Fund$ at All-Time High
NIC releases new survey results

Lenders' and investors' familiarity with and preference for funding senior housing and care facilities has contributed to attracting record levels of capital, according to a national study by the National Investment Center for the Seniors Housing & Care Industries (NIC). The 1998 Lender and Investor Survey, co-sponsored by Valuation Counselors, shows more than $12 billion to be invested in the industry in 1998--up from $8 billion in 1997. The study presents the most comprehensive review of preferences and trends collected directly from the industry's major financiers, and compares those results to similar studies in 1994, 1996 and 1997.

"This has been a banner year for investment in senior living and long-term care, with decreasing interest rates attracting a record volume of funding to a rapidly growing industry," says Robert Kramer, NIC executive director. "This activity was evident in total dollar volume funded, breadth of participants, number of transactions and lending capacity reported."

He warns, however, that survey responses were received in the summer of 1998, prior to the recent upheavals in the world financial markets and real-estate investments, especially real estate investment trusts (REITs) and commercial mortgage-backed securities (CMBS). "Fortunately," he adds, "the survey found that the majority of investors view both senior housing and long-term-care properties as superior to traditional real-estate investments from a reward vs. risk standpoint. This suggests that the sector may fare better in times of uncertainty than other commercial property types."

Surveys were sent to those lenders and investors who indicated that they funded senior living, long-term care or related healthcare projects. A record number of 138 capital providers responded. Most active were commercial banks and mortgage banks, comprising more than 45 percent of the respondents. Other participants included REITs, pension funds, insurance companies, credit-finance companies, investment banks and venture capitalists.

Seven major findings emerged from the study:

1. Increased loan volume. Loan volume far exceeded that reported in previous years. Of the 68 respondents reporting dollar activity, almost half said their firms would be investing more than $100 million during 1998.

2. Continuum of property types supported. Nursing homes and assisted-living facilities currently remain the most popular investment choices. However, Alzheimer's units appear to be gaining favor, as are properties that are comparatively more real-estate intensive and less service intensive, such as active adult and senior apartment projects.

3. Investment potential remains high. Investment potential in the industry remains high, with more than 80 percent of respondents regarding the industry as "superior" or "comparable" to traditional real-estate investments, such as commercial or multifamily properties. Despite these overall strong numbers, there are a few signs that financiers believe the pace of overall growth is slowing. For the second year in a row, there was a decline in the number of lenders who rated the investment potential of long-term care (assisted-living, Alzheimer's and nursing homes) as "much better" or "better" than traditional real estate. There was also an increase in respondents who rated the potential of long-term care as "worse" than traditional real estate (though this number is still only 18 percent).

4. Management is critical. "Because of the high level of management and care expertise required to successfully operate a senior-living or long-term-care residence," says Wade Collins, vice president of Valuation Counselors, "investors often cite the selection of a management team as important as--or more important than--market analysis or site selection."

5. Decrease in interest rates, spreads and yields. On average, interest rates on permanent debt decreased from 8.5 percent or more in mid-1997 to the 7.5 percent range in mid-1998. Interest rates were lower, in part, because the indices (Treasury Securities, LIBOR, etc.) on which they were based decreased. Also, the spreads above these indices narrowed about 50 basis points from a year ago. Similarly, average yields decreased from approximately 9 percent to 8 percent or less. However, since August 1998 (after survey responses were received), spreads have increased--reflecting uncertainty in world financial markets and real-estate investments.

6. Decrease in capitalization rates. Financiers' comfort with the industry and willingness to lend were reflected in a significant decrease in capitalization rates. Respondents estimated reasonable capitalization rates at an average of 11.6 percent for nursing homes and 10.7 percent for assisted-living facilities. These rates represented more than half a percentage point decrease for both property types than reported in 1997.

7. Wide range of financing. Investors indicated the availability of a wide range of financing structures and products, from conventional mortgages and construction loans to equity capital. The most preferred financing products were refinancing of existing permanent debt, permanent financing on new projects that have achieved a stabilized census, and acquisition financing for stable properties.

