Insider Newsletter

May 2013

A Discussion with Matt Huber, Division Head of First Niagara's Healthcare Group

Image of Matt HuberIn the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, NIC’s Chief Market and Data Strategist, recently interviewed Matt Huber, Division Head of First Niagara’s Healthcare Group.

NIC: First Niagara is a very active lender to the seniors housing and care industry. Can you provide us a bit of background including a sense of your footprint and the bank’s volume in our sector?

Huber: Thank you for the opportunity to be interviewed for the NIC Insider. First Niagara has been quite active in the seniors housing and care space since we started the Healthcare Division in November of 2009. As of the end of May 2013, we’ve committed more than $1.3 billion to the healthcare industry, of which almost half is in the various forms of seniors housing and care: SNF, CCRC, AL, AL/IL and AL/ALZ. Geographically we cover New York, Pennsylvania, all of New England, Ohio, New Jersey, Delaware, Northern Virginia and Northern Maryland. So, really, it is New England, NY and most of the Mid-Atlantic States. We’ve enhanced our staff considerably since 2009 and now have healthcare lenders in each of our major markets within that footprint.

Buford Sears and I started the Healthcare Division at a time when many lenders were sitting on the sidelines due to economic uncertainty or their institution’s internal issues. We felt it was the perfect time to bring First Niagara into the healthcare space and provide traditional commercial, real estate, construction and acquisition financing for the industry. We knew there were some great operators with deep experience and projects that needed support. Since that time, we have been very consistent in our approach to the industry.

NIC: The seniors housing construction pipeline has been slowly rising over the past year and it is now at 2.5% of existing inventory. Can you give us a sense of how the bank is viewing construction lending and has that changed?

Huber: We, too, are seeing more banks getting back into construction lending. Our view of construction lending has not changed since day one. Approximately 20% of our portfolio is dedicated to construction lending, and we have no intention of slowing that down. We could see that number rise as high as 30% of the portfolio as the economy continues to recover and the market demand continues to increase.

First Niagara has always looked forward to working with experienced, well capitalized borrowers who do a superior job of analyzing the market in which they intend to build and are willing to put their own capital into a new project. We use NIC MAP extensively to verify our prospective borrower’s assumptions and the third party market analysis that the borrower has engaged. With this type of information and sponsor support, the construction projects we’ve been funding are all a huge success.

I think it is worth mentioning that our construction loans have been for a wide variety of project types: repositioning an older facility to better meet the market needs, ground up construction for AL and ALZ, complete replacement SNF facilities, or additional IL capacity for a stabilized CCRC. If it makes good business sense and the structure is appropriate, we’re taking a close look at the opportunity.

NIC: Are underwriting terms moving? Where are and what is happening with LTVs/LTCs, DSCRs, Debt Yields, and other metrics?

Huber: Fortunately, we have not seen underwriting criteria move much in the past six months to a year. But we are seeing pressure on pricing from the banks re-entering the lending field. Our LTVs/ LTCs have been very consistent in the 75-80% range. We are seeing some LTCs go a little higher if it looks like some real value is being created right out of the gate, but we haven’t seen much movement in the LTVs. DSCRs seem to be holding steady depending on the sponsor and overall structure of the deal, but no real wholesale changes.

Due to changes in services at facilities and their reimbursements, we are seeing more pushback on occupancy requirements, which makes sense when skilled nursing facilities are getting heavier into short term rehabilitation and outpatient rehabilitation. High occupancy isn’t always a key indicator to financial success when your turnover of patients and residents is double or triple what it was under the old paradigm. Also, the need to have a heavy focus on payor mix and CMI, plus expense controls to offset the new managed care payments all make occupancy covenants a little less representative of stability. So we’ve had to become more creative. Really, it means we need to marry our covenants to the changing risks of the industry. We have not found one good solution or replacement for occupancy in terms of monitoring, but ensuring the bank has a couple of covenants that make sense is still important to a good structure.

Yields have come down a little, but typically for the stronger credits. I think the smaller players in the industry aren’t commanding the same pricing power as the larger operators in our industry. Banks are still looking for quality and have been willing to reduce yield to get it. But when there is real or perceived risk, we’re seeing rates hold up over the past year or so.

We continue to see SNF occupancy come down as people move into more appropriate levels of care. Memory care / dementia facilities seem to be doing very well when placed in the right markets and demographics.

NIC: Entrance fee CCRCs are the only seniors housing property not yet fully participating in the occupancy recovery during the past few years. How does the bank view this property type and do you see fundamentals improving?

Huber: The answer is really market-to-market. Entrance fee CCRCs just don’t work in every community. For whatever the reason, we see a strong acceptance of them in certain markets like Eastern PA (their birthplace) and some New England and Western PA communities. In other regions, they just don’t work; the market wants the rental model or a pieced together continuum of care. But let’s face it: the entrance fee CCRC model is intended for the reasonably wealthy population, so it just doesn’t fit everyone.

At First Niagara we take a very conservative approach to entrance fee CCRCs and model 4 different cash flows and DSCR.

  • First, we look at the GAAP net income and determine Total EBITDA and DSCR.
  • Second, we strip out all non-operating impacts to EBITDA to determine operating DSCR.
  • Third, we strip out net entrance fees (new entrance fees less refunds) to see if operating cash without turnover can handle debt service.
  • Then fourth and last, we calculate cash flow and DSCR in the same manner as the rating agencies by leaving in entrance fee income but striping out amortization of past entrance fees.

