The Seniors Housing Capital Environment: A Discussion with Kevin McMeen
In the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, Vice President, NIC MAP, recently interviewed Kevin McMeen, President – Real Estate, MidCap Financial, LLC.
I understand MidCap Financial had a very good 2011. Can you provide us with an overview of MidCap Financial and the progress you made in 2011?
Mr. McMeen: MidCap Financial was started in September of 2008 by the former senior management team of Merrill Lynch Capital. After Merrill Lynch sold the ML Capital business to GE, the six of us decided to start our own finance company focused solely on the healthcare industry. We raised equity commitments of $500 million from Lee Equity Partners, Genstar Capital and Moelis Capital Partners and we leverage that equity through various credit facilities and structured syndications to generate attractive returns. Our business model, while tightly focused around a single industry, has an aspect of diversity that is captured in the different products we offer. We serve the healthcare industry through four product groups – real estate, asset based lending (working capital), leveraged lending and life science lending. Each of these products has varying structure, pricing, and demand dynamics that move differently across the business cycle and enhance our ability to manage growth, yield and the credit profile of our portfolio.
Since opening for business just over 3 years ago, we’ve grown our book of loans (net funds employed) to over $850 million on $1.1 billion of outstanding commitments. We are on pace to surpass $1.0 billion of net funds employed in the second quarter, keeping pace with our growth target for 2012. In 2011 we saw our portfolio grow by over $450 million of new business. Our growth came across all product lines, with real estate loans on senior housing and care facilities of approximately $180 million. We also serve the skilled nursing sector through our asset based lending product (working capital facilities) which grew to roughly $400 million of funded business. While our relative portfolio growth was very strong in 2011, we remain very selective in how we approach new business to control credit quality and returns on our equity.
2011 was particularly strong for our real estate group and we anticipate even more robust growth in 2012. Much of the growth is attributed to several factors, including strong activity in the market, capacity and liquidity within our business, creative approach to transactions and a reputation for executing. We found that the level of deal flow has been quite strong since around the time of NIC’s Fall 2010 conference. Given our focus on 2-5 year floating rate loans, we need to see a high and consistent level of deal flow to create a pipeline of loans that will close. As our business has grown, our capacity and liquidity have grown as well, which enabled us to aggressively pursue and win several transactions in excess of $25 million. As these factors converged, it gave us the ability to fund a significant higher level of business in 2011 than previously. Looking at our pipeline and the flow of opportunities we are seeing, I anticipate our 2012 volume of new business to surpass $250 million.
MidCap Financial is a commercial finance company (CFC) that was formed in 2008. Can you tell us how seniors housing and healthcare real estate underwriting standards have changed for MidCap (and other CFC’s) since then and what impact that is having?
Mr. McMeen: I think it’s difficult to look at what was happening between roughly Labor Day of 2008 and spring of 2009 as a starting point to evaluate the changes in any sort of valuation or underwriting metrics. That period of time was so extraordinarily tumultuous that we were concerned any deal we did in that time period could be greatly underpriced for the risk within a matter of months, if not days. For us, things began to return to normal by fall of 2009. Around that time we set underwriting criteria that really has not been materially modified since then. While our view of certain markets and types of transactions has evolved, we’ve not made meaningful, across the board changes to our underwriting.
Clearly, there has been a need to adjust our approach to the skilled nursing business with the Medicare cuts and ongoing federal and state budget issues. For example, rather than exiting the market until operators had several months of performance post-cut, we spoke to numerous operators to understand how they modeled cash flows and made adjustments to minimize the impact of the cut. We then factored that into our underwriting and ran various sensitivity models to determine tolerance for further revenue declines and evaluate structuring options to offset deterioration in collateral value. We took a thoughtful, proactive approach to dealing with the issue, stayed active in the market and closed multiple transactions that we believe have very good risk profiles. With respect to seniors housing, our approach changed with regard to looking at lease up situations and asset valuations. As the market stabilized and occupancies began to grow, our view of transactions requiring lease up became more positive. Clearly, our perspective varies by market, asset quality, price point and operator, but the general desire is greater than it was 3 years ago. Similarly, with regard to valuations, our view is that there is a clear premium that investors will pay for quality assets in major metro markets. Any financing of assets that fall into that category requires an understanding of how that impacts collateral value for the better and perhaps more importantly, identifying where, along the spectrum of asset quality, that valuation premium ends. Generally, we are more positive on seniors housing and have accordingly adjusted the cap rates and fill rates we use in our underwriting.
