Lenders show more interest
When cash flow runs low and government payments are late at nursing homes, there are options to re-ignite the business. Nursing homes that face a tight regulatory climate, cyclical reimbursements and thin margins need to stay apprised of these financing trends. Specialized healthcare financing companies are prepared to front loans against receivables — Medicare, Medicaid, HMOs — especially in the current reimbursement climate, they point out."I would say there are more lenders coming into the space right now," says James Pieczynski, director of CapitalSource, based in Chevy Chase, MD. "Medicare reimbursement has gotten a little better with the just over 6.25% increase last October."
When the reimbursement climate looks safe, lenders feel more comfortable boosting nursing homes backed by these instruments. This leads to more liquidity in the market.
"The rate of payment is low (from the government), but it's consistent," says Greg Scrine, vice president of long-term care strategies for GE Healthcare Financial Services in Chicago, though he says skilled nursing in general is risky because it's faced such distress over the past six years. "It's not often a state does not pay. The near-term reimbursement environment looks good."
Financiers say the market for skilled nursing homes has stabilized. Public companies, such as Beverly Enterprises, Kindred Healthcare and Extendicare are reporting increased first-quarter earnings due to higher Medicare margins. Stock prices have doubled and, in some cases, tripled. Occupancy rates were at a four-year high at 86% in the last quarter of 2003, according to figures from the National Investment Center for the Seniors Housing & Care Industries.
In addition, the average price for nursing homes on a per-bed basis hit a low last year ($31,650), compared with $38,400 in 2002, according to Irving Levin Associates. As prices come down, activity goes up, sparking more acquisitions, loans and growth.
So what's the advantage to obtaining these loans?
It's a symbiotic relationship. The financiers can, in some cases, such as for a HUD 232 loan, leverage the government's AAA bond rating to get providers a cheaper cost of money they wouldn't otherwise get on their own. GE has an AAA rating and can get a cheaper cost of money through its namesake. Most nursing homes are unrated, but even the largest providers, such as HCR Manor Care and Kindred, have ratings no higher than B+, as typically rated by Moody's.
Economies of scale
The catch is these financiers will not loan less than a certain figure -- $500,000 at the lowest, but typically $2 million -- because of economies of scale. So these loans are for middle-market players, typically with at least five to 10 nursing homes.
Heathcare Business Credit Corporation advances nursing homes 85% against accounts receivable that are less than 150 days old. The company has $200 million committed to the skilled nursing sector and the loans are typically for three to five years.
Capital Source loans 75% to 85% against accounts receivable less than 150 days old, with a $500,000 minimum. The loans are three years.
"The nursing home business is probably about two-thirds of our (healthcare) business," says Pieczynski.
GE also typically lends three- to five-year loans with a floating interest rate, though Scrine says he thinks more will be fixed rates down the road. The typical advance rate, says Scrine, is 80%.
The nursing home business is "capital intensive" notes James Craig, the executive vice president of Healthcare Finance Group. His company monitors skilled nursing facilities' collateral once a month, using a lockbox.
"Keep in mind that the skilled nursing business is a lot more steady than most other health services, where the daily revenue is pretty volatile," he added.
Indeed, some plan on keeping a firm stake in skilled nursing.
"It (skilled nursing) is one of our biggest markets," says Thomas Carden, vice president of Mount Laurel, NJ-based Healthcare Business Credit Corporation, referring to skilled nursing. "We expect it to remain one of our biggest markets into 2005."
Nursing homes, says Carden, may not trust specialist financiers, but they may not have a choice because banks exited the market after it crashed in the late 90s.
"Most people are used to going to a bank for financing," says Carden. "Lots of banks don't lend into the skilled nursing market anymore."
However, most companies do have s