This level of detail gives us a really good idea of the campus’ ability to service debt if turnover slows down. If there is a DSCR in any one of the categories that is less than 1:1, we go to the balance sheet and see how much cash they have to cover shortfalls and how many years that cash can cover the shortfall.

With this type of analysis, we have a pretty good idea if First Niagara would be comfortable becoming part of the capital structure. Yes, it’s conservative, but we’re long term players in this industry and a conservative capital structure is a good indicator of the CCRC’s success long into the future.

Tight Inventory Driving Home Prices

The March report for the S&P/Case-Shiller Home Price Indices showed the Composite-20 index rose 10.9% during the last year. Prices rose even faster in some markets, such as Atlanta, Detroit, Las Vegas, Los Angeles, Phoenix, and San Francisco where prices rose by more than 15% during the past year. While the magnitude of these increases may be reminiscent of those during the housing bubble, the circumstances are different this time around. The recent rise in prices has been largely supply-related, as tight inventories have caused fierce bidding competitions in some markets.

As of March, the National Association of Realtors estimated inventory represented 4.7 months of supply at the present sales pace. Although inventories have risen slightly since bottoming at 4.3 months of supply in January, inventory had been declining since mid-2010. As home prices recover and with fewer homeowners underwater, more homes are likely to go on the market. Since months of supply and home prices are inversely-related, as more homes come on the market, it’s likely that the pace of home price appreciation will begin to slow.

Supply of Existing Homes and Home Price Changes

According to the Q2 2013 Zillow Home Price Expectations Survey, economists predict home prices will rise 5.4% in 2013. As the housing market rebalances, home price growth in the long-run is expected to revert towards its pre-bubble trend rate. During the interim, the consensus expectation calls for average annual growth of 4.1% through 2017.

New Construction a Hot Topic in Seniors Housing and Care

As the U.S. economy continues to improve, albeit slowly, the NIC MAP® team is seeing a heightened level of interest in new construction data for seniors housing and care properties around the country, in particular, for assisted living and memory care. NIC MAP® subscribers are using the NIC MAP® data to measure the impact of new construction on the occupancy and the asking rates of existing properties as new inventory is delivered to the market and to look for opportunities for expansion. A number of existing seniors housing and care developers that we recently spoke with have new projects in their development pipeline; one developer/owner/operator recently hired a new development director from a multi-family developer.

Many developers are reaching beyond their traditional market areas – seeking opportunities for growth and development in new territories. Commercial and residential real estate developers are also considering entering the seniors housing and care arena, recognizing there is available capital, decent investment returns and stable performance in the sector. Many of these new entrants are looking for operating partners, while some are contemplating a build, operate and hold strategy.

The NIC MAP® team recently attended the ALFA Conference & Expo in Charlotte on May 6-9, 2013 and the Colorado Real Estate Journal’s 2013 Senior Housing Conference & Expo in Denver on May 14, 2013, and found that new construction is “top of mind” for many developers, operators, lenders and investors. We even heard from a REIT that it is providing construction loans as a way to increase its inventory of properties in lieu of the more traditional method of competing for existing properties in the acquisitions market. Please contact us if you are interested in learning how appraisers, lenders, developers, REITS, operators and investors are using customized solutions of NIC MAP® data to explore new territories, minimize risk of new development, evaluate investment opportunities, and to monitor and value existing assets.

John Blumer
National Sales Director
Kristen Joy
Senior Sales Director, NIC MAP


Session Preview for 23rd NIC National Conference

The 23rd NIC National Conference, October 9-11, 2013, at the Sheraton Chicago Hotel and Towers has an outstanding educational programming lineup featuring session topics relevant to the seniors and housing care industry with key takeaways and actionable information. Here are some session highlights:

  • Seniors Housing: Living with Health Care Reform
    As we near 2014, the go-live date for key elements of the Affordable Care Act approaches. Health insurance exchanges are being established and marketed, new regulations are yet to be issued and questions remain. In spite of the uncertainty, seniors housing operators are preparing to implement the law under mandates of the ACA and deal with implications to cost structures and the potential impact on employee recruiting and retention. This panel of industry experts, led by Marilynn Duker, president, Brightview Senior Living, will engage in an in-depth discussion regarding new regulations, updates to implementation timelines, and an overview of practical factors that may affect your execution strategies and budget planning. Learn how to structure your health care plans and better educate your employees about being wise consumers of healthcare.
  • Ancillary Services Executive Roundtable
    Are ancillary services important to you? This roundtable discussion delves into why owners and investors should consider ancillary services—and question whether current changes should challenge existing approaches and financial paradigms. Should they remain ancillary, as they are in some businesses, or become central to the care model, as they are in others? The conversation also addresses what specific services make most sense—for residents and for owners. Four industry executives will offer insight into the expected financial impact for the sector and implications for future valuation, discuss innovations and adaptations to operating platforms and service delivery models and how changes in rules and reimbursement have created pressures for providers of ancillary services in the skilled nursing sector.
  • Skilled Nursing Investing: Opportunities & Challenges:
    This much-anticipated session will provide an overview of the investment opportunities within the rapidly changing skilled nursing sector. This newly developed investor presentation is geared toward investors, either new or currently invested in the sector, and owners or operating companies seeking investment. A panel of industry experts will explain the ways in which skilled nursing‘s product offerings and clientele are evolving—and what that means in terms of risk and reward for investors.

Look for upcoming emails with additional information and a link to view the Preliminary Program, which includes a schedule of events. To register and learn more about the conference, please visit our conference website. – See more at:

Premier Partners

Official Partners

May 14 2024 NIC Insider Newsletter Now Available Read Now »