The long-term care market is poised for growth in 2013 after the industry experienced a significant increase in mergers and acquisitions activity, refinancings and development projects over the last couple of years. This trend is exemplified by the acquisition of Sun Healthcare by Genesis Healthcare, solidifying Genesis’ perch as one of the largest LTC operating companies in the country. The increased frequency of deals and acquisitions and the larger dollar values represent a distinct market shift from recent years and portend a continuing trend in 2013.
Prior to 2011-12 there was a wealth of cash on reserve for the LTC market, but it was not readily available due to economic uncertainty and challenges in the financial sector. In the new year, a significant amount of capital is available for seasoned developers with high-quality projects in the assisted living and skilled nursing sectors.
MARKET DRIVERS SUPPORT GROWTH
A number of market drivers are supporting growth and additional funding opportunities in the LTC sector as evidenced by activity last year. For example, the demand for senior housing is increasing as a result of favorable demographic trends such as the significant number of baby boomers retiring. According to the Pew Research Center, approximately 10,000 baby boomers a day turn 65 and that trend is expected to continue for at least another 17 years. Two other factors creating opportunity for qualified borrowers are one, pent-up demand due to reduced market activity during the Great Recession and two, tired inventory as a result of fewer development projects and capital investment over the preceding four years.
Due to significant pressures on financial institutions during the last few years, debt capital for constructing new facilities has been very limited. With respect to property sales, buyers were capital constrained because of limited financing options while sellers’ price expectations remained at pre-recession levels. The available financing options were at much lower multiples, making it difficult for buyers and sellers to agree on price. The predictable result was significantly reduced deal flow.
In addition to increased industry consolidation, a number of large transactions characterize the current LTC environment. The aforementioned Genesis/Sun deal was made possible due to the greater availability of capital. The significant term loan necessary to complete the acquisition was most likely unobtainable in the preceding years due to the restricted capital markets. Similarly, in another large transaction in 2012, a private equity firm sold a LTC provider for three times its initial investment.
HOW TO ACCESS CAPITAL
As the availability of capital increased in 2012, some developers chose to rebuild or modernize existing facilities. Many facility upgrades involved reconstructing functionally obsolete buildings that were originally developed in the 1950s and 1960s. In some cases, older facilities with standard three- to four-bedroom units are being converted to feature more private or semi-private rooms. With the changes to LTC markets, coupled with new regulatory requirements for banks, healthcare providers looking to access capital will need to ensure that financing proposals are more robust, including feasibility and market studies, sensitivity analysis to rate adjustments, management experience in the LTC market, equity support and compliance history. While capital has become more accessible, more stringent requirements to obtain financing persist. Banks and other financial institutions typically prefer developers with successful track records and solid credit histories.
To access capital that is increasingly available, borrowers in the LTC industry should review their funding options and do their homework about specific lenders before submitting a financing request. There are a litany of options for potential borrowers, including large and small banks, other financial institutions and REIT’s. Operators and developers should also consider lenders and lending teams who have a long track record in the senior housing industry and significant balance sheets to weather the volatility inherent to the industry. An experienced lender becomes all the more important when the borrower hits the inevitable “bump in the road,” either in the development phase or operationally. If the lending team is experienced in the healthcare sector it will respond appropriately and accordingly to any unexpected challenges, and avoid exacerbating the problem.
In seeking debt capital, developers should also be prepared to address lender concerns about the expected success of the project, more specifically, the financial projections. As an example, all lenders will be concerned about fill-up risk for new development projects. Therefore, reliable feasibility and market studies to support the financial projections will be critical to the lenders’ underwriting. Additional lender considerations include demographic trends and character of the local market, quality mix (for nursing homes) and management’s experience.
Ultimately, approaching prospective lenders with thorough, strategic plans that are tailored to proactively address questions about a development will yield the best result. Ideal financing options will be much more likely if developers are transparent and treat lenders as true business partners, offering project details that go beyond the basic financial information.
Keith Reuben is Executive Vice President, Commercial and Specialty Finance, Capital One Bank. In this role, he heads up the healthcare, security and defense and technology specialty teams for the bank.