The factor cited most favorable by respondents in attracting industry investment was demand driven by a growing and more affluent elderly population. Other attractive factors included nursing regulations tending to limit competition, the maturation of the industry with a stable base of operators and investors' increased familiarity with the industry. Investors' greatest concern was the potential for market saturation. Other concerns were increasing project costs and regulatory uncertainty, particularly those regulations affecting payment systems.

Founded in 1991, NIC serves to facilitate efficient capital formation for the senior-housing and care industries through networking, research, and providing business and financial information. Proceeds from its annual conference, attended by more than 1,200 decision-makers in the financial and senior-living industry, are used to fund research. Results of NIC's 1998 Lender and Investor Survey are available for $75 by calling (410) 267-0504.

Financial Transactions

Cambridge Realty Capital, a senior-housing and healthcare lender based in Chicago, reported a record number of transactions through the first nine months of 1998. With 28 transactions closed as of October, Cambridge had already surpassed the number closed in all of 1997, the company's busiest year ever. According to Jeffrey A. Davis, chairman, it was projected that the company would fund 43 separate financings for about $150 million in 1998, 60 percent of which would be funded by traditional loans and the remainder being HUD transactions.

In other news, the company provided a permanent mortgage loan and joint-venture equity for the owners of Perris Medical Arts Convalescent Hospital in Perris, Calif. The hospital, a 109-bed facility, required a $3.9 million conventional mortgage loan arranged through Catalyst Resource Group of Los Angeles. Cambridge also funded another $3.9 million, permanent, first-mortgage loan for Balmoral Care Center, a 120-bed nursing home in Tucson, Ariz. For more information, call (312) 357-1601.

Alternative Living Services Inc., a healthcare provider operating assisted-living residences, reported record earnings for the three-month period ended Sept. 30, 1998. At quarter end, the company operated or managed 336 residences with a total capacity of 14,315, and had 7,846 resident capacity under construction or development for a total identified capacity of 22,161.

For the three months ended Sept. 30, the company reported revenues of $66.3 million and net income of $5.8 million. For the nine months ended Sept. 30, revenues of $168 million and net income of $14.3 million were reported. The company opened 37 newly constructed residences with a capacity of 1,691. In addition, the company completed acquisition of six Kansas properties and two others in Wisconsin.

ALS also announced that it obtained a $200 million construction/mini-perm loan with a consortium of seven banks. It reported that this credit facility will be used to continue funding the company's development pipeline of new assisted-living residences. For more information, call (800) 236-3454.

WMF Huntoon Paige, a commercial-mortgage, financial-services company headquartered in Vienna, Va., recently provided $3.3 million in financing for the construction of Governor's Glen Assisted Living Community in Forest Park, Ga. The transaction was facilitated under the Department of Housing and Urban Development's Fast Track Program. The facility houses 40 private and 20 semi-private beds for patients with Alzheimer's disease. Construction is slated for an August completion. For more information, call (404) 240-4300; Web www.wmfg.com.

Greenbriar Corp. reported an operating profit of $113,000 for the quarter ended Sept. 30, 1998, compared to an operating loss off $992,000 for the quarter ended June 30, 1998. For the comparable period of 1997, the company had an operating loss of $39,000. Cash flow during the quarter, before interest expense and taxes, was a positive $1.5 million compared to a negative cash drain of $85,000 during the prior quarter. The company reported revenues of $13.9 million for the quarter ended Sept. 30, with four underperforming properties having been disposed of during that period. For more information, call (972) 407-8400.

Allied Healthcare, a manufacturer of respiratory-care products, medical-gas equipment and emergency-medical products, reported a net loss of $1.3 million in the first quarter of fiscal 1999 (the three months ended Sept. 30, 1998). Excluding a one-time, after-tax charge of $583,710 for expenses associated with the closing of its B&F division plant, the company lost $695,547, which compares with a net loss of $637,820 for the fiscal 1998 first quarter. First quarter 1999 sales decreased 22.5 percent to $17.9 million from base business sales of $23.1 million the prior year. The decrease was due to continued soft-market conditions in the United States, the overall economic downturn in Asia and a reduction in sales of unprofitable distributed parts. For more information, call (314) 771-2400.

