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Large, national provider brands and REITs (real estate investment trusts) have driven mergers and acquisitions (M&A) volume in recent months as both entities have looked to restructure their portfolios, divest non-core assets and non-strategic tenants, and rebalance their holdings through diversification into other parts of the continuum of care, according to Erik Howard, executive managing director, healthcare finance, Capital Funding Group (CFG).

He says the increase in M&A activity over the past couple of years, which has continued into this year, has created highly liquid debt markets and driven competition among lenders, making financing solutions readily available to potential borrowers.

Baltimore-based CFG, which bills itself as a one-stop shop dedicated to providing “full-service” financing and advisory solutions to the health care and multi-family industries, expects demand for LT/PAC to continue to grow as the broader industry sees increasing demand in the coming years from the influx of residents hailing from the baby boom generation.

When asked which of the many financing tools available to LT/PAC stakeholders and those in seniors housing is most popular these days, Howard says the answer largely depends on the specific needs of the borrower. But, Howard notes that one program typically popular for most borrowers is so-called “Bridge-to-HUD (Department of Housing and Urban Development)” financing.

By definition, such Bridge-to-HUD loans are for borrowers who require a more timely and rapid financing option for acquisition; refinancing of existing loans; and/or repairs, renovations, additions, or conversions to properties. CFG provides bridge loans starting at $3 million, with no dollar limit on financings of larger transactions.

“A bridge loan allows for flexible, timely financing and is a good alternative for straight-to-HUD loans,” Howard says. “Bridge loans allow for creative structuring solutions tailored to each unique situation and provide the ability to execute turnaround acquisitions, short-fuse transactions, and cash-out deals while arranging for an ultimate exit through HUD refinancing,” he says.

HUD financing in general, either through a refinancing event following a successful end to the terms of a bridge loan, or a straight-to-HUD financing event, remains in favor for many borrowers because of the attractive terms HUD provides that endure in all interest rate environments.

“Owners with portfolios of any size find the non-recourse, long-term, fully amortizing, and fixed-rate terms very attractive,” Howard says.

Within LT/PAC and seniors housing, he says M&A activity across the assisted living, independent living, and skilled nursing sectors has remained strong.

Looking at what pressures there are on the capital markets and financing worlds, Howard says there are several macro issues that will continue to influence debt and equity markets.

Clearly global financial market participants and borrowers alike are focused on the Federal Reserve, as well as the overall health of the economy. The Fed’s decision to reduce short-term interest rates, coupled with recent events in the currency market, have created a flight to quality for investors seeking stability in

U.S. Treasuries.

This has been, at least temporarily, a great opportunity for borrowers to lock in long-term rates and has helped to keep cost of debt capital relatively cheap, with rates for HUD-insured mortgages approaching 3 percent.

The yield curve is suggesting there is minimal inflation expected on the horizon, which could provide a near-term window to take advantage of historically low HUD rates for those companies that have traditionally utilized bank financing.

Much talk has occurred of late on bankruptcy developments among some providers, but Howard sees the worst as being nearing its end even as the topic continues to attract attention.

“I feel the industry is moving in a direction that will reduce the number of these bankruptcies going forward,” he says.

“As the industry becomes more complex, we are seeing a trend of regional companies acquiring assets from smaller operators while large, nationally focused operators also look to concentrate efforts in specific markets.”

The operational nuances within the LT/PAC industry have become more complex as a result of changes to reimbursement models and local and state regulations, which has left the smaller operators in a lurch.

“We are seeing a trend of regional companies acquiring more of these assets within their geographic footprint,” Howard says.

“These operators are large enough to have the economies of scale and organizational backing to run these facilities efficiently, while still being small enough to focus on the micro-operational aspects that can oftentimes be overlooked at some of the larger operators—health care is a local business.”

At the same time, larger and nationally prolific operators have in many cases become overleveraged and may have met capital financing and lease payment challenges by breaking up their portfolios through sales of properties.

“The acquiring operators have predominantly been more geographically hyper-focused [on staying within a certain region] and can be more nimble than larger operators,” Howard says.

There is another priority issue lurking in the LT/PAC community and its interested investors, and that is the new payment model for skilled nursing centers coming online in October, Howard says. 

“I would say one of the primary subjects on everyone’s radar right now is PDPM, Patient-Driven Payment Model reimbursement,” he says. “We believe that PDPM represents an opportunity for the well-established operators to outperform their peers.”

Howard says CFG also expects PDPM to enable market opportunities whereby operators that will not be able to successfully adapt to the changing reimbursement environment will divest assets, increasing the M&A activity.

As for CFG and its results of late, he says the company has continued to be a top competitor in the market, resulting in closing nearly three-quarters of a billion dollars in combined bridge and HUD loans in 2018, a number that should be surpassed in 2019. “We have already closed over half a billion of combined bridge and HUD loans through July [2019],” Howard says.