In the past 30 years, Capital One has transformed itself from “just” a credit card company into one of the U.S.’s top banks. And as part of its lending arm, Capital One Bank says it has a significant focus on its commercial and specialty finance business, which encompasses senior housing and care lending.
Last Fall, Capital One Bank hired a number of former CapitalSource Inc. team members among other experienced healthcare professionals to form its own group for specialty finance lending—including Keith Reuben, the former president of CapitalSource’s commercial finance business.
Senior Housing News recently got a chance to speak with Reuben, who’s now the Executive Vice President of Commercial and Specialty Lending at Capital One Bank. During the interview, Reuben emphasized his company’s long-time regional presence in the seniors housing and care industry, talked about the sector’s recession-resistant attractiveness, and spoke of Capital One’s focus on the middle market.
Senior Housing News: What prompted Capital One’s return to a senior housing platform?
Keith Reuben: We’ve never been in and out of the senior housing and long-term care industry. The company has always been active in the long-term care and senior housing business. Capital One Bank has been an active player in its regional footprint in the senior housing world: In the Northeast, the Mid-atlantic, and part of the Southwest.
Now, an important part of Capital One Bank’s commercial strategy is to build national specialty businesses such as healthcare. Particularly, we’re focused on industries that are not only growing, but also very recession-resistant, and healthcare, in particular senior housing, is very recession-resistant. We’ve built a national platform which is focused on skilled nursing facilities, assisted living facilities, and CCRCs throughout the country.
SHN: What made you launch a national platform after having been focused on specific regions?
KR: Part of our strategy was to build a national specialty business in industries that are growing and recession-resistant. History will bear it out from other institutions, how healthcare, and particularly the long-term care and seniors housing, has fared through the downturns: It has fared better than the general real estate and overall traditional business market.
That was part of the reason to go national, because we felt like it was a business that generates appropriate returns for less risk. That’s why we as a group at Capital One have decided to focus on this platform.
SHN: Would you agree that the senior housing pendulum has swung toward construction over acquisitions, and is Capital One involved with new construction?
KR: We have seen an uptick. The whole industry has seen an uptick of new construction. A lot of the building of nursing homes happened about 30 to 40 years ago, so the buildings are older. And it’s not all new construction; there’s also facility rehabilitation.
We do lend to select operators that have both a proven track record and a business plan that we can get comfortable with.
There are different types of new construction: Building a replacement facility, or adding new wing to older facility, presents much less uncertainty as to whether the facility will be able to fill up. Those are easier for banks like Capital One and others to get comfortable with on the new construction side.
Also, excellent operators do feasibility studies that determine if it’s the time, place, and right demand to build a new facility in a specific area.
SHN: Is it easier now, in the current environment, to obtain construction financing than it has been in the past several quarters?
KR: It depends on the operator, and the business plan. In a lot of ways, new construction lending is a different type of lending than lending on stabilized facilities. If there’s a really good plan and a proven track record, it’s definitely more possible.
Overall, it’s hard to say it’s easier [now] to get a loan, because it really is case-by-case. We look at every case separately. The best place to start with a construction loan is typically with a bank that understands the regional dynamics and an operator with a proven track record of operating and opening and building new facilities.
SHN: With most lenders only willing to lend to operators they have existing relationships with, will these standards prevent new players from entering the industry?
KR: I think the industry has lots of very good operators. A lot of times, there are what some people may call “new operators,” but it could be a senior executive from a top-three company who decides he wants to do his own thing and start his own company. That, in my mind, is a proven operator.
In any business it’s hard to start new. That being said, there are going to be really good, new operators that have proven track records in their previous experience. I think it’s going to be important to have a track record—more important than ever—but you’ve always got to have newer people coming in the business, as the business continues to mature. They’ve got to cut their teeth and work for a seasoned company first, then start on either their own, or move over to another company to expand their experiences.
SHN: Would you agree that the mega deals done by REITs last year are done? Are there mostly just small- to mid-sized portfolios left on the market?
KR: You never know when the next large operator will decide to sell. It’s hard to know… I don’t think the REITs are going to redo a bunch of large deals again. I do think this business is incredibly transactional. I would say it’s always been event-driven. I probably wouldn’t predict the same kind of huge numbers we had last year. But I’d be surprised if there weren’t significant deals that happen in the marketplace; I don’t see there being a dearth of significant transactions, or a slowdown in activity. The M&A market seems to be heating up, and I see the nursing home market doing the same thing
SHN: You’re involved with skilled nursing, AL, IL, and CCRCs. Where do you see the biggest growth opportunities? Are you more favorable toward continuum of care models?
KR: We lend to all types of organizations, along the healthcare continuum. We work with hospitals and LTACs, and while we have a particular focus on skilled nursing, assisted living, and CCRCs, we work with independent living operators as well.
What we are focused on is making sure they’re good deals. We lend to all types of organizations throughout; it’s not like we lend to one and not another.
SHN: Do you prefer needs-based property deals over lifestyle?
KR: Our group is more focused on needs-based, where there’s a couple of things: significant growing demand, and barriers to entry as you get higher in the acuity spectrum.
The barriers to entry create a limited supply. On the skilled nursing side, because of these barriers to entry, we feel it’s a good platform in an industry that’s very recession-resistant.
SHN: What is your current loan portfolio mix, and are you looking to diversify? Who or what are you targeting?
KR: As with anything, there’s variation depending on the timing of when deals come in, but we do have a focus on higher acuity. Our platform is almost too young [to talk about looking to diversify the portfolio]. We’re very comfortable in our [regional] footprint; we just rolled out this national lending platform late last year.
We do look at the business nationally. We stay very up-to-date, not only on the Medicare regulations, rules, and reimbursements, but also state-by-state Medicaid reimbursements and regulations.
As you’d expect, we’re very focused on the states that have significant concentrations of nursing homes, like Florida, California, New York, and Texas.
We’re not really diversifying in terms of Medicaid and Medicare, or private pay. For any of our transactions, they’re deal by deal. The most important thing is who we’re lending to; their plan has to make a lot of sense.
Everyone wants to be diverse, but it’s more deal by deal.
The long-term care market is very fragmented. When it comes to diversification, you certainly don’t want to have everything with one company. The advantage to this business: there is significant opportunity because it is so fragmented.
Although we do work with some of the large players, we focus a lot more on regional players, the middle-market players. They play a very important part in what we do. It’s very important to us.
We’re very focused on the middle market; the healthcare business in general is a local and regional business. It’s where our experience is, it’s where we’ve seen the best outcomes, and where we’re most comfortable.