An Inside Look at How Senior Care Lenders are Responding to Rate Cuts

Excellent communication, a good reputation, and solid financials are crucial to senior care operators’ ability to get financial support in the current economic and reimbursement environment, said a panel of financiers during a session on how lenders are responding to Medicare rate cuts at NIC’s 2012 Skilled Nursing Investment Forum.

Key Considerations for Developing Operator-Lender Relationships

When partnering with a lender in this ever-changing industry, communication is a necessary component for a successful financing relationship, said Keith Reuben, Senior Vice President of Commercial and Specialty Finance at Capital One Bank, during the session.


A few things that haven’t changed for how lenders assess partnerships include considering the company’s reputation; reviewing its metrics, financial performance, and occupancy; getting third-party appraisals; and performing on-site inspections and performance reviews, Reuben said during his presentation.

And while this traditional approach still applies, many lenders are adding on more qualifiers. A company’s reputation and track record carry even more weight, he said, and lenders are following current healthcare trends including methods of delivery (such as managed care or accountable care organizations) and Medicaid and Medicare reimbursement issues. They might even perform their own valuations in addition to third-party reports, and could want to review clinical survey history, as well.

“Lenders are much more hands-on than they have been before, and they will delve into your operations,” Reuben said.


Establishing and maintaining a good relationship with a lender is key to ensuring a partnership’s success.

“Treat your lender like a partner, and tell him what’s going on in your business. It goes a long way with having good relations in a loan, even through rough times,” Reuben said, adding that it’s better for lenders to find out bad news straight from the source, and not from newspapers or other outlets.

Questions Lenders Ask in Down Cycles

Qualitative analysis is key when considering a facility or portfolio, said William Shine, Senior Director of Synovus’s Senior Housing Lending Group (NYSE:SNV).

Lenders will be considering how a facility matches up to others they’ve seen, and whether the services a particular facility offers is replicable, or if its Medicare utilization will eventually become unsustainable if newer facilities were to get developed.

The resilience of a borrower/operator is another factor, especially in light of the possibility of rate cuts. Whether or not borrowers have other debt, or whether they have sufficient cash flow, or who their debt capitalization is with are all questions that could arise.

And if reimbursement is cyclical, then past performance can be misleading at best, said Shine, who said it’s necessary to operate on a forward-thinking basis.

In the Aftermath of Medicare Cuts…

The net result of changes in reimbursements and drops in Medicare payments is that ‘C’ and ‘B’ assets are going to be harder and harder to finance, Shine said.

“The key will be, do the assets have potential for modification or enhancement?” he said, going on to list some predictions:

  • Pools of assets in multiple states will be favored.
  • Replacement of older assets with newly-constructed facilities will be favored.
  • Acquisition and small-scale consolidation will pick up. “This is the period when non-public companies use access to capital to buy low,” says Shine.
  • There will be a decline in actual number of nursing homes will accelerate as economic obsolescence becomes apparent.
  • The industry will see increased financial volatility.
  • There will be more properties that no one wants.

“Looking ahead, traditionally in the nursing industry, balance sheets haven’t mattered that much; it’s been about income statements and cash flow,” said Buford Sears, Senior Vice President of Speciality Lending at First Niagara Bank. “But with cashflows stressed by rate cuts, qualitative facts are more important and the balance sheet needs a little more than it used to in the past. We might see stronger capital/guaranty structures going forward, and more owner equity.”

And because of states’ autonomy, it’s like having 50 countries within the United States when it comes to underwriting SNFs, said Buford, as underwriting must be tailored to each state and market.

He said lenders often prefer states which require Certificates of Need to those that don’t, and they’ll often compare occupancy and other indicators in a specific facility to the state average.

Positioning the Balance Sheet to Deal with Future Uncertainty

Operators have it “as good as it’s going to get for a while,” because no one knows the timing or severity of future cuts, according to Sam Dendrinos, the senior vice president and managing director at Chicago, Ill.-based The PrivateBank.

Right now, operators need to focus on two things: retaining earnings to build a cushion, and staggering loan insurance by refinancing loans and pushing maturities out.

“Those are two things to do to control your own destiny,” he said.

Ultimately, lenders are “still very bullish” on the skilled nursing industry as it’s the “lowest-cost provider of care.”

“Opportunities exist for well-positioned operators with the right lending partner; well-capitalized and knowledgeable lenders remain active,” said Dendrinos.

Written by Alyssa Gerace

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