Life Support for Your Health Care Portfolio
Anthony, Rick, The RMA Journal
While this article deals primarily with aspects of secured lending for medical model senior housing, the principles presented can be applied to all types of lending to a very complex industry.
It doesn't matter whether you are currently active in lending to the health care industry, have decided to nurse your existing portfolio waiting for brighter days, or are considering entering the field on the next up-cycle. How you manage your risks before, during, and after your portfolio exhibits symptoms will almost always determine whether your portfolio faces a future terminal illness or requires only preventive medicine.
Is the Doctor In?
The complexity of the health care industry demands a team of highly analytical professionals to perform ongoing assessments of a loan portfolio. This job is not for the faint of heart or for part-time analysts and lenders. It generally takes three to five years for a banker to develop the analytical, business development, and underwriting skills that will set your institution apart as a leader in the field. Exposure to commercial real estate lending is a plus.
Make House Calls
Never underestimate the power of regular visits to the properties you finance. A wealth of information is available through administrators and executive directors of properties. An on-site visit at least once a year gives you an opportunity to assess the quality of care at a facility and its general physical condition. Appearance of poor or disconnected management at the property level and poor physical condition of a property should concern you greatly, as they usually are responsible for economic success and market acceptance versus a potentially serious downward economic spiral.
State and federal agencies also survey your properties on a regular basis for regulatory compliance, quality of care, and physical condition. Those surveys are publicly available and should be a part of your borrower's annual documentation requirements. Any red flags in these surveys should call for immediate action on your part to be certain your borrower has rectified all issues raised by regulators, as licenses to operate and/or potentially large penalties for noncompliance usually hang in the balance. Without a license and the revenue generation that goes along with it, your collateral value can be materially impaired and, suddenly, that conservative loan-to-value can become the most over-leveraged transaction in your portfolio. While loss of licensure does not necessarily translate into a loan loss, as operators can be replaced, it can definitely erode potential property value if not remedied quickly and serve as a real wake-up call concerning aggressive loan-to-value financing.
Other borrowers can be your best source for replacement operators, so be sure you maintain regular contact with them and know what their capacity for new business is at all times. They will usually welcome the opportunity to help their lender / out with a property and may see it as a purchase opportunity.
Likewise, it is important to maintain a rapport with regulatory agencies because they too can be helpful in replacing operators before a loss of licensure comes into play.
Get a Regular Fiscal
Although it is a lagging indicator, there's much to be said for a regular detailed analysis of operating statements for the properties you finance. Many specialized lenders to the senior housing industry choose to do this on a quarterly basis, assessing property performance in great detail by breaking out all sources of revenue and all major expense categories to ascertain comparative performance on both the most recent quarter as well as a 12-month trailing basis. Most lenders will impose performance covenants for minimum occupancies as well as debt service coverages and, in many cases, will require borrowers to post cash collateral to cover any cash flow or valuation shortfalls if these covenants are violated on an ongoing basis. …