Losing steam
Around July 1, 2007, financial experts painted the rosiest picture in eldercare’s history. They raved about a favorable lending climate with unprecedented loan volumes and performance, robust-but-balanced construction growth, breathtaking mega-mergers and vigorous revenue generation.
At mid-year, an exuberant Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry, called the first two quarters of 2007 “very, very strong … as good as we’ve ever had.”
But while the eldercare real estate market was going like gangbusters, the residential housing sector veered sharply in the opposite direction: Home buyers were defaulting on mortgages en masse, property values were plummeting rapidly, foreclosures were escalating and mortgage brokers were left holding a ton of bad paper. 
Could the negativity spill over and cause the industry’s sizzle to fizzle?
While marketplace activity has noticeably slowed, it could hardly be called a fizzle, industry observers say. How much of an impact the subprime mortgage crisis could have is difficult to pinpoint, they add, because a direct correlation is elusive. Though Kramer remained optimistic in July about the industry’s fortunes going forward, he also hinted that “there is always a danger when a lot of capital comes into a market in a short amount of time.
“Publicity around transaction activity in seniors housing could draw in other debt and equity folks who don’t know the industry very well,” he said. 
That’s precisely what happened during the last industry real estate boom in 2000, and anyone who was in the sector at the time knows the chaos that ensued. Nothing like that monumental wipeout is evident or even being forecast this time around. In fact, despite a slowdown in loans and investment, the eldercare market’s financial outlook remains relatively bright, experts say.
Caution around the corner
There are pockets of concern, however. Erik Howard, vice president of Baltimore-based Capital Funding points to collateralized mortgage-backed securities as one area that has been affected by the housing mess.
“The CMBS folks are sitting on the sidelines now and the ability to conduct large transactions is impacted,” he said. “It is making lenders go back and ensure that the underwriting is appropriate, focusing more on historical figures and less on potential.”
Still, industry fundamentals remain strong as operators maintain efficiencies, occupancy rates are stable, and the reimbursement landscape remains positive, Howard said.
“There are plenty of good deals out there. Lots of activity and deals are continuing to get done,” he said.
Scot Sandel, senior vice president of real estate finance with the New York-based Healthcare Finance Group, reassures facility operators that “funds will always be there for credit-worthy customers.” But he also notes that for now, widespread access to capital has tapered off.
“I can’t say how much is attributable to the mortgage crisis, but large portfolio transactions have ceased for the time being,” he said. “Re-pricing is an issue – people are standing back to take another look to see if it’s the ‘right’ price.”
Even so, the market’s financing status is sluggish only when compared to the supercharged atmosphere of the first half of 2007, Sandel said.
“Our firm is getting opportunities now that we wouldn’t have had nine months ago,” he said. “For balance sheet lenders, the opportunity is there, though it is more conservative. We saw lenders start to sit on the sidelines around September, but I believe they will be back starting (last month). The difference will be, however, lower leverage on higher cap rates. As the sector figures out what is going on, the buyers’ and lenders’ expectations will match up.”
If there is a trickle-down effect from residential into long-term care, it’s related to the cost of financing, said Jim Pieczynski, co-president of the healthcare and specialty finance group at Chevy Chase, MD-based CapitalSource.
“The biggest thing is that the credit crunch has caused spreads to widen compared to what they were a few months ago,” he said. “Some lenders have exited the space, some lenders are pulling back and those who are staying are widening their spreads. As a result of new terms, borrowers are balking a little bit now – the cost of debt is up and buyers want to pay less for assets, so there is a general slowdown in that activity.”
Pieczynski agrees with other observers who say there won’t be any more mega-deals for a while, noting “the big whale days are over for now – the Manor Care acquisition is the last deal of that size that we will see for a long time.”
Resident perspective
One aspect that may get obscured by all the financial orchestration involved in the real estate environment is how some consumers are straddling both the seniors and residential housing markets. Because non-skilled nursing services are typically not reimbursed, they are more vulnerable to ripples in the general economy, said Robert Guy, an attorney with Nashville, TN-based Waller, Lansden, Dortch & Davis specializing in long-term care.
“A lot of consumer wealth is tied to real estate, so when there is a meltdown on the residential side, people feel a lot less affluent,” he said. “This could have an impact on the demand for housing, especially CCRCs, assisted living and independent living, at least for the short term. People need to sell their houses to move into those facilities.”
Yet Sandel says that appearances may be deceiving on this front.
“The good news is that many potential residents for assisted living and independent living have already paid off their mortgages, so in theory that won’t diminish demand,” he said. 
“There is a possibility they may feel that they can squeeze a little more equity out if they wait or their children are urging restraint.”
Moreover, demographics are a protective shield for the eldercare real estate market, Guy added. “The marketplace is definitely resilient,” he said. “In the short term, it should sustain any corrections.”
Pieczynski thinks skilled nursing probably won’t be affected at all by the outside economy’s turmoil.
“Nursing homes do better in a recession – the economy does nothing to their occupancy levels.”
Red flag alert
While he’s hardly in a pessimistic mood, Guy has ventured to suggest the kind of occurrences that could portend substantial market stagnation, such as:
• Shorter waiting lists for CCRCs and “lifestyle-based” properties
• Underwriters less willing to put capital out for bond issues, bond downgrades and defaults
• Significant slowdown in new construction, which could cause new projects skittishness
• Depressed prices for facilities – the main cause of bankruptcies and consolidation.
“Everyone thinks they know the warning signs, but the truth is that they usually can only be seen in hindsight,” Guy said. 
“There are several ways the residential meltdown can impact seniors housing and there will be some effect, at least to a certain degree. But really, the market is doing very well considering what is happening in the overall economy.”
The providers who are in the best position for the future are those who have financing locked in place, Pieczynski said – those who went longer than two- or three-year loans into five- and 10-year loans.
“They are set and they will be rewarded for that,” he said. “They can maintain the business they have, consider a rehab project, focus on the provision of good care, and look for other opportunities.” 
Hospital investors to copy LTC rush?
Is acute care the new eldercare?
Based on the results of a new survey, the hospital sector is on the verge of a dramatic increase in financing. If predictions ring true, the hospital marketplace could see at least the same frenzied level of capitalization activity that seniors housing enjoyed during the first half of 2007.
The survey “Hospital Investments in Competitiveness: Financing Options” found that approximately 75% of hospitals anticipate capital investments for the renovation of their current facilities. That includes one-half of tax-exempt hospitals and one-third of investor-owned hospitals, according to the study, which queried 464 hospital executives and was sponsored by the Nashville, TN-based law firm Waller, Lansden, Dortch & Davis.
Among the findings:
• Nearly half of both the tax-exempt and investor-owned hospitals expected to make a major capital investment in order to offer new services.
• Almost half the respondents were planning a satellite campus or clinic.
• With respect to technology investments, both tax-exempt and investor-owned hospitals — 79% and 69% respectively — saw likely capital investments on the horizon for acquiring and upgrading equipment.
“All hospitals are faced with the competitive pressure of maintaining up-to-date facilities, technologies and equipment to attract physicians and patients and provide the best quality of care,” said Reggie Hill, head of the law firm’s healthcare practice. “This study provides a window into the plans and priorities of hospitals and hospital systems throughout the country.”