Housing market fear doesn't affect long-term care confidence

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Housing market fear doesn't affect long-term care confidence
Housing market fear doesn't affect long-term care confidence

While the rest of the housing market is gripped by credit fears, those in long-term care are staying confident.

The housing market has seen better days. As of this writing, Wall Street was struggling to stabilize after the subprime market fallout, a major mortgage company was quieting rumors of bankruptcy and the word "recession" was appearing with greater frequency in the media.

But if the rest of the financial world was seeing a half-empty glass, long-term care was still gazing at a cup bubbled over. The pessimistic conditions could not shake experts' confidence that long-term care housing was still relatively healthy and would remain so, despite larger market forces.

They credited their optimism to a steady momentum that has carried the industry to a period of unprecedented growth. The strength of the sector – seen in stable reimbursement levels and a decent regulatory environment – is not likely to weaken despite a market scare, they say.  

"There are still people looking for great opportunities, plenty of lenders in the market and plenty of opportunity to refinance and acquire," said Tamera S. Gundersen, senior vice president of GE Commercial Finance. "It's just not quite as strong as a few months ago. People are getting shy."

Borrowing confidence

General market jitters should not deter long-term care providers from borrowing money, experts explain.

"It's a good time to be an operator," said Randy Abrahams, president and CEO of Bridge Finance Group. "The capital is plentiful. The only issue is rates, which should remain competitive for the foreseeable future."

Turmoil in the bond market will lead to a tighter long-term care financing market, experts believe. But it is more of a slight market correction than a downturn, they say.

"I see more of a moderation," said Alan Plush, senior partner of HealthTrust. "I don't see anything that tells me we'll see a true correction. I see a dampening of expectations and pricing."

Because of the suddenness of the housing market change, how the conditions will affect nursing homes is still hard to discern, experts note.

"Will the average skilled nursing operator who owns 10 facilities in the state of Michigan be impacted? Probably not," says Angela Mago, senior vice president and national manager of KeyBank Real Estate Capital. "Could it affect the Genesis transaction and the GE deal? Could it have some disruption in some large mega-deals? Maybe."

Adds Ray Lewis, senior vice president and chief investment officer with Louisville, KY-based Ventas, a real estate investment trust: "The bond market has really taken a hit because of the subprime mortgage default. That has nothing to do with seniors housing, but it has a spillover effect on the credit markets."

A probable consequence for nursing homes is fewer offers on the table. While a year ago nursing homes may have had interest from 10 different lenders, today they might only have five suitors, experts said.

Newer lenders to the sector might be likely to flee as a result of the shifting environment. But established players in the sector, such as commercial banks, are not so easily scared off, they say.
"No matter what scenario you paint, they will be around to lend that money," Abrahams said. "They weathered the storm of 1997 and came out the other end. It's a more sophisticated group."

Staying fit

As is the case in the best of times, those operators with good fundamentals – that is, strong census, reimbursement and sound balance sheets – are still attractive to lenders.

"I see the marriage of private equity money with established owner-operators," said Meredith Oppenheim, senior vice president of Granite Partners. "Because of the operating specifics of our business, you really are seeing smart money marrying with smart operators that could minimize the risk that comes with dabbling in this business."

Ventas' Lewis agrees.

"The market is still attractive from a fundamental perspective," he said. "It's harder to get capital and it favors people with a strong balance sheet and who use less leverage. As a REIT, we think the near-term prospects are pretty good in terms of acquiring additional assets."

Mago notes that a well-managed operator with a good operating history and track record in recent months has not had a problem having access to capital. They have been able to use that capital to divest, renovate, construct and "buy off the guy down the street," she said.

A full glass

Lending experts say there is little reason to be on edge because of the solid foundation long-term care housing has laid over the last few years. Stable reimbursements and regulations and an improved litigation climate have helped to attract lenders to the sector. Low cap rates, which translate into high values, and low-interest rates have also helped to normalize the environment.

