$$$$ Calling all capital NIC financing forum.

AT LAST YEAR'S NIC CONFERENCE, Thilo Best, treasurer and senior vice president of Salem, Ore.-based Holiday Retirement, moderated a panel of lenders and investors who were on hand to talk about their respective products. His introductory remarks painted a picture of the industry that was nor pretty.

"Last year there was a shortage of debt; this year there seems to be a shortage of debt and equity," Best said, "We're hearing from Wall Street that our business is too complicated, particularly in an environment where you can buy Internet stocks that go up 500 percent a year. We have black boxes, gray boxes, local market overbuilding, PPS implementation, missed earnings, and undisclosed earnings -- all of which doesn't lend itself very well to earning money, whether it's debt or equity.

"Of course, the marker's over-reacting -- but when and how are we going to come out of it?," Best continued. "We've gone from a growth story to a value story in an era when value-oriented portfolio managers have less money than ever before."

That said, it was the panelists' view that the situation, while dire, is not hopeless. There's money our there, said the experts, who proceeded to discuss how developers of senior housing and care can get a piece of it.

ACQUISITION AND TURNAROUND

James Thompson 

Senior Vice President, Health Care Division, GMAC Commercial Mortgage Corp. in Birmingham, Ala.:

GMAC's health care group services about $3 billion in commercial mortgage loans. Although most of our originations are placed in some form of permanent financing, we also make interim loans. Acquisition and turnaround loans would be funded under that program. Our focus of late has been on skilled nursing facilities, but we'll also do assisted and independent living, and, on a case-by-case basis, rental-model CCRCs.

Like permanent financing, our spreads have increased as have our underwriting requirements in light of current conditions in the financial market as well as conditions facing the industry But we remain bullish on nursing homes. Our traditional-operator focus has allowed us to get comfortable with acquisitions and turnaround situations.

All of our interim loans are on a floating rate. Spreads today are running 265 to 325 over the 30-day LIBOR, with turnarounds at the higher end of that range. However, spread reductions are possible as agreed-upon targets are met. Typically, we charge a 1 percent fee on acquisitions, slightly more for turnarounds. Our interim loan program requires us to include an exit fee, which is waived if GMAC provides the permanent financing.

Current conditions in the financial markets and in the industry have affected our underwriting, which is a lot more comprehensive, a lot more detailed, and, in many cases, a lot more conservative. Our requirements have put a greater burden on borrowers to provide more and better information to support historical trends and justify future changes -- the backbone of underwriting decisions on acquisition and turnaround deals.

The current reimbursement environment has yielded a lot more turnaround situations. Facilities that had operated profitably under the old system are having to change their case mix, service offering, and expenses. Our challenge is to understand and validate those changes and determine a sustainable net cash flow. Meanwhile, the current regulatory environment is forcing a renewed emphasis on care and on the qualifications and execution of the operator. That's going to play a larger role in the underwriting of individual loans or groups of loans, as well as in monitoring the loans on our balance sheet.

COMMERCIAL MORTGAGE-BACKED SECURITIES 

Julie Smith

Principal of Charlotte, N.C.-based Bank of America and manager of its health care conduit program:

The permanent financing market has been a tough place for the senior housing industry over the last year and a half. The spreads are widening. The rates are increasing. The underwriting criteria are consistently tightening in terms of not having a lot of flexibility. However, the permanent market is an ideal place for a very stable property that can be financed for 10 years, where the borrower can get fixed rate, non-recourse financing and get on with operating its business.

With the Fed's economic forecast, and the 10-year Treasury rate continuing to move up, there are concerns that rates will continue to widen, probably through at least early 2000. But money is available. We have not exited the market in any product type. However, we do look very closely at the operator and the exposure that operator may have to regulatory issues.

The commercial mortgage-backed securities (CMBS) market is alive and well, although there's a lot more scrutiny of this product type in the market. The rating agencies and subordinate buyers continue to want to keep the level of operating business assets limited to 5 to 10 percent of the pool. We have a $1.115 billion issue on the street right now, of which 5.3 percent is health care. For the right operator with the right mix of product, that paper is available, but prices definitely have gone up. You have a better opportunity to get CMBS financing if you are willing to do less leverage. The 75 percent leveraged transactions are available to the right operator, but they're better received if they're lower than that. And the more you can make something look 'multifamily,' the happier the rating agencies and the subordinate buyers are.

