Proving your worth: finding capital in tight times
Proving your worth: finding capital in tight times
Still, that doesn't mean that stronger lending is on the immediate horizon, especially for operators who have suffered operational, financial or clinical setbacks during the downturned economy.Overall, lending remains weak, particularly when compared to more laissez-faire financing seen before 2006. Today, the majority of financing is long-term through Fannie Mae, Freddie Mac and U.S. Department of Housing and Urban Development. Overall, lenders are exercising extra caution. They're inking most deals with operators who have held their own and kept their operations rooted in quality.
“Deals are definitely still hard to come by,” confirms Jeff Binder, managing director for Senior Living Investment Brokerage Inc. in St. Louis. “Not that long ago, there would be this comfort level that when you got to a certain point in the [financing transaction], you could be pretty confident that the deal would go through. Now, one blip, such as a bad survey or a credit blemish, could potentially derail the entire deal.”So what do you do when you've hit bumps in the road? Lending will be tougher, but you don't have to give up all hope, experts say.
Time for transparencyFinancing will be more difficult to secure for an operators who have suffered blows to their credit, occupancy or survey scores. Success largely will depend upon their level of commitment in overcoming the setback and maintaining a good, trust-based relationship with lenders.
“Relationships are always important, but that's especially true now. A [borrower] who surprises the lender by not keeping them informed and isn't upfront with bad news will have a difficult time recovering with the lender,” notes Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry, Annapolis, MD.“[Blemishes] can happen, but transparency is critical. If you can show evidence of righting the ship, a borrower is still liable to be in a good position.”
It's in the detailsPresenting the lender with a formal and detailed plan is essential. Ideally, such a plan will reflect a borrower's understanding of what caused the setback, and also present the development and implementation of a strategy that's based on attainable short- and long-term goals aimed at preventing repeated mistakes.
“You can't hide your head in the sand,” says Kathryn Brod, senior vice president, Ziegler Senior Living Finance, Chicago. “Ongoing dialogue helps lenders understand an [operator's] situation and will show [lenders] the staff's level of sophistication in responding to the situation.”Lenders also will be asking for accurate, up-to-date financial reporting, and a history of surveys to demonstrate quality with core business functions. Lancaster Pollard, for example, asks operators for three years of clinical survey history.
Senior Living Investment Brokerage encourages operators to focus on organization, accuracy, efficiency, and timeliness with their clinical materials and financial statements.“Audited financials are best and the more current, the better,” Binder says.
Wise operators also will embrace patience, perseverance and proactive planning. If an operator has suffered a financial or clinical setback, or a drop in occupancy—or is even anticipating such a hiccup—it should inform its lenders immediately. Operators that are a few steps ahead, ask difficult “what if” questions and develop contingency plans to address problems before they arise will stand out amongst a sea of other potential borrowers, according to Brod.“Many times, an operator makes the mistake of waiting too long to address a situation and assuming that things will keep going the way they always have,” she says. “But you can't look at a waiting list and assume it'll stay that way. You have to ask those tough questions: What if things get really bad? How should we position ourselves if we lose momentum? What can we do now to be more proactive? Providers who are caught in the status quo and wait will be caught in a bad position [with lenders].”
Back to basicsCertainly, in today's challenging market, lenders can't afford to assume a bad risk. Their first sign that an operator is a safer bet? When good, solid operations and the delivery of quality care remain the top priority.
“Lenders want to see borrowers that have strong controls in place and are good operators. Poor survey issues are a red flag,” reasons Mark O'Brien, vice president of sales and marketing for Philadelphia-based Gemino Healthcare Finance. He adds that how well cash is collected is another key indicator to the lender. “Strong financial reporting is needed.”Focusing on the “Three C's”— care, census and cash—is a wise move in good times and bad, notes Steve Gilleland, director of healthcare real estate for CapitalSource in Atlanta.
Aside from clean surveys, lenders also will look for operators with a good census and the right resident mix. They also prefer those that are effectively managing and controlling expenses, “with special attention being given to labor costs, which account for [roughly] 65% of all nursing home costs.”Lenders are also keeping a closer eye on borrowers' levels of cash reserves. Limited reserves will signal lack of proactive planning, which could indicate to a lender that the operator is not prepared for immediate or future unforeseen challenges and, therefore, might be a high-risk borrower.
The same can be said for falling behind on payroll and property taxes, and, of course, delinquency on mortgage payments.“This is definitely something we look at,” Gilleland stress. “Lenders don't look kindly on late payments.”
Failure to properly maintain existing facilities is another “no-no” in the eyes of lenders. General upkeep, such as fresh paint and well-groomed landscaping, requires minimal investment. Remember that it conveys to lenders (and, certainly, to existing and prospective residents) that the operator cares about its image and maintaining its competitive advantage, even in more challenging economic times.“It's important to continue putting TLC into the building,” says Gilleland. “Curb appeal is key.”