Finance feature: Climate change

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Thanks to favorable market conditions, the time is ripe for smaller long-term care operators to invest in their businesses.

Note to small long-term care operators: You know that rehab gym you've been thinking about building for a few years? Well, here's a tip: It's time to do it.
Low interest rates, relatively stable government reimbursements and growing occupancies have increased lenders' confidence in recent years in the long-term care industry. That, along with a growing elderly demographic and smarter operators, means conditions are ideal for smaller players who want to invest in their businesses, say bankers, investors and long-term care operators.
"Whether it's the mega-deal of GE or smaller acquisitions, it's a really good time to be the operator of a smaller long-term care company looking to cash out or get money for refinancing or renovating," said Bob Kramer, president of the National Investment Center For the Seniors Housing & Care Industry.

Choices, choices
Not only do smaller players have easier access to capital, they also can get their pick of loans, investors say. Operators can choose from such options as fixed rate to floating rate debt to interest-only.
"Your menu of products has increased dramatically in the last five years, too, especially for the small operators," said John Cobb, senior managing director for GE Healthcare Financial Services' real estate team.
"If you can't find what you want out of a loan, you're probably not creative enough," he added.
One new option that is gradually becoming available to smaller players is the conduit loan, a product with 10-year fixed rate permanent debt.
The conduit market – in which a lending institution bundles this loan with others and sells it off to securities – is starting to slowly open its doors to skilled nursing. It disappeared from the long-term care scene during the losses in the 1990s when many companies defaulted on their loans.
It has been used in a few large deals in recent months, including the sale of former Beverly Enterprises Inc. to Fillmore Capital Partners LLC last year.
The conduit loan may be a
good alternative to the traditional Housing and Urban Development (HUD) loan, which can be cumbersome, said Curt Schaller, director of National Originations for Merrill Lynch Capital Healthcare. It allows operators to pull out equity from their properties, unlike a HUD loan. Typically, a smaller operator who wants to reinvest in his properties must take out a bank loan, pull out equity and wait one year and refinance with HUD.
While the conduit loan may not be ideal for everyone – HUD may provide higher leverage and the terms may be longer – it is another option from which operators can choose, Schaller said. Some experts also noted that some operators might feel more comfortable working with an institution that holds the loan.

A new era
Smaller operators can certainly thank the big guys for some of this market bullishness of late.
"The rising tide has truly raised all boats in the healthcare space," said Raymond J. Lewis, executive vice president and chief investment officer for Ventas Healthcare Properties. "The market is awash in capital and the large operators have experienced an unprecedented level of liquidity. That has trickled down to the smaller and mid-size operators as well."
The lending sphere has markedly improved since the rough-and-tumble days of the late 1990s. Then, changes to the prospective payment system and overbuilding pushed many of the larger chains into bankruptcy. As a result, lenders recoiled from long-term care.
Not so anymore.
"Wall Street is getting more comfortable with skilled nursing as a lending product," Schaller said. "People are getting more comfortable in the real estate class and the hangover from the losses in the late '90s are starting to wear off."
Today, companies are more conservative and there are more "true blue operators," adds GE's Cobb.
"You don't see more aggressive investing," he says. "There's more capital today than in 1998, but you don't see people doing a bunch of development."
There are other encouraging signs: Interest rates at historically low levels; strong Medicare reimbursement, improving cash flows; and other market fundamentals, such as occupancy rates, are strong.
What does this mean? The lending community is now more willing to take a chance on a smaller chain or a Mom-and-Pop operation.
"There's an appetite for a big deal and an appetite for smaller deals, and every lender has its own niche," says John Sheehan, senior investment officer for Nationwide Health Properties, a real estate investment trust. "For a customer, it's maybe the best it's ever been."

Out with the old
This capital-rich environment provides new opportunities for smaller outfits. Some have opted to expand their businesses. Operators with one or two facilities now see the opportunity to pick up another, said NIC's Kramer.
Still others regard the current environment as a good time to cash out of their businesses and retire. Real estate investment trusts afford operators the chance to sell and lease back their facilities or sell them flat to a REIT.
In coming years, Kramer foresees the growth of companies with five to 15 facilities and the shrinking of companies with one or two facilities.
"These started out as family-run, but I think for many, the family has been in business for 35 years and sees a good opportunity in terms of their retirement," he said.
Many operators are using loans to reinvest in their aging plants. Jim Pieczynski, co-president of Healthcare and Specialty Finance Business for CapitalSource, said that a lot of operators are looking for refurbishing financing. That is extra money built into a loan for fixing or expanding a facility.
Renovations may include building more private or semi-private rooms, incorporating residential features, or building rehab gyms for short-stay residents to take advantage of Medicare's lucrative reimbursements.
"The industry recognizes that the better margin business is on the Medicare side, so to attract those residents, you need a facility that is looking in better shape and having the ability to provide the services that are available to Medicare residents," Pieczynski said.
Terry Russell, an operator of three long-term care properties, has done just that. He and a fellow managing partner of Largo, FL-based KR Management, recently completed a 2,400-square-foot therapy gym. They also have finished an 800-square-foot day room in a continuing care retirement community.
"We felt that with the addition of the state-of-the-art therapy space, that would help us in the marketplace, as far as competing with other skilled facilities," he said.
He sees firsthand the strength of the marketplace, particularly for small operators, he said.
"It's like anything. You go to the restaurant that gives you the best product. We have an advantage by being small and trying to do it right," he said.

Know your market

Providers can learn how to size up their competitive markets in ways previously thought unimaginable during a free McKnight's Online Expo session March 15.
"New data tools for market analysis" will be conducted by Mike Hargrave, marketing director for the NIC Market Area Profiles (NIC MAPâ„¢) program. The session starts at 11 a.m. Eastern time (10 a.m. Central, 8 a.m. Pacific).
Spend a few minutes at your computer, rather than days and hundreds of dollars in transit, to learn from an expert about supply and construction issues.
Registration for the session is free and without obligation. To register, visit http://events.unisfair.com/rt/mcknight.

Borrowing tips (for small guys)
- Be successful. Lenders look at operating experience, ability to generate cash flow and liquidity.
- Establish a sound work history. A provider who has operated in a state and wants to buy in the same state will be more credible as a borrower. A good survey history will help instill a lender's confidence, too.
- Be knowledgeable. Articulate a relationship to your lender, from historical financial statements to future financial projections.
- Do your research. When shopping for a loan, talk to different financing sources and consider various options.
- Know your lender. Work with lenders who understand long-term care and healthcare in general.