CONSTRUCTION

Jack Killough

Senior Vice President. Guarantee Bank in Dallas:

Guarantee Bank is a $13 billion financial institution whose primary area of lending has been commercial construction--$16 billion since its founding in 1990. Three-and-a-half years ago, we received quite a few requests to finance the construction of senior housing and, since then, we've been fairly active. We've originated about $800 million, some of which is moving into the permanent market, but quite a few projects are still in the construction phase. Meanwhile, we're closely monitoring the fill-up of properties in the lease-up stage.

We're still lending money, although our loan volume requests have dropped off significantly since the end of the first quarter of 1999. We think this is a reflection of the lack of equity in the marker. I'm not a 100 percent-lender and I don't know anyone other than REITs that is--and they've been out of the picture for some time now. And it's not just the publicly traded companies that are hurting. Privately held companies, which are even less well-capitalized, have basically quit developing properties. Rather, companies are focusing on filling the capacity they've already generated because, bottom line, you have to generate your own equity as precursor to obtaining debt.

Our strategy has also changed. We're being a bit more cautious with the capital we have in development programs, checking operating performances very closely so we don't get caught with projects that run out of operating reserve because of slow lease-up. We loaned out $300 million in the first quarter of 1999, and close to $200 million for the balance of the year, so you can see the dramatic drop-off. We're looking at 2000 as the year for people who borrowed from us to execute the business plans that they represented to us.

FREDDIE MAC 

Margaret Scott, Director, conventional products, McLean, Va.-based Freddie Mac's multifamily division, and head of its seniors housing and assisted living business:

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages from lenders, holds them in its portfolio or packages them into securities that are sold to investors.

We offer a low and consistent cost of capital: We stayed in the marketplace when things fell apart in the fall of 1998, and we plan to be here for the long haul. Also, we don't have a fixed annual allocation for seniors housing. We're a portfolio lender and putting everything on one balance sheet gives us more flexibility and creativity to meet borrowers' needs. In terms of the types of loans that we do, we are a long-term player. We can do terms of anywhere from 7 to 25 years, and amortizations as long as 30 years. We offer very competitive pricing.

Generally, we look for stabilized properties; we're nor in the business of raking lease-up risk. We like to have at least two years of stabilized operating history. We also look at management. Regulations will change, your business will change, and climates will change, and we want to make sure we have a management team that can weather these changes.

We've been in this business two-and-a-half years and during that time we have financed approximately $500 million and expect to do another $300 million this year. In terms of the number of loans, it has been an even mix between congregate care and assisted living properties, but in terms of dollars, we've done about twice as much congregate as assisted.

PRIVATE EQUITY

Larry Shagrin,

Managing Director,

William Blair Capital

Partners in Chicago:

We're a private equity firm affiliated with William Blair and Co., a leading investment bank. Total capital under management for our firm is $700 million. We are currently investing out of our sixth fund, which was capitalized at $270 million, and are looking to make private equity investments in the $5 to $30 million range. Historically, about a third of our funds have gone to health care and health care services, including assisted living.

The private equity markets are a good news/bad news story. The good news is there are more dollars available than ever. In 1990, private equity funds raised $2.3 billion. In 1998, a record $25 billion was raised and 1999 was another $20 billion-plus year.

The other piece of good news is that private-equity investors have a long-term perspective. They're not like the portfolio managers who buy public stocks with one eye on their bonus at the end of the quarter. We hold our portfolio companies from three to seven years.

The bad news: We haven't figured out a way to make this a dotcom business, and that's where people are looking to put their dollars. Also, you don't need me to tell you about the health care sector's public market performance, government reimbursement issues, and potential overbuilding by assisted living companies.

To get private-equity deals done today, look to firms that have had a long-term commitment to health care; in this market, you're not going to get a new group interested in the sector. Or target real estate opportunity-type funds that appreciate the underlying assets. Consider also non-traditional private-equity sectors such as hedge funds.

What we look for in a developer is a solid management team with a good track record, a good business model, and a prototype that's verifiable. The private equity community currently favors higher acuity assisted living and Alzheimer's-type care, which it views more as health care services than real estate.

Finally, private equity is interested in corporate investments because they're more liquid. Project financing is not something you're going to get a private equity fund interested in.

We're looking for returns above 30 percent in most cases, and we usually get involved in our portfolio companies at the board level, and build various other control provisions into the transaction.

SALE-LEASEBACK

Andrew Stokes, Senior Vice President of Corporate Development, Nationwide Health Properties, Newport Beach, Calif.