"We've been on a good bull run for four to five years," said Steve Gilleland, director of healthcare real estate for CapitalSource. "The reimbursement allows for predictable cash flows for owners and lenders like me. I can tell what kind of cash flows I can lend on, and Medicare and Medicaid rates are going up at a nice upturn."

Demographics are no doubt also in the sector's favor.

"I think there will always be a place for nursing homes," Gilleland said. "That's why we feel so good about lending in this sector."

One sign of the sector's robustness is the presence of institutional capital, a kind of status symbol of a mature sector, Mago explained. Office, industrial, retail and multi-family – the four major housing sectors – have attracted institutional capital.

The final step in the evolution of a market is the interest of capital markets, notes HealthTrust's Plush.
"One thing I love saying is that healthcare is the last one invited to the party and the first one asked to leave," Plush said.

Word of caution

Still, there is reason to be cautious. The market crisis is not over, which still makes long-term care vulnerable. Ventas' Lewis notes it has been one of the fastest deteriorations in the credit market since the devaluation of the Russian ruble in the early 1990s.

Specific concerns for the future of long-term care include increases in interest rates that could affect cap rates, and reimbursement changes, Mago said. Providers also need to keep an eye on items such as the House bill that was threatening to reduce Medicare reimbursements to skilled nursing facilities by $2.7 billion over five years, as of press time.

It's also important to be wary of highly leveraged acquisitions that are dependent on insufficient cash flows that could cause credit default and capital flight, she said.

Because of the current uncertainty, it has been wise to wait before borrowing to see which way the market goes, one investor advised.

"All indications are the fall will be a smoother ride," said the investor, who asked not to be named.
Others say the time to sell is now.

"If you're contemplating selling, now is a good time because you never know when the government will change the game," said CapitalSource's Gilleland.

His attitude points to a reality of working in long-term care finance: Lenders are always on their guard. No matter how well things have been going, it's hard to dispel the possibility of a crash. This scenario last occurred in the late 1990s when the government introduced the Prospective Payment System, which changed reimbursement and sent many long-term care chains into bankruptcy.

"I've seen the movie before and I'm a little worried," Gilleland said. "I'm just hoping the government doesn't pull what it did last time. They are talking about adjusting the highest RUGs categories."

But for reassurance investors and providers just have to think back to last year's October conference sponsored by the National Investment Center for the Seniors Housing and Care Industry.

During a reception, Abrahams recalls lenders standing around the perimeter of the room courting providers who were nibbling on shrimp in the middle.

"The operators and borrowers looked very relaxed," Abrahams said. "I think the prospects of capital to long-term care providers remains very strong. I don't see that flow interrupted in any meaningful way."

Finding out what really happened: A market recap

Understanding the current housing crisis is not brain surgery. But sometimes it feels that way after reading general news reports.

Experts who spoke with McKnight's summed up the general scenario:

"The institutional bond market is in turmoil due to the overheated leveraged buy out (LBO) and the subprime mortgage market deterioration," according to Angela Mago of KeyBank Real Estate Capital. That has caused some capital flight that will have a macro effect on the global capital markets, she added.

The problems started with the subprime mortgage borrowers, or those with poor credit. When these borrowers began defaulting on their loans, it caused credit markets to tighten. It also sent shockwaves through the bond market because those loans were bundled and sold off around the world. As of press time, Countrywide Financial, a major mortgage lender, had just received a $2 billion cash infusion from Bank of America, to avoid bankruptcy.

The effects of this market scare have an effect throughout the borrowing world, including those in long-term care. A tighter credit market means that private equity players and others that use a lot of leverage to generate higher returns will have a harder time making those returns, according to Ray Lewis of Ventas.

While a small long-term care provider may not feel the effects of this larger market crisis, a provider involved in a large transaction might.

There have been reports that deals involving private equity firms could be in jeopardy because of the high amount of leverage that private equity players use to generate higher returns. One example is the recent decision of the Carlyle Group to purchase nursing home chain Manor Care Inc.