A shifting climate: navigating an uncertain lending environment

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A shifting climate: navigating an uncertain lending environment
A shifting climate: navigating an uncertain lending environment
The financial hardships that followed last year's economic collapse have definitely restricted long-term care loan availability, and perhaps altered industry lending practices permanently.

But those in the field say the situation is not as dire as some may believe, especially the misperception that access to capital is non-existent.

While it's true that lending activity has slowed down dramatically compared to the frantic pace before last year's financial implosion, the general consensus is that funds are still available for worthy borrowers. Chances are long-term care operators who have diligently managed their finances throughout the economic crisis can still get loans since banks and financiers that stuck to basic lending principles are still willing to provide funds for projects they deem sensible.

The 2009 McKnight's Long-Term Care News Lenders Source survey results support the notion that there are still plenty of lenders looking to do business with providers, though activity has waned considerably in the past two years. For instance:

• 73% of lenders said they offer acquisitions financing, but that figure is 12% lower than last year;

• 67% offer construction financing, down 8%;

• 53% offer interim financing, a nearly 20% drop;

• 47% offer permanent mortgage loans, a decrease of 23%;

• 47% offer term loans, an 11% decline.

Even so, the long-term care market is far from dormant on the lending front, especially when compared with the rest of the economy. Loans for working capital actually rose this year, with 47% offering them compared to 40% in 2008.

Providers should be aware however, that they will almost certainly be scrutinized at a higher level when it comes to qualifying for loans, says Doug Korey, managing director for Shrewsbury, NJ-based Contemporary Healthcare Capital.

“The reality is that it is a lender's market today, not a borrower's,” he says. “Operators who have been active in the market for the past nine months certainly know that capital has been restricted at many levels. Pricing for many lenders has increased, leverage has decreased and time to close has lengthened. Credit standards have substantially tightened.”

A renewed sense of caution and discipline are at the heart of today's lending landscape and Korey advises that providers familiarize themselves with new policies and procedures before approaching lenders.

“Be sensitive to your relationship officer's process and learn about that process on the front end of the transaction—there typically are a lot more hurdles that the officer needs to jump through than two years ago,” he says. “Don't expect that this will be a 60-day process with your bank. Don't expect that your old terms are going to be the new terms.  I consistently am amazed when a borrower that I have never dealt with comes to me for financing and says things like, ‘Your terms are out of the market,' and then returns 30 days later with hat in hand.”

Borrowers: Be proactive

Brian Beckwith, senior managing director for GE Capital's Healthcare Financial Services Real Estate in Bethesda, MD, agrees that it is essential for providers to recognize the changes that have occurred in the financing markets and plan accordingly.

“The most successful borrowers are being very proactive – planning for more equity, appropriating covenants to monitor the transaction and allowing more time to close financing transactions. It is also important that borrowers conduct more due diligence on prospective lenders, including capabilities to close and fund transactions and the lender's commitment and track record in the industry.”

Bethesda, MD-based Walker & Dunlop is one of the largest healthcare lenders in the country and continues to be active in the long-term care segment, says Doug Bath, group head of the company's healthcare finance group. While opportunities continue to exist in the market, Bath maintains that minimizing risk is and always has been the top priority at his firm.

“We favor getting back to basics with location and an experienced property manager being paramount,” he says. “Proposing a new building in the middle of nowhere with an inexperienced manager is not going to make it past the credit committee. It must have the right ZIP code, street corner and manager in that market.”

Due to its volatile nature, any type of loan speculation is now considered a dangerous prospect in the lending community, Bath says.

“We're more cautious in our underwriting, looking at historical trends rather than trying to figure out what could happen in the future,” he says. “There are just too many questions to consider, such as if Mrs. Jones pays X dollars for Suite 101 and then moves out, what does the incoming Mrs. Smith pay? Will it be higher or lower? When you apply that to an 80-unit community, the answers are all over the board. If Mrs. Jones paid $100 and Mrs. Smith moves in paying $95, it's a challenging community to underwrite. We just don't know what the trends will look like.”
Showing your best side

In order to present the best possible image to lenders, long-term care operators need to find economic positives to counteract the negatives that have surfaced from the sour economy, says David Souder, administrator and CEO for the United Methodist Memorial Home in Indiana.