We're a real estate investment trust, registered on the New York Stock Exchange. We used to have a market cap well in excess of $1 billion, but like many players in long term care, our access to equity has been affected. While we are an investment grade-rated company, we're not willing to sell equity at its current price--about 60 percent of its highs--or to accrue any more debt than we are already committed to. So right now, we're doing sale-leaseback financing and funding pre-existing commitments, but are extremely selective about new investments.

Sale-leaseback financing is often available locally. If you want to buy a business, and it's fundamentally a real estate business such as a long term care nursing home or an assisted living facility, we buy the real estate and maybe also the equipment and lease it to an operator on a very long-term basis. We're providing essentially 100 percent funding for the acquisition so the operator can concentrate its working capital in places where it can do better. We are active in that but are not actively seeking new investment opportunities right now.

Once the problems of over-leveraged operators wash out--when the defaults work their way through--we will be back in. Also, dividends are not in style right now, but when they come back in style, it will restore value to our stock price, which will allow us to raise equity and, in turn, rake on a prudent amount of leverage.

TAX-EXEMPT BONDS 

Herb Horowitz, Vice President, Shattuck Hammond Partners New York:

We're an investment banking firm that specializes in providing debt, equity, and M&A services to the health care industry: We have made a major commitment to the senior living area, and work with a variety of for-profit and not-for-profit companies. At a time of gloom and doom when it comes to obtaining project financing, the tax-exempt market is a good source of financing for senior living projects. While religious and other nor-for-profit sponsors historically use tax-exempt financing, there is considerable opportunity for for-profit sponsors to rake advantage of that market as well. In the assisted living area, for-profit sponsors can rake advantage of the so-called 80/20 or 142 (D) residential rental housing guidelines, and issue tax-exempt bonds for construction and permanent financing. Like most tax-exempt bond structures, these would involve 30-year fixed rate or, under certain structures, up to 40-year fixed rate, with 30- or 40-year amortizations. While rates have increased, they're still at attract ive levels. Rated bonds might go for 7 to 7.25 percent for 30-year fixed rate and just over 6 percent if they're credit-enhanced by HUD or a similar enhancement. If you can find a bank to credit-enhance the whole issue, you can issue low-float bonds with weekly rates of about 3.5 percent plus the cost of the enhancement.

A major area of new bond activity is in acquisitions of for-profit nursing homes or assisted living facilities by not-for-profit asset owners. While many are traditional not-for-profits such as hospitals or religious entities, an increasing number are 501(C)3 asset owners buying whole portfolios of nursing homes or assisted living projects from owners who are having difficulty obtaining the type of prices they're looking for from cash-strapped public or private companies.

Typically, acquisitions are made at appraised value. Depending on the structure used, the bonds would have to show debt service coverage on the senior debt based on a feasibility study market analysis of approximately 1.35 times debt service. The seller may have to rake back a subordinate note. From the standpoint of the Internal Revenue Service, the bonds must be considered "health care bonds"-even if an assisted living project is being acquired. Assisted living facilities that do not have kitchen facilities in the units meet this test, but even with kitchens, a facility could qualify if it provides continuous medical services. In some instances, a facility can qualify by agreeing to meet an 80/20 test.

The structures vary. Often, unrated bonds are used to market these issues. However, with certain properties, other structures are available, including FHA mortgage insurance, and Freddie Mac and Fanny Mae credit enhancements.

WORKING CAPITAL

Mark Idzerda

President of DVI Business Credit Corp. in Newport Beach, Calif.:

Just before I started my assignment at DVI Business Credit, I was the managing director of DVI'S activities in Latin America and lived in Buenos Aires. I think that experience has helped me cope with the many changes that are going through this industry today. Latin America's a tough place to lend money, and I think this is clearly a rough industry to lend money to. But the long term demographics are there, the cash flow is there, the need is there, the patients are there, the care is needed-and all that means that this is an industry in change. Wherever there's change, there's opportunity.

We have total assets of only $1.7 billion, but about $1.3 billion of that is in the equipment leasing division. DVI Business Credit does one thing-we lend on the value of accounts receivable. When you've gotten as much equity and long term debt on your balance sheer as you possibly can, and stretched your payables as long as you can, you need working capital. That's where we come in.

Aging varies with the category of receivables such as Medicare/Medicaid or private pay. We take receivables in a certain aging bucket-anywhere from, say, 0 to 180 days-and determine their net collectable value. We then apply an advance rate-between 75 and 85 percent of the net collectable value-and then lend that.

Borrowers report to us what their receivables are on a daily, weekly, or monthly basis, and we continue to lend, rolling forward the collateral, and raking a look at it every time someone wants to borrow.