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Sizing up the borrower

September 1, 2007
by Richard Peck
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Interview with David M. Boitano, Senior Investment Officer and Vice President, Nationwide Health Properties, and Alex Chavez, Director, Healthcare Real Estate Group, CapitalSource

When you ask a long-term care lender or investor what they look for in a would-be borrower, the answer always seems so self-evident: in so many words, they favor “an experienced provider with a good reputation and a passion for the business.” Of course, there is much more to say on that, as longtime REIT operators David Boitano and Alex Chavez discussed at the NIC Western Regional Symposium. More recently, they provided helpful elaboration in an interview with Nursing Homes/Long Term Care Management Editor- in-Chief Richard L. Peck.

Peck: To begin with, what about the thought that one should only lend to or invest in an owner/operator—does this still hold true?

Alex Chavez: Owning the asset isn't quite as an important factor these days. We're seeing a lot of operating companies that are structurally separating the operational arm from the real estate arm. The real estate is owned by a holding limited liability company and the operator leases it. The reason for this is to strengthen the company's protection against liability judgments.

David M. Boitano: That's true, companies are structuring themselves in this way for that reason. And that does seem to be a prudent financial measure to take in this day and age. For that reason, third-party management companies are viewed as potentially sound prospects.

Peck: In any case, what are some of the first things you look for—those crucial first impressions—in a would-be borrower?

Chavez: It's always been our view that who you lend to is more important than what you lend on. Key factors we look for are integrity, reputation, experience….

Boitano: Yes, it's the same with us: experience in the business, the track record, the level of support that exists throughout the organization beyond the top people—because a sound business is built on more than any one person or small group of people.

Chavez: And once the term sheet is signed, we do our due diligence—including a full background check that entails a criminal background check.

Boitano: A criminal background check probably wouldn't be typical for us, in that this industry is a small community where “everybody knows everybody.” Perhaps with a new name coming into the picture, though, we would.

Chavez: We generally do it for new or first-time customers. With known parties, we might be somewhat more informal.

Peck: What are business management approaches or techniques that you favor?

Chavez: We like to see whether borrowers have been involved in credit markets before. We also find today that a lot of the smaller operators have become quite sophisticated with their internal accounting and financial systems, as well as in their overall management strategies.

Boitano: I agree, the level of sophistication is not what it used to be in these operations; it's much better. But you still need people who understand a balance sheet and an income statement and who are thinking not just month to month, but five years out in terms of the investments they need to make to stay viable.

Chavez: Of course, MDS coding skills are highly important in this business and, fortunately, most operators I'm aware of have access to good skills in this area—either on staff or from consultants. They are acutely aware of the impact of proper MDS coding on their financial health.

Peck: What about marketing strategies for the organization? David, at the regional symposium, you mentioned the two basic strategies of word-of-mouth reputation versus greater media orientation. Care to elaborate?

Boitano: In this field, marketing comes down to the individual building and how that administrator and property staff operate that building. If they do it well, the marketing largely takes care of itself.

Chavez: That's true, you need good quality of care; you provide it and measure success facility by facility. If you don't have word-of-mouth reputation based on this kind of operation, recognized especially by your referral sources, no amount of media campaigning will help you.

Peck: How do you assess the outcomes of an operation? Do you focus on survey results, for example?

Chavez: Surveys are one indicator, but they can be quite subjective and vary not just from state to state, but within states. For that reason, one tends to take survey results with a grain of salt. We also look at resident and family satisfaction studies, as well as ask around and talk to referral sources and the nursing home staff themselves. You'd be surprised how honest the people can be, both positively and negatively. Also, personal site visits are important, and it doesn't take long to get a feel for an operation….

Boitano: I believe that you get a feel for the operation's quality within the first two minutes of walking into a building. It's like entering a restaurant and knowing within moments whether you really want to eat there. Then, as you go along, you tend to develop further impressions that support that feeling. Also, in multiple facility operations, it's not a bad idea to show up in buildings where they're not expecting you. That can be very informative.

Chavez: Yes, we do that, in fact. It's like secret shopping or mystery shopping. It's probably the best way of all to evaluate an operation.

Peck: How do you assess operators' strategies for investing in themselves—for example, investing in staff versus investing in property upgrades?