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Financing the project

January 1, 2005
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Advice from three prominent long-term care lenders

In today's long-term care environment, administrators and other staff are usually too busy with the day-to-day adventures of caregiving to worry about much else. Capital investment financing is generally not given much thought until it moves to center stage. Even then, administrators and frontline staff might be unaware of important factors that gain or lose competitive advantage for them in the eyes of financiers. When potential investors scrutinize the operation, what are they looking for? What can administrators do to ensure a successful outcome? Nursing Homes/Long Term Care Management Assistant Editor Todd Hutlock spoke with three leading long-term care lenders to get a feel for what they look for when they evaluate a facility.

What is the principal facet of a new project that attracts you?

Raymond J. Lewis, Senior Vice-President and Chief Investment Officer, Ventas Healthcare Properties: When considering new investments at Ventas, we focus primarily on cash flow. Because we look to the cash flow to pay our rent, so to speak, we like to see properties that have exhibited stable and predictable cash-flow growth over a two- or three-year period. The key drivers of cash flow in nursing homes are census, quality mix, acuity, and expense management. Good operators will manage these items closely and have plenty of data available to help us evaluate these important attributes.

John Cobb, Managing Director, Long Term Care, GE Healthcare Financial Services: While the actual real estate project and location are very important, GE Healthcare Financial Services really looks to the owner/operator of the project. Basically, it is a philosophy of to whom you lend, not necessarily what you lend on.

Randy T. Abrahams, President and CEO, Bridge Healthcare Finance: We specialize in the differing capital needs of small to midsize healthcare providers in the long-term care industry. Our lending products are written around specific industry segments—home healthcare, acute care, skilled nursing, and diagnostic imaging. We see several factors common to successful facilities across industry segments:

  • clean and modern facilities

  • track record of quality care

  • operational efficiency

  • dedicated workforce

  • skilled management team

A principal, specific factor important to our evaluation process is the availability and type of common areas for patients. Long-term care patients like to aggregate, socialize, and have somewhere to go beyond their rooms. The newer, more successful properties emphasize common areas and specialized social activities for their patients.

What do you expect from a facility's administration in terms of operational information, track record, etc.?

Lewis: At the facility level, we look for administrators and staff who have a good grasp of the details of their operations and the markets in which they compete. We visit each property and meet with the administrators and their key staff. As we speak with them, we look for a firm grasp of important operating and strategic information, such as census, competitive position, referral sources, staffing ratios, and extent of risk-management issues. We also like to see an administrative group that has been together for a number of years. Tenure not only shows experience but also indicates that the facility is a good work environment.

Cobb: GE Healthcare Financial Services typically looks for an operator who has direct experience in the specific market and product type in question—a very key factor. The information is generally received during the due diligence process and may include historical statements, detailed census data (rent rolls), survey history, and accounts-receivable agings.

Abrahams: We expect facility operators to focus primarily on a few key areas of their business: quality of care, operational excellence, and reputation. Providing the highest standard of care and service is at the core of the business. If a company has a documented history of poor care, poor compliance, or high management turnover, there is little hope for its maintaining value in the eyes of the financial community.

Strong financial and operational controls will therefore not only ensure that the business is run efficiently, but will also contribute to controlling risk-management and staffing issues. Retention of good management and nursing staff will demonstrate commitment on the part of the workforce. A committed workforce not only reduces costs but enhances the reputation of the facility. This, in turn, creates demand and increased occupancy rates—and attractiveness to investors. Improved quality of care—another result of a committed workforce—also contributes to a facility's reputation in the most basic of ways.

What do you expect when personally visiting a facility whose project you're financing?

Lewis: The facility should be clean and well maintained inside and out. There should be a friendly staff that greets us when we arrive. The hallways should be free of clutter, such as hospitality carts or empty wheelchairs. As we tour the facility, we try to see if the staff knows and greets residents by name. During the tours, I like administrators who ask us to wait while they attend to a resident's need. Finally, to the extent possible, we like to see residents dressed and out of their rooms, interacting with staff and other residents or participating in activities.

Cobb: I expect the facility to be clean, well-staffed, and purpose-designed for its market. I always look to see whether the staff is engaged and interacting with the residents.