Souder cites some of his organization's challenges as higher-than-usual seasonal census declines, scarcity of Medicaid funds against a growing demand, escalating capital expenditures and personal economic difficulties among residents and employees.

Conversely, he cites improved employee attendance and less turnover, stable and softer prices for supplies and services, heightened awareness of expenditure control and an organization-wide effort to improve all areas of weakness.

“Illustrate with both talk and action your commitment to quality care and demonstrate with timely and accurate records your interest in cost control,” he says in advising his peers about dealing with lenders.

Though Souder says United Methodist has put future building renovations and other non-urgent capital expenditures “on hold” for now, the organization has been able to secure a new and larger line of credit “as a precaution against a worsening economy.”

As a result, it was able to upgrade employees' 401k plans “to hopefully provide better returns and quicker recovery” while also offering employees professional assistance with their own financial challenges.

More good signs

Chris Wettig, chief financial officer for Wichita, KS-based Legend Companies has taken a similar tack in promoting the opportunities that have followed in the wake of the economic crisis.

For instance, he says “turnover has decreased and we are experiencing an increase in applications for new and existing positions” and that “acquisition opportunities have been on the rise and asking prices for vacant land are lower.” Moreover, “our consolidated occupancy has been above 97 percent for two consecutive years and our margins are at all-time highs.”

Deals getting done

Loan activity is stable and steady for long-term care, despite a noticeable decline in the number of transactions, according to officials with Gemino Healthcare Finance and GE Capital Healthcare Financial Services. Both report having about 12 deals either completed or in progress so far this year.

In Philadelphia-based Gemino's case, the providers that qualified for loans all showed the same characteristics, says Mark O'Brien, vice president of sales and marketing.

“They have a solid history of predictable cash flow, their accounts receivables are turning well and they have sound internal systems,” he says. “We are also looking for personal guarantees on more of our deals now as well.”

GE Capital's Beckwith asserts that finding “quality operators” is central to establishing a business relationship. Other parameters the company considers are the strength of provider collateral, the structure of the loan, financial operating history and caliber of operations and clinical practices.

“Given the relative uncertainty in financial markets, property valuation and healthcare legislation, we are taking a more critical view of cash flows and reimbursement related to new transactions,” Beckwith says.

Chevy Chase, MD-based CapitalSource is another lender that has been active despite the economic slowdown. Steve Gilleland, director of healthcare real estate, says the group's conservative philosophy has helped it weather the turbulence that crippled other financial firms.

“We always look at financials, but also at the annual surveys because good care equals good surveys, which equals good financial results,” Gilleland says. “We want to know if they pay their bills on time, if they are timely with their payroll taxes, property taxes and provider taxes. We don't want to lend to a provider who considers it an interest-free loan.”

CapitalSource also has a forensic accounting team to scrub the cash receipts, checking the stability of cash flow. Even after closing the loan, the same auditors make regular visits to the facility.

Future loan activity

Despite the slowdown in capital provision, the need for funds will escalate in the future as an aging long-term care infrastructure requires renovation and replacement. Will lenders ever resume their pre-crisis levels? And if so, when will it happen?

Korey admits that the current situation could last indefinitely.

“The market to exit loans at maturity has greatly shrunk, which is a big reason why so many operators have applied to HUD for refinancing,” he says. “Complicating the picture is that many of these lenders are no longer making new loans, forcing the borrower to tap into new banking relationships.  Will the borrower be able to fully refinance out the senior loan without taking on mezzanine or equity financing?  Will the cash flow of the facilities underwrite to the higher cost of capital?  A chicken-and-egg scenario is certainly possible and may be even probable where the lender needs to ‘prod' the borrower out of its portfolio and the borrower has nowhere to go.”

Beckwith is more optimistic, however, pointing to encouraging signs that the overall economy is recovering.

“Although there will certainly continue to be stress for highly levered borrowers–particularly if their lender is facing challenges –conditions will likely begin to improve,” he said. “Financing markets are becoming more stable, borrowers are proactively addressing maturity issues and some of the most challenged properties in the assisted living market are coming to resolutions of their problems. The survivors, both lenders and borrowers, will be those that have the best understanding of the needs of the other parties in the relationship.”