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Still Hope
Despite tough market conditions, survey shows capital is still available
By Robert G. Kramer, National Investment Center for the Seniors Housing &
Care Industries
It's no secret that some assisted-living companies--particularly those that depend on
financing from the public-equity markets--have been hurting in recent months. From the
announcements about failed earnings projections, to the dramatic drop in market
capitalization for publicly traded, assisted-living companies, news on the assisted-living
front has not been positive.
Although these circumstances have taken place in the public-equity markets, they have
cooled lenders' enthusiasm for assisted living in general--even for those privately held
companies that may be in a very strong position at the present time and with good access
to private capital (equity or debt). As a result, loan terms have tightened and credit has
become harder to obtain. But contrary to the common perception that assisted-living
financing has dried up, capital is still available to this industry sector. So how can
you, as an owner or operator, still attract that much-needed capital? What are lenders and
investors looking for now?
Some answers can be found in the 1999 NIC Lender and Investor Survey, an annual study
conducted by the National Investment Center for the Seniors Housing & Care Industries
(NIC), in collaboration with Valuation Counselors Group Inc. As the most comprehensive
review of data from those financiers known to support senior housing and long-term care,
this survey report provides a guideline to the lending preferences for and trends about
this industry.
Key Survey Results
What does the 1999 NIC Lender and Investor Survey, conducted mid-summer 1999, tell us
about the lending and investing environment for senior housing and long-term care? First,
compared to 1998, it's definitely no longer a borrower's market. At the same time, there
has not been a massive flight of capital from the industry. While lenders are clearly
exercising more caution, some are seeing real opportunities in this industry--as evidenced
by their plans to finance more projects in 1999--and with record loan amounts.
In fact, despite some of the problems attributed to the industry, lenders and investors
remain committed to providing funding, especially for experienced operators. Survey
respondents indicated their projected loan volume for 1999 would be $10.8 billion or more,
an increase of 15 percent over respondents' actual 1998 loan volume of $9.4 billion.
Approximately $4 billion of the 1999 total was allocated for new construction and
development, while the balance was for financing acquisitions ($3 billion) and
refinancings (almost $3.5 billion).
In addition, two-thirds of the respondents considered the investment potential for
assisted-living projects to be equal or superior to traditional real-estate investments,
although percentages favoring assisted living were down considerably from 1998. Lenders
expected to increase loan volume (but not the number of transactions) for assisted living
and other long-term-care projects, and fewer lenders intended to reduce their
assisted-living portfolio allocations.
But events in the global capital markets in the second half of 1998--and, again, in
late 1999 in the assisted living public-equity markets--did (and continue to) have an
effect on the availability and cost of investment capital for senior housing and
long-term-care projects. Rates, spreads and yields have all increased from 12 months
earlier; lenders require more equity from borrowers, higher debt-service coverage ratios,
and more cross collateralization and personal recourse.
What the Results Mean for Providers
Because lenders are more selective than they were in 1998, they are demanding more from
operators. In addition to wanting borrowers of capital to have more equity in the deal,
lenders are looking for well-conceived projects run by those with experience in the
industry.
First, they are looking for operators with demonstrable operating expertise and a
proven track record--particularly in providing care and not just in developing real
estate. Almost 80 percent of lenders surveyed say they will not finance a project for a
group without experience in the industry. Lenders also want to see that you have a game
plan that will distinguish your property from competitors.
In addition, lenders want to see whether or not your projected operating performance
realistically provides evidence that you'll be able to survive a longer than expected
fill-up period. Among other things, lenders will expect to see a financial feasibility
study and not just a market feasibility study. They will want to know that you have the
necessary dollars in place to do the needed marketing--as well as sustain operations and
cover debt--if it takes your property, for example, 24 months or longer to realize
stabilization. They'll want clear evidence that your property will be successful, even in
those markets experiencing temporary saturation.
In many cases, the larger, established companies have a better likelihood of accessing
capital and at more favorable rates. But even for these operators, credit is likely to be
more expensive, with more restrictive loan terms and lower loan-to-value ratios than a
year ago. An apparent trend has also emerged toward financing regional operations, as
opposed to financing on a national level. This could indicate a desire to focus on
familiar markets, particularly during uncertain times.
Even with all these conditions, you may not get the money to build as many properties
as you would have before. In fact, current evidence suggests that new construction dollars
are very hard to come by for anybody doing assisted living. Today, capital is more likely
to be available for acquisitions than it is for new construction.
Conclusion
Although the public-equity market may be closed right now, other capital sources--such
as private debt from banks, credit finance companies, etc.--are alive and well. Evidence
of financiers' interest from these sources can be found in the 1999 NIC Lender and
Investor Survey, which is largely a survey on debt financing, not on the public-equity
markets. Although it's possible that "spill over" from the chilling effect of
the public-equity markets may have had further adverse impact on long term care since this
survey, the fundamental findings are still instructive. That is, experienced operators
with a proven track record should still be able to find needed capital--though at a higher
cost--to fund well-run properties.
Robert G. Kramer is executive director of the National Investment Center for the
Seniors Housing & Care Industries (NIC). Founded in 1991, NIC serves to facilitate
efficient capital formation for the senior-housing and care industries through research,
networking, and providing strategic business and financial information. Proceeds from its
annual conference, attended by more than 1,200 decision-makers in the financial and
senior-living industries, are used to fund research. For more information, visit www.NICinfo.org or call (410) 267-0504.
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