Insider Newsletter

December 2012

A Discussion with Dan Storer of Huntington Bank

Image of Dan StorerIn the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, vice president of NIC MAP®, recently interviewed Dan Storer, senior vice president – Healthcare Banking Director of Huntington Bank.

NIC: Huntington National Bank is a $56 billion bank with a footprint spanning six states: Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Can you tell us about Huntington’s book of business within the seniors housing & care industry?

Storer: From a big picture perspective, we provide financing to senior living providers but we also finance their landlords and the REITs, which are very active in the space. Our portfolio represents a good mix of operators, REITs and landlords.

We generally stay within our footprint (franchise), but we do have operators who are based within our franchise that are pursuing transactions and/or developments outside of our footprint. In such cases, we can follow the sponsor to those locations. In addition, we are looking at some other strategic ideas where we may go outside of our footprint on a selective basis.

We have grown our book of business over 30% each year, and we lend to both the senior living and long term care sectors. This includes subsectors such as CCRCs, assisted living, skilled nursing, independent living, and some other specialty property types such as memory care.

We finance transaction activity, but much of our business is around construction, expansions and renovations. We also do bridges to HUD, buyouts and then your typical refinancings. Some of our most recent activity has been buyout and tax driven activities before year end. Construction financing has been woven into our lending activity throughout the year. Regarding construction, we are seeing requests for replacement skilled nursing facilities. We are also seeing an uptick in requests for building Alzheimer’s units and memory care, not only in our franchise, but also outside our franchise with some of our sponsors.

Huntington’s CEO, Mr. Stephen Steinour, was just recently awarded The Banker Of The Year by American Banker. He has instituted a variety of verticals in the bank and health care is one of them. This will be a big driver in the commercial segment of our bank, and we are targeting some pretty significant growth for next year in the health care real estate space.

NIC: With regard to construction you mentioned replacement facilities and seeing an uptick in expansions of Alzeheimer’s/memory care wings. Does the bank prefer more health care related or needs driven construction compared to more residential based construction?

Storer: We like the more needs driven health care real estate. That can change, but there is currently a high inventory of housing that is still affecting property types like independent living and CCRCs. While we are targeting the needs driven property types that is also true of our customers, we do not see many requests for IL properties or IL additions.

This is especially true for our nonprofit clients/CCRCs. For instance, if they are planning new construction or renovation, they are typically looking to build or expand assisted living, rehab, skilled nursing or memory care. They are generally not looking to build additional independent units because they may already have a rather high vacancy rate in that area.

NIC: We have seen several regional banks over the past few years slowly become more active in lending to seniors housing and care projects/companies. While this is certainly welcome news, the effects of the credit crisis and ensuing great recession are still fresh in our minds. Given this, how aggressive are regional banks becoming and in what ways are they mitigating risk in this new lending environment?

Storer: First of all, we do a lot of competing in this space, and I think we have a good feel for what is going on in the marketplace with other banks. There are some inconsistences with regional banks, particularly the smaller regional ones; sometimes healthcare real estate lending is being managed within the commercial banking division in another city/area and is not housed in the vertical of a healthcare corporate level, so you get some inconsistency in delivery of financing to the market place.

Some lenders don’t like construction because of the lease up risk but will do replacement facility financing, as there is little/no lease up risk. We are also seeing and doing a lot of syndications. All of our syndication deals have been oversubscribed on the assisted living/skilled nursing side. That tells me we are underwriting to the market, and I think we are being conservative in doing that. To mitigate the risk, you need to stay away from high risk transactions. These include turnarounds, new development, greenfield development with lease up risk, property conversions (for example, when you take a hotel and turn it into an independent or assisted living property), and financial sponsor risk. Regional banks have a good understanding of these core risks.

We are looking for high caliber operators who know the business, have a portfolio of 3 to 4+ properties, and have a good track record. Another risk mitigation strategy I am seeing is the underwriting of global cash flow providers/sponsors. In the past, lenders might have underwritten the specific project for that provider. Now lenders are really looking at global cash flow for all locations an operator or sponsor may operate or own.

Another way we mitigate risk is to underwrite in place cash flow (rather than pro forma). This is why we are generally not doing turnaround deals that pro forma an increase in EBIDTA by 20%, or an increase in valuation.

NIC: According to NIC MAP, construction vs. inventory in the not-for- profit seniors housing sector has fallen from 6.3% in 2Q08 (when there were 11,402 units under construction in MAP 31) to 1.3% as of 3Q12 (2,562 units under construction). This level of construction has fallen more than other for profit seniors housing (4.2% or 12,288 units under construction in 2Q07 to 2.4% or 7,665 in 3Q12). Do you see not-for-profit construction levels picking up any time soon? What needs to change to make this happen?

Storer: I don’t see construction levels, especially on the IL side of CCRCs, picking up in the near term. First of all, they are going to have to absorb the units they currently have vacant. We have a large book of nonprofit business and some of the requests have been around adding new IL wings, but most requests have been around adding memory care or rehab/skilled care.

We are also seeing some trading activity in the nonprofit space, particularly when underperforming assets are involved.

