a 50 percent Fannie/Freddie, 50 percent HUD? 

Stephen Ervin
Right now it’s more heavily weighted toward Fannie and Freddie. We’re a relatively young group. I started August 1st, then we added people in September and then moving on to the end of October is when we really built up the core of the originations team. As you know, the length of time it takes to get HUD deals going is generally a little bit longer. HUD’s recent activity and ability to remove the queue has created far more interest in HUD today, but from the last three to four months, there was still the belief that HUD was taking nine, 10, 12 months, and there wasn’t as much interest in HUD. We’re starting to see a lot more interest in the HUD side, and I would imagine that it’s going to end up balancing that side out. Right now we’re a little heavier from an origination standpoint on the Fannie/Freddie.

Steve Monroe
Are you seeing just a general increase in funding requests, or is it the same kind of volume? 

Stephen Ervin
Oh no. We’re definitely seeing an increase, even compared to what I had seen in my prior lives at other companies, what I’m seeing right now, and in the chair that I’m sitting, I’m seeing absolute increases in funding requests. It’s more people who are looking for acquisition financing than I think have to do with a bridge, looking for more deals that are trying to take advantage of where rates are today in anticipation that we’re going to have higher rates in a year/year and a half. Unfortunately, I’ve been saying rates are going up for about the last five years. I’ve been wrong for a while. I expect to be right some time soon.

Steve Monroe
Eventually you’re going to be right on that one. I can guarantee that. So you’re seeing more on the acquisition side than the refinancing side? 

Stephen Ervin
I’m sorry. I mean to say that the acquisition side is increasing. I’m not seeing more on the acquisition than refinancing, but the acquisition inquiries are up from where they had been previously, and that was something I wasn’t really expecting. I’m very happy to see it. It consists of some people deciding to let go of their real estate company, some people exiting the business and other, just, general accumulation of some clients that we’ve already have.

Steve Monroe
Have you been happy with the quality of what those clients are buying? 

Stephen Ervin
At this point the purchases that I’m seeing are somewhat of a mixed bag. We don’t spend an awful lot of time working when we don’t like the quality of the assets. We try to make that decision relatively quickly and maybe the financing is better placed elsewhere. When we like the assets we go after them pretty hard. So far I have seen adequate quality, some very good, some kind of mid-range, but most of them with significant upside potential, whether it is on the skilled nursing from a Medicare mix improvement, or whether it is on the AL/IL, just from a little improvement in the operations. We see improvement; we generally underwrite the existing and look for the improvement to be on equity side.

Steve Monroe
Why shouldn’t a borrower refinance now?  You must go to the clients who already have the debt on their books, they might say, hey your rates are so low—historic lows. Why wouldn’t they, or why shouldn’t they refinance? 

Stephen Ervin
There are a few reasons that somebody wouldn’t want to refinance today, but they all primarily deal only with the current plan, their current structure of where their debt is. If somebody’s looking to get out of their buildings in two to three years, putting new debt on today, there may not be a benefit to the ultimate cost. Yes, the debt is all assumable, but there’s a frictional cost they assume, to assumption, and it may end up getting in the way if you’re going to sell to a REIT, for example. On the other hand, there are enough people out there who still have some pretty strong yield maintenance issues, and yield maintenance, when rates are where they are today is incredibly painful. Aside from those reasons—or, if you’re going to do a replacement facility or do some substantial expansion, that you aren’t quite done with your business idea, if you have a core asset that’s operating as expected, there is, in my opinion, no reason not to be looking at a potential refinancing and taking your debt cost for an extended period of time down to levels that I don’t believe that we’re going to see. There I go again for my five years…

Steve Monroe
Especially because you know rates are going to go up.

Stephen Ervin
They are going to go up. To rates where I just don’t think you’re going to see a repeat. One exception is in states where, on the nursing side, where Medicaid will go down right with the savings in interest rates, such as New York. And right there, we have an awful lot of loans in New York sitting at 7.5 percent and there’s no benefit to a refinance. It’s interesting, but they lose all the money in the Medicaid reimbursement. Those are the only reasons, other than that somebody should absolutely be considering a refinance in order to lock away their debt, at an advantageous a financing option as they can.

Steve Monroe
It is definitely a great time to finance, and, as you said, at some point rates are going to go up. So hopefully you’ll have a great year with your new team, and good luck.

Stephen Ervin
Thank you very much.
 

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