An Investment House That’s “Bullish” on Long-Term Care

Peck: Why, in general, is GE HFS adopting such a positive stance toward long-term care investment?

Cobb: GE HFS’s philosophy is to be a consistent provider of capital. There are always cycles in long-term care, and right now we think that some sectors, including skilled nursing, have hit bottom and are on an uptick.

Peck: But what about the Medicare cutbacks and all the talk (at press time) of states looking to reduce Medicaid expenditures?

Cobb: This shows why dabbling in healthcare, as many investors in this field do, is dangerous. True, some states aren’t allowing us to sleep at night, because the size of the cuts that they’re talking about is unknown. Based on budget proposals, some states could be cutting their facilities’ cash flow by 30 to 50%, depending on the facility’s operating margin-and when you have an unknown that big, you don’t lend until some decision has been made on the specific cuts.

But this is why we have a good research department and underwriting department. We find that the key in long-term care is to look into specific circumstances, try to grasp the situation before it happens, or just as it happens, and react accordingly. For example, when California announced its MediCal cutbacks earlier this year, we let our clients there know that we wouldn’t be lending until the situation is resolved. When Illinois cut its Medicaid rate by 5.9%, that was a pretty dramatic swing for some nursing homes.

The key is to understand how a position is developing and then plan. When the Medicare cliff dropped Medicare reimbursement 10% last October, that was something we saw coming and had planned for. In fact, we did most of our business last year in the third and fourth quarters because we anticipated that Congress wouldn’t act and made loan decisions accordingly, rather than sit back and wait to see what happened.

Peck: What about another troubling factor in the long-term care equation: the staffing crisis? How do you work that into your strategizing?

Cobb: Staffing is definitely a factor, although we see it as only one of several things to take into account. The downside of the staffing situation, in our view, is excessive use of contract nursing-it’s expensive and raises questions about management practices. But what we do, when we make a loan of more than $10 million, is spend the better part of a day with that company and, among other things, evaluate its response to its particular staffing issues. Basically, we won’t lend to people who toss off staffing as of no concern or say, “We have the situation in hand,” usually through the escape valve of contract nursing. If we find that they’re concerned about the issue and have given it some thought, that’s good. We can’t control the nursing shortage, but a company thinking about it and addressing it as best as it can-that’s what’s important.

Cobb: We have a standard underwriting checklist. The major elements we review are quality of care (usually determined from interviewing management, reviewing state survey reports, checking references, etc.); the experience of the management team; the company’s operational history; and whether the balance sheet appears solid-if the company hits a bump in the road, can it still carry our debt service?

Peck: Let’s switch gears and talk about the assisted living sector. Some say the field remains in the financial doldrums without much near-term prospect for serious improvement. Your thoughts on that?

Cobb: We never really know when we’re “at bottom” in this field. Some cities are good, some are bad, and you have to watch this market closely, because things can change markedly within a matter of three or four months. For example, Charlotte, North Carolina, used to be a tough city for this type of investment, but of late it hasn’t been so bad.

Our highest-volume sector last year was senior housing-independent living and congregate care. There were a lot of good acquisitions and lots of stable deals for refinancing. It was a good year for us in these areas.

Peck: Speaking of senior housing, one of the chief findings of studies done recently by the National Investment Center for the Seniors Housing and Care Industries was that the fewer services offered by the property seeking financing, the better its chances of getting financed. Do you agree with that?

Cobb: I agree that, from the borrower’s point of view, that’s probably true. Sometimes borrowers see it as a question of “following the money”-changing one’s basic approach to business to get financing. Frankly, we don’t agree with this approach. They ought to do what they do best and not be a pack follower. Good quality of care, good management, good balance sheets-that’s what we like to support. And we’re doing well at it.

Peck: With the prospects for surging federal deficits looming this year, are you concerned about the impact this might have on interest rates?

Cobb: I’m not Alan Greenspan, but we’re coming off two years with short-term rates at about 3% and longer-term rates at about 4%. My guess is that long-term rates will probably remain low, at least for the immediate future. Our biggest fear concerning the federal and states’ deficits is not how they will affect interest rates, but Medicaid rates. That’s the unknown that’s causing us concern.

Peck: Isn’t the situation exacerbated by declining Medicare rates, so that Medicare can no longer be relied upon to compensate for Medicaid shortfalls?

Cobb: There’s an old saying that Medicaid keeps the lights on and Medicare makes the money. We look at them, though, as two revenue streams, each deserving a close eye.

Peck: So, in view of all this, you’re still bullish on the field?

Cobb: We plan to be very active in senior housing, skilled nursing, and medical offices-in fact, we plan to increase our sales force by the latter part of this year. When it comes to skilled nursing, specifically, we’re bullish because we’re confident that we can make consistent investments based on good research. Our own company is in great shape, with a solid triple-A balance sheet, huge resources, and a 68% growth in healthcare real estate volume alone last year. We’re aiming for another 15% growth this year, and we’re just getting started. NH