With capital still widely available at attractive rates and market fundamentals appearing strong, small- and medium-sized senior housing operators are looking to grow. But to get needed financing for expansion—and succeed once they’ve obtained new assets—providers should not let the M&A game get them focused on dollar signs more than core operations.
At least, that’s the message from Paul Letourneau, deputy head of commercial bank and healthcare industry head at Bank Leumi USA, which lent more than $300 million to senior living clients in 2014.
Senior Housing News recently sat down with Letourneau, who spoke about how operators can position themselves for future success, what goes into green-lighting financing, and areas of concern in this boom period for growth.
SHN: Would you say there’s a general theme you’re hearing from operators you work with right now?
PL: Most of them are looking to grow. I would say that’s the general theme.
SHN: Growth through acquisitions? What’s the strategy?
PL: Most of our clients, their acquisition strategy is the same approach we take, which is to make sure we get a good deal with some upside, value-add, but most of our clients are not buying portfolios. They’re doing ones and twos, up to fives.
SHN: That seems to you to be the smarter way to do it?
PL: In our opinion, it’s the better approach. If somebody comes along with a 50-facility or 20-facility target, and it makes sense for them, who am I to say it doesn’t make sense? But by the nature of how I think a company should grow, slow and steady always wins the race, in my opinion. Not to mention, if you’re going to have a value-add acquisition or a turnaround situation, it takes a while to get that acclimated into your model. If you have 10 of those versus two or three, it makes a difference.
SHN: It’s interesting to report on those providers, going from three to 10 properties, seeing that progression. Tips for how to achieve that kind of growth?
PL: We have a lot of those clients. One of the key things we always ask is, forget about the opportunity for a second, how are you building your infrastructure? Your people. Management team. Technology. All that stuff. Most people see dollar signs, but then they say, now that I have this [property], how am I going to run it successfully? We spend some time on that.
SHN: Making sure operators are thinking things through.
PL: We spend a lot of time with our operators, whether it’s a an op co loan or a prop co loan, it doesn’t matter. We pride ourselves on adding value. We do state-by-state analysis through a third-party vendor, to be up to date on regulatory issues. We are a team of bankers, so we don’t advise, that’s not our role. But I want [our team] to have enough in-depth knowledge of current trends—ACOs [accountable care organizations], ACA [Affordable Care Act], on and on—I want them to be able to talk intelligently, represent the bank intelligently, and have our clients understand that this is a focused industry for us.
SHN: Makes sense. In comparison to traditional commercial real estate, where it’s just, collect your rent, everyone has to be in for the long-term. You not only have the building, you have the operations, and everyone needs to be on the same page.
PL: Absolutely. Let’s be honest. The building’s worth is only as good as the operator is. Or, I’ll boil it down even further: the NOI [net operating income]. How many components are in that NOI? It’s a multiple. So my point is, the prop co, the owner, the investor who collects his rent check in whatever way, it’s a scary proposition if they have no idea how operations actually work, if they’re not understanding what different impact can have on that NOI.
At the end of the day, you at least have to educate yourself if you’re going to go into this space. It’s not a one time and done. It’s a constant education process. And, frankly, we spend a lot of time analyzing not the specific opportunity, who who it is we’re lending to. In fact, we spend more time on that than probably anything.
SHN: What do you look at specifically? Past performance?
PL: We look at past performance. We don’t get married right away. We have a date. We spend a lot of time getting to know each other. We talk to industry sources.
SHN: What are the top things operators can focus on to improve their competitiveness right now?
PL: Build relationships for the long-term, post-ACA. The model is changing, and I think the opportunity for the good operators is to get in front of that model. How do you start doing that? By building relationships external to maybe what you’ve been used to in the past. And the technology piece. Becoming more efficient from a tech perspective. I thik that’ll be critical when there’s always going to be downside pressure on reimbursements, that you come in with a very efficient model and you can be flexible within that model.
SHN: Anything you’re staying away from right now?
PL: We don’t specifically stay away from anything, but our core business is long-term and short-term skilled, assisted living with either memory care or Alzheimer’s, and independent living, as well. We in the basic three. There’s no reason we’re staying away but we don’t have a lot of CCRCs. It’s not something our client base is going after, or that we’re heavily prospecting. We have some facilities that look and feel like CCRCs, but there’s no entrance fee and they don’t call themselves CCRCs.
SHN: The rental stuff seemed to get hot last year.
PL: We’ve seen some conversions, actually. Some entry fee into rental. Skilled to assisted living/memory care.
SHN: Converting skilled to assisted living?
PL: That requires a lot of cap ex. You’re talking maybe doubles or triples to convert into an apartment. Usually when [clients] talk about assisted, they’re talking about memory care. The memory care part is easier.
But, I’ll say we work in partnership with our clients to understand whether the need is there. If they come back with the assumptions and the reasons why a need [for skilled to AL conversion] is there, we’ll work with them on those types of projects. But that’s not something we do every day, day-in and day-out.
In other words, if we have a prospect htat comes to us and says, I have a skilled building, I’m going ot convert it to assisted, I need financing, I’m not sure that that’s the right opportunity for us.
SHN: What about post-acute? It has seemed hot in the last 12 to 18 months, especially with the Mainstreet/Welltower [formerly Health Care REIT] deal.
PL: Yes. You have to go up on the acuity level just because of some of the changes in reimbursements, to be honest with you. So, ultimately, you’re going to have to find different ways to make the home profitable. The old status quo model of the 70s through the early 90s of, we’ll just fill the beds and make a nice little profit are gone. I don’t have to tell you what the Medicaid rates are, and if you think you’re going to have a whole Medicare home, you’re probably fooling yourself, unless you’re a pure rehab and it turns every three to four weeks.
So you have to figure out what type of resident, the connections, marketing, outsourcing you’re doing, partnerships with the local community doctors, hospitals, discharge planners, those are all the things we look at.
SHN: It’s difficult.
PL: It is. I don’t want to harp on that. What we’re seeing is that obviously there’s a lot of capital that’s available, but ultimately what’s happening, I don’t think they’re pricing it to risk.
SHN: Why?
PL: I see the price going significantly lower, which is getting closer to an industry that doesn’t have regulatory, legislative, all the other issues that are surrounding this industry.
SHN: Do you finance new construction?
PL: No. We’ll do cap ex, so, basic improvements, but not ground-up. We’re not there. We tell our clients, and we’ve found most appreciate the honesty.
Frankly, there’s a lot of good organizations out there that can do that very well. There’s really room enough for all of us, as long as we’re all growing in the same direction.
Written by Tim Mullaney with reporting by John Yedinak
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