LTC Finance: Capital improvem ents: More money is becoming available, especially for solid performers
For operators who need capital, this is already a very good year. Whether the goal is refurbishing, expanding services or even purchasing new facilities, old and new funding sources are readily available — with terms that are especially inviting. Perhaps too inviting, those with long memories might caution.
Certainly there are signs that some established players -- such as LaSalle Bank in Chicago and Sovereign Bank in Philadelphia -- are gearing up in a big way to handle heavier loan volumes. "The majority of our business is in the skilled sector, but we are looking at an increased number of opportunities in assisted living and senior housing," says LaSalle's Michael Monticello.
In fact, many traditional lenders are bullish, notes Curt Schaller, director for the Healthcare Finance Group at Merrill Lynch Capital. High capitalization rates, solid operator performance and relatively decent reimbursement rates have made more lenders comfortable doing business in this sector, he says.
As a whole, the senior living industry has seen an approximate 15% increase in market capitalization – that is, net profit returns converted to a capitalized investment value – in the past six years, according to an update just released by the National Investment Center for the Seniors Housing & Care Industries (NIC).
NIC President Robert G. Kramer says the new information will help lenders and investors better understand the relative strength of the sector, especially when compared to others that haven't performed as well.
"With the growth of the seniors housing and care industry approaching the size of the lodging industry, it is becoming increasingly clear that this is a real estate class that should not be overlooked," Kramer added.
John P. Fogarty says institutional investors will have lots of company. The senior vice president and managing director for GMAC Commercial Mortgage's Healthcare Financing Group sees both traditional and new funding sources ramping up to serve the marketplace's capital needs. Among the latest arrivals: pension funds, foreign investors and private equity firms.
Randy Abrahams, CEO of Chicago-based Bridge Healthcare Finance, says the influx plays well for good operators, especially those looking to launch new projects.
"But while it's true that money is coming back, the good lenders have stood by their operators all along," he added.
Finding a niche
Michael Noda, an executive vice president for MMA Financial's San Francisco office, sees new opportunities emerging for smaller operators and lenders. Noda has focused on serving many of the so-called mom-and-pop operators in and around the Bay area.
"It is a people business," he emphasizes. And the more a lender can do to be sensitive to clients' needs and goals, the better both sides are served, he says.
But at the same time, many smaller operators are realizing that with old physical plants, limited resources and growing competition, it may be time to either move up or move on.
In some states, operators have begun contacting local religious organizations with an eye toward affiliation. But more often, smaller facilities are interested in either joining or being purchased by multi-facility owners.
In fact, 25 long-term care deals took place in the fourth quarter alone, according to Irving Levin Associates, New Canaan, CT.
"With capital flowing back into the market and cap rates declining, some of the prices paid were the richest we have seen in five years," stated Stephen M. Monroe, managing editor at Levin Associates.
Overall, more than $6.9 billion was channeled into a total of 390 healthcare venture capital transactions last year, a 23% increase over 2003, he says.
And it appears that even more venture capital dollars may be coming into play in this sector. In 2003 alone, 146 firms raised a net of $10.53 billion, according to Thomson Financial Venture Economics and the National Venture Capital Association.
Permanent financing remains common, but other options are growing, as well. One of the relatively new wrinkles has been combining HUD 232 loans (which can be cumbersome to acquire but offer unusually good protections to facilities and lenders) with short-term bridge financing. Several lenders -- such as Jack Dwyer from Capital Funding Group -- have capitalized on this approach. Similarly,