During 2011, REIT’s were responsible for approximately 83% of the buying activity within seniors housing & long term care. Do you see this changing in 2012 and in what way?
Mr. McMeen: Clearly the REITs have dominated the M&A story in seniors housing over the past 12-24 months. However, we still see a great deal of activity in the smaller transactions with, say, one to five assets. As I mentioned previously, deal flow for us, which is primarily transactions under $50 million, has been good for nearly 18 months. Sale brokers we speak with that focus on smaller transactions had record years in 2010 and 2011. The REITs have dominated the market based upon the value of their transactions, but there continues to be a good deal of activity in the smaller/middle market and I don’t see that changing. I think the activity in the REIT sector will be much quieter with regard to large transactions simply because there are fewer large private companies to acquire. I would expect the smaller REITs to continue to be active because they can drive good growth and will actively pursue smaller deals that don’t move the growth needle for the large REITs. Overall, I think you see a return to a more normal distribution of M&A activity among private investors, real estate funds, operators and REITs in 2012.
NIC Research Insights Seniors Housing Occupancy Continues Slow Recovery
The seniors housing occupancy rate continued its slow recovery in 4Q11, rising 10 basis points to 88.2 percent. In the past year, occupancy has risen 70 basis points and is now 110 basis points above its cyclical low of 87.1% in 1Q10. Absorption remained solid during 4Q11, with the number of occupied units increasing by 0.5 percent from the prior quarter. While absorption was healthy again this quarter, inventory increased by 0.4 percent from the prior quarter, resulting in occupancy increasing only marginally.
Although occupancy was nearly flat at the national level this quarter, there was considerable variance across the metropolitan markets. St. Louis had the steepest occupancy decline at 130 basis points, while Denver had the largest improvement at 120 basis points. In MAP31, there were 22 markets that saw a relatively small change in occupancy (± 50 basis points).
To find where your market ranked, contact John Blumer at jblumer@nic.org.
NIC MAP Update (February 2012)
NIC MAP Portal Release Features Customized Dashboard & Integration of Charting Capabilities
NIC MAP recently completed development of several major enhancements to the online subscriber portal. These enhancements address many of the concerns and feedback previously received from subscribers. They include:
- The development of a Dashboard which allows users to create their own pages in the portal and to customize the tools displayed on each page.
- Charting capabilities were implemented, providing subscribers the ability to create custom charts to be displayed on their dashboard page.
- Development of a Mobile website that now detects if a subscriber is visiting the website from a mobile device. This site is optimized for both Android and iPhone.
To find out more about NIC MAP contact John Blumer at jblumer@nic.org.
NIC Events Update (February 2012)
NIC March 2012 Participatory Sessions
Your registration to the Skilled Nursing Investment Forum & Seniors Housing Regional Symposium 2012 gives you access to two concurrent educational programming tracks, valuable networking and deal-making opportunities. Whether you are an operator in the skilled nursing or seniors housing sectors or a lender looking to expand your portfolio you won’t want to miss the exciting opportunity these participatory sessions offer.
Are you a small to mid-sized operator in the skilled nursing sector looking for access to lenders? Now is your chance to submit an executive summary business plan for the opportunity to pitch to a panel of wellrespected capital market professionals. If selected, a business advisor will coach you in the weeks before the Forum to help ensure your pitch is comprehensive and well-developed. During the session, you’ll present a request for capital for either a new project or an expansion opportunity. Be sure to bring business cards as a networking session will follow so connections will be made.
