Operators with a strong company culture stand a better chance of retaining employees, say capital providers.
By Matt Valley
While oversupply concerns and rising labor costs understandably dominate headlines in today’s seniors housing industry, one of the biggest underwriting challenges that lenders face at the property level is accurately assessing the quality of the operator’s culture and staff.
“We can crunch the numbers, and we do all that, but really trying to understand that philosophical approach, the culture, is becoming more important,” said Brian Heagler, senior vice president and senior banker with KeyBank Real Estate Capital. “We’re asking our operators a lot more questions centered around their understanding of their company, their philosophy, their brand. Are they building a culture internally that is going to retain employees?”
As a capital provider, Heagler said he can’t possibly know the business as well as the operators do, but he knows what it’s like to work for a company, and he is proud to be a KeyBank employee.
“Is your executive director proud to be an employee of your company? Because that is what is going to keep that executive director there when somebody comes along and says, ‘Hey, I’ll pay you $10,000 more to come across the street.’ We’ve seen that when key people leave, it can have a pretty devastating effect on a specific facility.”
The comments from Heagler came during a panel discussion at InterFace Seniors Housing West on March 7 at the Omni in downtown Los Angeles. The event attracted nearly 300 industry pros. David Boitano, senior investment officer for Ventas Inc., moderated the panel titled Capital Markets Update: Who’s Lending and for What Deals?
In addition to Boitano and Heagler, other panel participants included Michael Coiley, managing director, CIT; Billy Meyer, managing director, Columbia Pacific Advisors; and Dague Retzlaff, senior vice president of Capital One Healthcare.
Coiley said that when new, competing facilities open up, lenders are always concerned about the impact on occupancy at the existing properties in a particular market. But what shouldn’t be overlooked is the effect that new product can have at the executive director and marketing director levels because the new facility will likely poach talent from surrounding properties. “It’s just a game of musical chairs,” said Coiley. Thus, the depth of management talent becomes critical for all operators. “Can they backfill?”
It is for those reasons that Capital One likes to finance larger portfolios, said Retzlaff. “Losing one executive director or one asset is much less important because you have 20 other assets buoying up the portfolio.”
Sage advice for borrowers
In the seniors housing space, it’s imperative that a borrower find a lending partner that truly understands the business, particularly the assisted living and skilled nursing segments, said Retzlaff.
“As you move up the acuity scale, things happen — a bad flu season or you lose an important executive director. There are ups and downs in this business that you are not going to see in long-term leased medical office buildings, right? You want a lender that understands that there are going to be hiccups and is not going to panic because there is an adverse survey at a facility, or you had 10 deaths in a month and suddenly performance cratered temporarily.” Capital One has been actively lending in the seniors housing space for the past 15 years.
Heagler underscored Retzlaff’s point, adding that plenty of debt capital providers have entered the seniors housing space over the last four to five years, particularly smaller local lenders. Inevitably, the industry will face a cyclical downturn at which point problems and issues will surface, Heagler assured the audience.
“Your lender may actually understand all of that, but if your lender’s credit person doesn’t understand that then you are going to be in big trouble if you need to modify the loan and the bank wants out,” warned Heagler. “And the only time a bank wants out is when there are no other options available. Choosing a capital provider is a really important thing, and you should be thoughtful about it. The experience is important.”
Meyer said that 96 percent of borrowers in its bridge lending program don’t execute their plans as quickly as they initially thought, prompting them to seek a loan extension. In those instances, lender flexibility becomes paramount, emphasized Meyer.
“What happens if the borrower needs another six-month extension option, or something unforeseen happens and it needs another 12-month extension option? And suppose the borrower has already improved the property a little bit. Can he get another $2 million in loan proceeds to cover those costs? Does your bridge lender have the authority and capability to give you this extension and/or additional proceeds?” asked Meyer.
Many bridge lenders either don’t hold the loan on their balance sheet, or they sell off most of the loan and only retain a small piece of it, according to Meyer.
“That means when you need to come back for that extra six-month extension, who are you calling, who are you talking to? Nobody really knows,” said Meyer. He advised borrowers to find out ahead of time who will own the note on their bridge loan and to ask a series of “what if” questions to determine which lender is the right fit for them.