THE DEGREE OF resurgence in the healthcare capital market relies heavily on whether the banking community can once again start lending with regularity. But in looking at the state of capital provision in early 2010, financial analysts haven’t yet seen much to get enthused about.
“I do not see much evidence that banks are actively lending any more to the industry than six months ago,” said Doug Korey, managing director of Shrewsbury, N.J.-based Contemporary Healthcare Capital. “Many banks have indicated that they would review the status of their lending programs at year’s end and in the first quarter, but recent conversations with large banks indicate no real improvement in our industry, particularly to the small and mid-sized borrower.”
Not surprisingly, real estate holdings remain a heavy yoke around the banking community’s neck, Korey said, citing reports that found retail vacancies in the fourth quarter at an 18-year high. Defaults on bank-held commercial real estate loans reportedly rose to a 16-year high during the third quarter and are not projected to peak until at least 2011.
“There is still a lot of weakness in commercial and residential real estate on banks’ balance sheets,” he said. “One banker I spoke with recently raised a good point that healthcare lending for many large and mid-sized banks in this country is classified as ‘real estate lending’ as opposed to ‘business lending.’ To the extent that a bank groups healthcare loans with the rest of its real estate lending and the general real estate loan portfolio is soft, then it is natural for banks and regulators to restrict further lending to the space.”
Jeff Binder, managing director of St. Louis-based Senior Living Investment Brokerage, adds that the situation could worsen in the near future.
“There is mounting evidence pointing to a potentially devastating storm of commercial real estate problems,” he said. “For instance, several sources point to $780 billion of commercial real estate debt expected to mature between 2010 and 2014; problem enough given the current limitations on accessing capital, but it is projected that nearly two-thirds of it is underwater at current property values. While [healthcare] loans continue to perform, the negative situation regarding the debt of other real estate sectors could certainly prove detrimental to those seeking capital for all sectors, including ours.”
Accessing capital
At the moment it’s hard to see analysts’ capital assessments as anything but bleak, yet that doesn’t mean opportunities don’t exist for healthcare providers, said Mike Hargrave, vice president of the National Investment Center for the Seniors Housing & Care Industries.“Generally speaking, if you are looking for financing or refinancing this year, communication is the key issue,” he said. “Speak with your lenders early and be open and honest. Lenders are more willing to work with borrowers they know. In all cases, make sure your expectations are realistic and come prepared with all requested documentation when approaching new or existing sources of capital.”
Dan Biron, senior vice president of Columbus, Ohio-based Lancaster Pollard Mortgage recommends providers “focus on the core business of operating your facility, make sure it is operating at its best and have financial records that prove that. To go to a lender now with a less-than-well-performing facility is setting yourself up for a negative outcome.”
To be sure, potential lenders will scrutinize every detail of the provider’s operation, Binder added.
“We urge any potential borrower to be organized, accurate, efficient, and timely – any limitation in one of these areas can be detrimental to their efforts in seeking financing,” he said. “Without question, we do not anticipate any softening in the reluctance to lend based on pro-forma and budgeted numbers – not unless the borrower has a strong lending relationship and equally strong operating platform.”
Stabilization eyed
If there are any positive signs to be found, it is the repayment of Troubled Asset Relief Program funds by several of the institutions that received taxpayer assistance during the housing market collapse. Even so, Korey remains reserved about the TARP fund repayment translating into industry capital.
“It is my perception that the repayment of TARP loans is a combination of public relations and getting out from under whatever restrictions the government has placed on them,” he said.
Brian Pollard, senior managing director for Lancaster Pollard is similarly skeptical.
“About $250 billion in TARP money was given to banks and close to half of that has been paid back,” he said. “Pure economics say that it should have the opposite impact because there is less capital for them to lend. TARP money was a source of capital for banks, but now that they are paying it back, it’s reducing the amount of capital they have to lend.”
Nevertheless, “it is an indicator that the overall health of the banking system has improved,” Pollard continued. “The health of the capital markets has improved as well, which has allowed the banks to access private sector money. The fact that they are paying back TARP isn’t an indication that healthcare organizations will get loans anytime soon, but maybe it’s a sign of stabilization in the industry as a whole.”