My colleague and contributing editor Kate Upson recently talked to Brian Pollard of Lancaster Pollard & Co., a leading industry banker and lender, about how senior care providers can benefit from the current economic climate.
You can click here to listen to the interview (6 minutes) or read the transcript below.
Kate Upson: Welcome to Expert Opinion, a Conversation with Brian Pollard, President and Senior Managing Director of Lancaster Pollard & Co. Brian was an original co-founder of this Columbus, Ohio-based firm and is Chairman and CEO of Lancaster Pollard Mortgage Company. He has almost 20 years of investment banking experience focused on the health care and senior living sectors and is a frequent speaker at state and national conferences.
Brian, how would you characterize the current general health of the senior living and senior care markets?
Brian Pollard: I would characterize the general health as very strong—2006 was the third year in a row of improved profitability metrics for the non-profit senior living industry. Balance sheet liquidity continues to remain near historically high levels. And there are a number of factors that are influencing this picture.
There is very strong demand across the continuum of services. There has been increased management focus in recent years on achieving a proper balance between the non-profit mission and higher levels of performance. We’ve been in a relatively stable Medicare payment environment. And providers have had continued access to low-cost capital to fund expansion and modernization of their existing facilities.
Kate Upson: How does this translate into the way ratings agencies and institutional investors are viewing not-for-profits and the senior living sector?
Brian Pollard: Well, the improved financial performance has been rewarded by the bond rating agencies through rating upgrades, which have exceeded downgrades in each of the last two years. And, by the way, that reversed a five-year negative trend that began back in 1999 and ran through 2004. Institutional bond investors have increased their appetite for the debt of senior living providers and that has resulted in a considerable compression of both sector and credit spreads.
And what that means is that lesser-rated organizations and, more important, non-rated organizations, since they represent really the largest percentage of facilities, are borrowing at interest rates very near those of the largest and strongest providers.
Kate Upson: You’ve noted that tax-exempt financing is one of the greatest competitive advantages available to not-for-profit providers. What volume of tax exempt financing have you been seeing and what do you anticipate for the rest of the year?
Brian Pollard: Well, tax-exempt bond issuance volume was up 41% during 2006 to almost $6 billion. And it is up by a similar margin through April as compared to the first four months of last year. The vast majority of this debt is new money versus refinance. And that new money is being used for new property development, as well as the expansion or repositioning of existing facilities. And we expect this trend to continue, provided there’s not a significant uptick in long-term rates like we’ve seen over the last couple of weeks.
Kate Upson: Yes. Given all of these favorable conditions, what potential risks could alter this economic landscape?
Brian Pollard: Well, certainly the softness in the real estate, the residential real estate market is looming pretty large right now, in particular, for that part of the continuum providing little or no health care, such as independent living or congregate units. These services are driven primarily by consumer choice and, in many cases, the consumer will choose not to move into a senior living environment until their personal residence is sold. So this softness could substantially impact the velocity of new unit fills or the turnover of existing units.
Also, due to the capital intensity of the industry, higher interest rates could also negatively impact this landscape. Shorter-term rates have increased dramatically over the past several years through actions of the Federal Reserve. Providers who have issued variable rate debt and who have not hedged their debt with interest rate swaps, I should say, have felt kind of the sting of these increases with a much higher cost of capital.
Long-term fixed interest rates have remained relatively constant and they’ve been at relatively low levels. If there was a substantial move in the longer-term fixed rates, we think that that would probably slow down new development and make it more expensive to revitalize existing properties.
Kate Upson: The financing requests you’ve seen point toward a new wave of construction over the next three to five years. And demographics are changing, too. What advice are you giving managers to help them adapt and prepare for the next decade?
Brian Pollard: Well, you’re certainly right, changing demographics will continue to present opportunities in long-term care and senior living. But there are also many organizations, both for-profit and non-profit, that are pursuing these opportunities. So the competition will remain rather intense.
Capital is cheap and plentiful today, but we are strongly encouraging organizations to really remain diligent about managing their financial profile so that their access to capital really remains strong in a less favorable economic climate. And this means that they must continue or adopt operating and financial best practices that will place their organization really in the top half of their peer group. We have found that organizations really with excess capacity to borrow will be best positioned to reinvest back into their properties, to adapt to changing consumer demands and changes in the ways services are delivered. And they will also be best positioned to pursue other mission-driven opportunities that will no doubt present themselves in coming years.
Kate Upson: Great. Thank you, Brian Pollard, for participating in our Expert Opinion.