The toughest deals to get done on the nonprofit side are on the independent living part of a CCRC. Except for the most well capitalized sponsors, there are limited bank participants in the CCRC/IL space for both greenfield development and expansion. On a whole, banks are still exiting that space.

NIC: The low interest rate environment has caused many banks to look at debt yields (property NOI/total proposed loan balance) in addition to debt service coverage ratios. How does Huntington National Bank look at debt yield in relation to the various seniors housing and care property types?

Storer: We look at debt yield as one of the components of our underwriting, and I can give you a range of the minimum levels by property types. With independent living we are looking at minimum debt yields in the 8 -9 % range, with assisted living we are in the 9 – 11% range, and with skilled nursing we are in the 15 -17% range.

Having said this, we do look at deals outside these ranges. In a recent transaction, we were seeing 30% on a funded debt yield basis and a loan to value of 50%. So we look at the loan from a variety of angles including debt yield, DSCRs and multiple levels of EBITAR and EBITDARM.

Market Fundamentals Differ Between Property Types in Baltimore

As of the third quarter of 2012, Baltimore’s seniors housing occupancy was 91.0%, which is 110 basis points above its cyclical low. Baltimore’s occupancy has experienced a slightly slower than average recovery to date, as Baltimore’s occupancy remains 380 basis points below its pre-recession peak, compared to 310 basis points for MAP31. While Baltimore’s recovery has been tempered to date, the lack of any significant scheduled near-term inventory growth, by itself, is favorable for continued gains in occupancy.

Baltimore Seniors Housing Supply-Demand; MAP31 1Q06 -1Q12

Somewhat unique to Baltimore is the large delta between independent living and assisted living occupancy rates. As of the third quarter of 2012, independent living occupancy was 93.2%, compared to 86.5% in assisted living, a difference of 670 basis points. The 670 basis point difference between independent and assisted living occupancy is second only to St. Louis within the top 31 metropolitan markets. While the delta has widened a bit recently, prior to the recession, this difference was still north of 500 basis points, suggesting this delta is structural rather than cyclical.

Baltimore Fundamentals by Property Type; MAP31 1Q06 -1Q12

A potential explanation of this phenomenon is the unique mix of independent living properties in Baltimore. Approximately 90% of the units within majority independent living properties reside within CCRCs, which is the highest proportion within the top 31 metropolitan markets. Even though overall CCRC occupancy continues to oscillate near its cyclical low, Baltimore’s CCRCs have escaped the overall lackluster performance in CCRCs recently. One reason for the lack of recovery in CCRCs is the sizeable amount of new inventory that opened near the time of the financial crisis, as many of those projects have had difficulty filling units. Baltimore has experienced no CCRC inventory growth since 2006, shielding the market somewhat from the supply pressures that were felt elsewhere. The majority independent living CCRCs in Baltimore have not been completely immune to the economic downturn, however, as their occupancy did decline 460 basis points from peak to trough but it never fell below 92.5%.

To learn more about Baltimore or another market of interest, view previously released Market Signals on our website. Market Signals are published throughout the year and focus on different markets and various topics of interest. To receive these updates via email, please sign up using the form at the NIC MAP Market Signals homepage.

Employment Growth Continues Despite Sandy

The economy added 146,000 jobs during November, as Hurricane Sandy’s disruptions to the national employment picture proved to be minimal. The largest gain was in retail trade (52,600), which is reflective of retailers hiring for the holidays. Retailers anticipated strong holiday sales, as this is the strongest November for retail hiring since the economic recession.

November’s gain of 146,000 jobs was consistent with data from the prior two months, where 132,000 and 138,000 were added in September and October, respectively. Employment gains YTD have averaged 151,000 per month, essentially the same pace as during 2011.

Monthly Change in Nonfarm Payrolls

While employment growth has been relatively steady, the economy still has a long road ahead to replace jobs lost during the recession. The recovery has been underway since 2010, and employment remains 4.17 million jobs below the pre-recession peak. Based on the average job growth to date during the recovery, total employment will likely remain below its last market peak until early 2015.

NIC Introduces The 2013 NIC Regional Conference Online Community

NIC conferences are known for unparalled networking and deal-making opportunities. The 2013 NIC Regional Conference will be no different; attendees will be able to connect with peers and industry experts to network, share insights, and make deals. To facilitate this process and make it easier, NIC is proud to introduce The 2013 NIC Regional Conference Online Community!

The 2013 NIC Regional Conference Online Community will allow registered attendees to network prior to, during and after the event. Attendees will be able to build their personalized profile and schedule meetings ahead with other attendees. In addition, attendees can:

  • Learn more about speakers, download speaker hand-outs, and even ask questions prior to sessions.
  • Build their personal schedule for the conference and schedule one-on-one meetings with other attendees. The schedule can also be exported to Outlook, iCal, Blackberry or viewed on mobile devices.
  • See an interactive map for the Meet the Capital Providers Reception, making it easy to find capital providers’ locations within the reception.

The online community will be opening up in mid-January and participation is optional for attendees. Please watch your email for an invitation to this exciting new networking tool or, if you have further questions, please contact Whitney Rule at

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