Back from the brink
Back from the brink

The long-term care industry appears to have fared much better than other sectors since the economic collapse nearly two years ago. While the credit paralysis that followed the mortgage crisis has continued in many places, lenders’ purse strings have loosened for skilled nursing properties that show solid financial performance, market analysts say.“The evidence is pretty strong that we’ve withstood the recession better than other areas,” said Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry. “It has affected us, certainly, but because our product is not totally discretionary, we’ve weathered it better than most.”

Private-pay SNFs have fared best, Kramer said, with very little drop in rent growth. At 3.5%, it is the highest charting level in seniors housing.

“Without question it is a very need-driven product,” he said.

Philadelphia-based Gemino Healthcare Finance has been focusing on the SNF segment because “it is being seen in a favorable light right now,” said Mark O’Brien, Gemino’s vice president of sales and marketing. “Working capital lending is strong and available for this segment.”

To be sure, long-term care “is faring well in lenders’ eyes,” agreed Steve Gilleland, director for Chevy Chase, MD-based CapitalSource. Clinical components such as memory care are especially attractive, he explained.
“Alzheimer’s and memory care are in high demand and get a high return,” he said. “The higher the acuity, the more desirable it is.”

Mike Hargrave, vice president of NIC’s Market Area Profile service, has seen “a number of companies pursuing freestanding memory care because it is viewed as a drastically underserved market and that there is a great need for those types of dedicated properties that can handle higher acuity late-stage residents.”

No free lunches

Yet, even though they have an advantage in getting lenders’ interest, capital still doesn’t come easy. For example, CapitalSource expects to see strong fundamentals that include an occupancy rate of 85% or higher, tight expense control and reinvestment into the property beyond normal maintenance, Gilleland said.

Doug Korey, managing director for Shrewsbury, NJ-based Contemporary Capital, adds: “Certainly the need for strong operator fundamentals is greater today than two years ago.  Those operators who have not been able to show positive growth or consistency in their operating statements or who wish to purchase or develop a type of facility that is different from what they have done in the past will find difficulty obtaining financing in today’s climate.”

Loan landscape

Brian Pollard, senior managing director for Columbus, OH-based Lancaster Pollard, says he’s starting to see signs of life with traditional funding sources, mostly at the community bank or regional bank levels. These may be early indicators that capital markets are beginning to normalize, he said.

“Investors are starting to return to the capital markets and are developing appetites for some level of risk beyond U.S. Treasuries,” Pollard said. “In June, we closed on expansion financing for a low-investment-grade CCRC using unenhanced tax-exempt bonds at a very good rate. That transaction would have been very difficult to sell 10 to 12 months ago, or if so, would have been at a much higher cost of capital.”

FHA, HUD, Fannie Mae and Freddie Mac are all dominant lenders in the seniors housing market and have picked up much of the slack caused by the capital collapse. Others are gradually creeping back into the game, Pollard said.

“While FHA terms are unbeatable, some clients are using the thaw in the credit markets to get transactions completed that could not wait for the government-backed funding to materialize,” he said. “Over the past nine months, we have had growing success with letter of credit-backed or bank-qualified bond financing, where in 2009 there was very little activity in this area, in particular with letter of credit-backed bonds.”

From a broker’s perspective, more options are materializing from a conventional lending platform, said Jeff Binder, managing director for St. Louis-based Senior Living Investment Brokerage.

“Coupled with the implementation of the ‘Green Lane’ by HUD, which has increased the processing time for qualified applications, certainly things appear to be trending in a positive direction,” he said.

“However, there is a dichotomy within the industry that rewards the more risk-averse applications while still showing a constrained appetite for all others,” he added. For instance, the creation of the Green Lane by HUD has significantly reduced the queue time to around 60 days for those applications that meet certain risk thresholds. Those that do not meet these guidelines are sent to another queue which can take six months, assuming the application is eventually approved.”

Hargrave acknowledges that the federal lenders are handling the bulk of activity but says he is encouraged by what he sees in the marketplace.

“The REITs are starting to get more involved and some banks are starting to gear up a little,” he said. “Banks are intrigued about the quality of the sector and commercial lenders are getting more active. I wouldn’t say that we’re all that different from other sectors, but we have a few more positive indicators here.”

Soft spots remain

Weakness in the overall economy is still weighing down long-term care and keeping it from making a full recovery despite the few bright spots that exist. Commercial and residential real estate remain in the doldrums, job growth is anemic and consumer confidence isn’t robust yet.

“Lenders have to get comfortable with all of their problem loans and make sure they have the capital ramp up lending,” O’Brien said. “Real estate lending will probably be the last area to expand.”

Gilleland concedes that “we may never approach pre-2008 heady times when credit was so available.”

Economic recovery must be triggered by the consumer, he said, “but if consumers don’t have jobs, how can they do it? We’re going to bounce along the bottom for a while longer.”

Hargrave sees the recovery pattern as “not a straight line upward, but more of a ‘W’ up and down.”

Korey maintains that four main areas need to improve: unemployment, commercial real estate, state budget deficits and foreign investment. At the same time, interest rates need to remain stable.

“If all of these factors improve or occur, then we should be able to see valuations improve, lending and investment capital return and general buyer interest increase,” he said. “Needless to say, I think that we are many months if not a couple of years before we see lenders and investors return to normalcy, which will include construction and permanent capital.”

Reimbursement pressure

For skilled nursing specifically, Medicare, Medicaid and managed care all present a financial obstacle and Kramer cautions that “the percentage of private pay in the quality mix is smaller than it used to be. Assisted living and home health services have taken it over. The focus now is more on Medicare and managed care.”

State Medicaid programs are an example of how, in some instances, federal bailout money actually made a situation worse.

“Many states used stimulus funds to plug budget gaps last year, thus sparing these states from cutting reimbursement,” Korey said. “This year, with those funds gone there are approximately 38 states that have either cut reimbursement or are thinking about it to reduce budget deficits.”

Threats to Medicare and Medicaid reimbursement make the future cloudy, says Michael Burchell, director for Baltimore-based Capital Funding.

“This will be determined on a case-by-case basis, but skilled nursing providers will see more and more people needing to use their services,” he said. “If cuts to reimbursement exist, the challenges will be endless. Skilled nursing providers must constantly fight to control expenses and grow their census while making certain they are providing excellent care and showing strong surveys.”


Loan tips

Skilled nursing facilities currently have a distinct advantage in the capital sweepstakes, but getting a loan is far from automatic. Even in a highly favorable industry such as long-term care, borrowers must meet a number of stringent requirements to qualify.

To be considered a serious candidate, loan seekers should:

-Have an occupancy rate of 85% or higher over the past 12 months
-Demonstrate tight expense control, but not at the expense of quality resident care
-Reinvest in the property beyond normal maintenance
-Show positive net operating income (NOI) growth
-Demonstrate strong surveys

Conversely, they should not:

-Develop a facility that is different from what they have done in the past
-Use discounts or concessions to attract residents
-Apply for a loan in a “cash negative” situation

Source: McKnight’s Long-Term Care News interviews, 2010