CareMatrix Corp. a provider of senior-housing services including assisted, independent and supportive-independent living, announced record results for the third quarter and nine months ended Sept. 30, 1998. The company reported net income of $4.9 million and revenues of $39.6 million for the third quarter ended Sept. 30 compared to net income of $1.9 million and revenues of $20.8 million for the same quarter of 1997. For the nine months ended Sept. 30, the company reported that earnings tripled to $12.4 million on revenues of $103.4 million, compared to net income of $1.9 million on revenues of $48.8 million for the same period in 1997. During the first three quarters of 1998, the company added 18 facilities with a resident capacity of 2,700 and currently operates 44 facilities with a resident capacity of more than 5,500. For more information, call (781) 433-1119.

Company Profiles

Finova Realty Capital

Finova Reality Capital is a commercial mortgage-banking firm and provider of capital solutions to commercial real-estate owners and developers throughout the United States. It has established itself as such by maintaining direct-lending capabilities, capital-market access and well-established, third-party funding relationships. Finova offers "one-stop" financing services ranging from conventional mortgage financing to complex mezzanine and equity transactions. From origination to funding, each financing transaction is handled by a team that leverages the talent and experience of the entire organization.

Finova, previously known as Belgravia Capital prior to 1998, has been providing real-estate solutions to senior-living owners since 1985. It was one of the first mortgage-banking companies to originate loans for the securitization market. Even with all of the recent upheaval in the securitization markets, it continues to originate and close loans.

Finova has 30 offices and 85 originators nationwide. This is important to assisted-living property owners for two reasons. First, a nationwide presence allows the company local access to owners and their properties, providing the opportunity to have in-depth and current market knowledge. Second, Finova has a distribution network that is prized by the capital markets giving the company leverage as it is working without third-party funding relationships.

Finova has worked with many owners and developers of assisted-living facilities. Clients range from national operators, both public and private, with more than 20 properties to local operators with just a couple of properties. The company has placed construction, bridge and permanent financing using both company balance sheets and those of capital partners and other relationships, and offers the advantage of being able to be a principle or a broker, as the situation warrants. Any of Finova's loan originators are able to discuss a potential  financing need for an assisted-living property and bring the resources in, as necessary, to help the owner structure the best possible loan under current market conditions.

Vine Street Financial

Vine Street Financial provides both construction and permanent financing--ranging from $250,000 to $4 million--to owner/operators of assisted-living facilities. Vine Street provides financing for new construction, expansions, acquisitions and refinancing of assisted-living and Alzheimer's-care homes throughout the Southeast, Mid-Atlantic and Midwest. Because Vine Street specializes in assisted-living and Alzheimer's-care home loans, the company is familiar with the industry and is able to offer expert advice on all aspects of financing.

Vine Street approaches the lending business quite differently than most lenders, because the company is actually a bank, not a broker, conduit, middleman, etc. Moreover, Vine Street strives to be relationship oriented, not transaction oriented. This is best evidenced by the fact that the company is a direct bank lender that does not "sell" loans in the secondary market. Rather, it keeps almost all of its loans in its own bank, which allows Vine Street to continue to meet the needs of borrowers as their businesses change. By not selling its loans, the company retains the right to modify the terms and conditions of its loans--in favor of the borrower--throughout the life of the loan. This also keeps the company focused on the relationship and not the transaction.

Vine Street is a division of The Vine Street Trust Company, based in Lexington, Ky., which in turn is a wholly owned subsidiary of Area Bancshares of Owensboro, Ky., and is traded on NASDAQ under the symbol AREA. Area Bancshares Corp. has approximately $2 billion in assets.

Heartland Capital Corp.

Heartland Capital Corp. is a nationwide lender to the assisted-living industry and long-term-healthcare industry. The company specializes in the HUD Section 232 program and provides 35- to 40-year, fixed-rate mortgages for the acquisition, refinance and construction of senior-housing projects. Bob Sheddy, executive vice president of Heartland, says that borrowers should not be dissuaded by HUD loan processing. "The advantages of non-recourse borrowing," he says, "with loan to value leverage up to 90 percent and low fixed rates ranging from 7 percent to 7.5 percent, more than compensates for any extra paperwork. Our goal has always been to go the extra mile for our customers to make loan processing as easy as possible."

Click here to purchase reprints

e-mail: alsuccess@vpico.com
Copyright © 2007 by Virgo Publishing.
Please read our legal page before using this site.