Finance Feature--In the money

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Lenders say financing is streaming into the skilled nursing field, creating a unique situation for many. Nursing homes haven't earned a gloom-and-doom reputation in the past for no reason. If it's not regulators, plaintiff lawyers or consumer groups standing in line to beat on them, often it's players within their own caregiving community complaining about something. That's what makes some recent news out of the sector remarkable.

There is optimism. There are favorable reviews. There are reasons for providers to feel as if they are "in the driver's seat."
That's what a strong financing climate will do for you. A convergence of factors – including favorable real estate and funding markets, as well as decent reimbursement – have created the uplift for providers. Some experts even claim providers' improved operations are to blame for such an increase in stature.
Various lenders attest to the high confidence the skilled nursing sector has earned.
"For a CFO, that means they have more options, more banks and more financial institutions in the market," says John Cobb, of GE Commercial Finance, Healthcare Financial Services. "They may have to return a lot of calls."
Cobb said he has doubled the size of his staff over the last 12 months to handle increased business volume. Overall, his firm conducted more than $1 billion in financings in the long-term care sector last year.

Contending with cuts
Even if Medicare reimbursements are scaled back next year, some experts still expect good financial times ahead.
"We've had four years of Medicare increases, whereby we were getting our annual inflationary adjustment, and a few years back, we got a 20% increase in rates," explained Jim Pieczynski, managing director at CapitalSource. "The reimbursement environment is perceived as very, very positive."
Like most others interviewed for this article, he quickly cautioned that reimbursement rates for Medicare and Medicaid must be closely monitored. "We do believe there probably will be a cut in Medicare rates as a result of (resource utilization groups) refinement, probably a minimum of $10 a day, though I wouldn't be shocked if we saw $20," he said.
New RUGs proposals from the federal government were expected out by early this month. After a 60-day comment period, they could then be in play by October.
"RUGS refinement is the big one out there and people need to be gearing up for it," Pieczynski said. "They should concentrate their energies not on whether it will come but what they'll do when it happens, where they'll cut expenses."
But Pieczynski and others, including GE's Cobb, emphasized that operators' abilities to weather stumbling blocks over the past few years have left them bullish.
"Generally speaking, skilled nursing has been doing great for two to three years now," Cobb said, calling himself "a little more conservative" than other lenders. "Nobody tanked when the 'Medicare cliff' happened a couple years ago. They definitely didn't make as much money. But everybody came back. It's amazing."
Non-traditional healthcare lenders have started nosing back in, which is usually a sign things are heating up. Capitalization rates have dropped (see figure on page 32), which has further helped the churn.
"You'll never see cap rates in skilled nursing go to 10, but they've dropped a bit, and more importantly, bed prices have gone up," says Doug Korey, managing director of Ziegler Health Care Capital, LLC.
"You have Merrill Lynch, Red Mortgage, GMAC, First Boston, CapitalSource – a number of non-banks coming back into the market with a lot of money," Korey added.

Creating froth
Experts largely agreed that while funding has been aggressive in certain cases, it's also been disciplined – so far. Runaway investors and lenders led to some of the problems of the 1990s, when a new federal reimbursement system also led to many bankruptcies.
"We've seen unprecedented levels of investors interested the last several years," said Curt Schaller, manager of Merrill Lynch Capital's healthcare real estate originations team, a unit formed about three years ago to deal in the seniors housing and care markets. "Billion dollar deals bring private equity funds in and get people lathered up about the opportunity. That's what really whets their appetite," Schaller noted.
The main concern for investors and providers alike, however, is that lenders be able to withstand liquidity bumps in the road. Inexperienced investo