Do you need financing for an acquisition or to refinance an existing loan, but are unsure who might be interested? Do you want to finance seniors housing deals and find new borrowers to build your portfolio? Join us for the Symposium’s first-ever speed meeting event as we pair borrowers and lenders for several six-minute meetings during the session. Use the time to discuss a deal and gauge mutual interest to continue the conversation. Be sure to bring your business cards and be ready to find the perfect match.
Due to positive feedback from the 2011 Regional Symposium session “Competing for Capital in a Challenging Climate” our esteemed panel of judges are returning this year for a follow-up session “It Takes More Than a Great Idea to Obtain Capital”. If you’re looking to raise debt or equity capital for a seniors housing project, this is your chance to submit an executive summary business plan for an opportunity to present your ideas to a panel of well-respected capital market professionals. During the session, our panel of judges will provide expert guidance on how to improve your chances when competing for capital. The operator with the best overall plan, determined by the judges, wins a $3000 credit towards a NIC MAP subscription and a complimentary registration to the 2013 Regional Symposium.
Leveraging Data and Analytics to Drive Business Decisions
It is no secret that the country’s leading companies are rapidly building power by leveraging data to gain insights and drive business decisions. But what about companies involved in seniors housing? At the upcoming Seniors Housing Regional Symposium 2012 hear about 4 companies that are leaders in the use of data and analytics. Peter Edeburn, Deputy Chief Underwriter of Oak Grove Capital, a premier national commercial real estate lender, will reveal their strategic use of various data sources, including NIC MAP to drive more efficient and better investment decisions. John Getchey, VP of Seniors Housing Underwriting at Health Care REIT , Inc. (NYSE:HCN), a company with an over $13 Billion portfolio, will show how HCN uses analytics to set their strategy. Jason Rock, Regional Sales and Marketing Startup Manager at Allegro Senior Living, a progressive operating company with 8 properties in 2 states, will show how they use data and analytics to frame local decisions. And Margaret Scott, Chief Investment Officer at Belmont Senior Living, will show how their use of data and analytics enabled them to find opportunities in the midst of the economic recession. The session is called Leveraging Data and Analytics to Drive Business Decisions and it will be held on March 27, 2012 from 1:45 pm – 3:15 pm.
State of Seniors Housing Survey 2012
State of Seniors Housing Survey 2012
Transparency is a necessity if our industry hopes to attract new sources of capital to invest in seniors housing. Since 1992, The State of Seniors Housing survey has captured and widely-disseminated financial performance data for seniors housing communities. We are asking for your participation to provide a representative picture of the industry.
Properties Eligible for Inclusion in Survey
Properties eligible for inclusion in the State of Seniors Housing sample include the following:
- For-profit or not-for-profit communities
- Communities where the majority of units provide Independent Living, including Senior Apartments
- Communities where the majority of units provide Assisted Living services
- Communities where the majority of units provide Alzheimer’s care
- Continuing care retirement communities (CCRCs)
- Skilled nursing facilities (SNFs)
Please do not complete surveys for properties where rates are subsidized, such as Sec. 202 elderly housing.
For owners or managers of multiple properties, please submit data for as many of your properties as is practical. We will adjust overall results so large portfolios are neither over-represented nor under-represented.
Please submit completed surveys to colleen.blumenthal@healthtrust.com by close of business Thursday, March 15, 2012. Questions about the survey should be directed to Colleen Blumenthal of HealthTrust, LLC at (941) 363-7502 or at her email address noted above.
Participating Organizations
The American Seniors Housing Association (ASHA), National Investment Center for the Seniors Housing & Care Industry (NIC), Leading Age, Assisted Living Federation of America (ALFA), and National Center on Assisted Living (NCAL) thank you, in advance, for your participation in this important annual research study.
If you receive a similar request asking you to participate in the State of Seniors Housing 2012, please accept our apologies for the overlap and understand that we are working collectively to try to improve the quality of our profession’s data.
Benefits of Participating
All organizations that complete surveys will receive a complimentary copy of The State of Seniors Housing 2012, which compiles the survey results for comparisons to your own operations.
Confidentiality
As always, the State of Seniors Housing data will be handled with complete confidentiality and the results presented only in the aggregate.