How to do it... Financing
Cheerful stories about financing have been the norm recently for stakeholders in the long-term care field. But it hasn't always been that way – and it's all but certain that this rosy outlook will shift at some point. Providers must prepare themselves for the time when the whirlwind of funding opportunities dies down. Here is some advice that will stick – in good and bad times.1 Facility managers should be mindful that the financial decisions they make today may have negative repercussions if a market downturn should occur, says Michael Monticello, senior vice president of commercial lending with Chicago-based LaSalle Bank. Prudent facility managers can position their organizations to prosper even in a cooling market by keeping some basic financial principles in mind, he adds. The first is to reinvest in existing properties.
"As you consider your growth strategy, be sure expansion plans do not compromise the quality and reputation of your existing operations," he cautions. "Now is a great time to recapitalize and reinvest the proceeds into your existing facilities. Updating and expanding physical therapy space will help attract Medicare residents."
"Clean, modern and well-run facilities maintain higher occupancy rates and generate higher revenues over the long haul," he adds.
2 With so much capital readily available, you should manage how you are leveraged.
"As you review debt levels, and the corresponding payments, consider how your business would fare if there were reimbursement reductions in either Medicare or Medicaid," Monticello advises. "At what level of reduction would you have difficulty sustaining operations and reinvesting for the future?"
3 Expand or simply establish your line of credit, Monticello says. With so much reliance on government money, access to liquidity is a key to success.
"With strong debt markets, now is a great time to establish or expand a line of credit. Review how many days of operating cash you can currently access," Monticello says. "As part of your budgeting process, you should anticipate the possibility and impact of reimbursement reductions, and then calculate how long your liquidity can sustain operations."
4 Jump into projects and borrowing – but don't overdo it, cautions Jim Sherman, senior managing director of Red Capital, Columbus, OH.
"A lot of borrowers try to go bleed the market as much as possible," Sherman says. "But don't over-borrow in relationship to the capability of the property. Don't overdo with variable rates."
Sherman says the "cheaper" label put on rates may be deceiving.
"The spread between variable and fixed rate is only 40 basis points," he explains. "I'm not sure 40 basis points is worth taking interest risks, with interest rates as low as they are today."
5 Now is an excellent time to make capital improvements, but also take your eventual exit strategy into account, advises Bruce Gibson, first vice president in the senior housing group for CBRE in Miami.
"The industry is relatively stable now. Go ahead and make those improvements before there's a rush of new developments and capital may pull back and interest rates go up," he says. "If you're an 'A' facility, you have to maintain that. My guess is some of those older facilities will be shuttered, so if you're going to stay in the game, now is the time to do capital improvements."
Whether you want to divest, grow or maintain your business, set up a capital structure that will work best for you, Gibson adds.
"If you're thinking of getting out in three years, maybe you can be more flexible and push it to five or six. Don't set up a lot of long-term debt that has onerous prepayments or lockouts. People are often focused on what the rate is today as opposed to how does that impact my long-term business plan."
6 As with most money matters, you need to pick your partners wisely. Search lenders' track records, taking special note of whether they have bobbed in and out of the long-term care market, advises John Cobb, senior managing director of real estate finance for GE Healthcare Financial Services.
"Relationships with capital providers that have been consistently in the market through previous cycles can be a real asset during future market fluctuations," Cobb says.
"Look for a capital provider where both the company and their employees have a long-term track record of providing capital to the industry. Many sources were in the market in the past but chose to exit when the industry slowed."
Mistakes to avoid
- Believe such a borrower-friendly lending market will continue indefinitely.
- Relying too much on variable rates.
- Failing to keep your long-term business plan in mind when structuring deals.