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An Investment House That's "Bullish" on Long-Term Care

March 1, 2003
by root
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Interview with John Cobb, Vice-President, GE Healthcare Financial Services
Interview with John Cobb, Vice-President,
GE Healthcare Financial Services
Will financial investment dry up? That question is bedeviling many a skilled nursing and assisted living facility these days, as long-term care enters a very scary-looking 2003. Skilled nursing facilities, having fallen off the Medicare "cliff," now see state Medicaid officials sharpening their budget-cutting knives. Assisted living providers are still wrestling with excess capacity issues. And neither sector has seen much to encourage them that soaring liability insurance premiums will go away any time soon. Who'd want to invest in a sector with financial prospects like these? GE Healthcare Financial Services (GE HFS), for one large answer. Coming off a year that saw GE HFS invest some $500 million in senior-care operations, the financing giant-$9 billion in assets-foresees 2003 justifying even higher investments. What are they thinking? Recently, GE HFS Vice-President John Cobb explained his company's "bullish" stance-and, yes, serious concerns-in an interview with Nursing Homes/Long Term Care Management Editor-in-Chief Richard L. Peck.

Peck: Why, in general, is GE HFS adopting such a positive stance toward long-term care investment?

Cobb: GE HFS's philosophy is to be a consistent provider of capital. There are always cycles in long-term care, and right now we think that some sectors, including skilled nursing, have hit bottom and are on an uptick.

Peck: But what about the Medicare cutbacks and all the talk (at press time) of states looking to reduce Medicaid expenditures?

Cobb: This shows why dabbling in healthcare, as many investors in this field do, is dangerous. True, some states aren't allowing us to sleep at night, because the size of the cuts that they're talking about is unknown. Based on budget proposals, some states could be cutting their facilities' cash flow by 30 to 50%, depending on the facility's operating margin-and when you have an unknown that big, you don't lend until some decision has been made on the specific cuts.

But this is why we have a good research department and underwriting department. We find that the key in long-term care is to look into specific circumstances, try to grasp the situation before it happens, or just as it happens, and react accordingly. For example, when California announced its MediCal cutbacks earlier this year, we let our clients there know that we wouldn't be lending until the situation is resolved. When Illinois cut its Medicaid rate by 5.9%, that was a pretty dramatic swing for some nursing homes.

The key is to understand how a position is developing and then plan. When the Medicare cliff dropped Medicare reimbursement 10% last October, that was something we saw coming and had planned for. In fact, we did most of our business last year in the third and fourth quarters because we anticipated that Congress wouldn't act and made loan decisions accordingly, rather than sit back and wait to see what happened.

Peck: What about another troubling factor in the long-term care equation: the staffing crisis? How do you work that into your strategizing?

Cobb: Staffing is definitely a factor, although we see it as only one of several things to take into account. The downside of the staffing situation, in our view, is excessive use of contract nursing-it's expensive and raises questions about management practices. But what we do, when we make a loan of more than $10 million, is spend the better part of a day with that company and, among other things, evaluate its response to its particular staffing issues. Basically, we won't lend to people who toss off staffing as of no concern or say, "We have the situation in hand," usually through the escape valve of contract nursing. If we find that they're concerned about the issue and have given it some thought, that's good. We can't control the nursing shortage, but a company thinking about it and addressing it as best as it can-that's what's important. Peck: What criteria do you use to assess a long-term care company in today's environment?

Cobb: We have a standard underwriting checklist. The major elements we review are quality of care (usually determined from interviewing management, reviewing state survey reports, checking references, etc.); the experience of the management team; the company's operational history; and whether the balance sheet appears solid-if the company hits a bump in the road, can it still carry our debt service?

Peck: Let's switch gears and talk about the assisted living sector. Some say the field remains in the financial doldrums without much near-term prospect for serious improvement. Your thoughts on that?

Cobb: We never really know when we're "at bottom" in this field. Some cities are good, some are bad, and you have to watch this market closely, because things can change markedly within a matter of three or four months. For example, Charlotte, North Carolina, used to be a tough city for this type of investment, but of late it hasn't been so bad.

Our highest-volume sector last year was senior housing-independent living and congregate care. There were a lot of good acquisitions and lots of stable deals for refinancing. It was a good year for us in these areas.

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