EXPERT OPINION: A Conversation with Jim Pieczynski and Steve Gilleland
What's ahead for the seniors housing industry, given the recent credit market meltdown and the increased scrutiny of private equity deals? Jim Pieczynski and Steve Gilleland, top healthcare real estate executives with CapitalSource Inc., tackle those questions and more.
Jim Pieczynski is Co-President of the HealthCare and Specialty Finance Business of CapitalSource Inc., a leading commercial lending, investment and asset management business focused on the middle market. Mr. Pieczynski joined CapitalSource in 2001 to start its healthcare real estate lending practice in addition to starting a sale leaseback business on healthcare facilities. Since joining the firm, Mr. Pieczynski has overseen the growth of the health real estate to portfolio to $2 billion. From 1993 to 2001, he was president and CFO at LTC Properties Inc., a publicly-traded healthcare REIT.
Since joining CapitalSource in 2003, Steve Gilleland has been focusing on developing financing opportunities in the long-term care industry. For the previous five years he was a Vice-President of Business Development for Centennial Healthcare, where he executed $300 million in long-term care and home health care transactions. Prior to his experience at Centennial Healthcare, he served as Director of Marketing for Healthcare Capital Finance/ PRN Mortgage Capital for five years where he originated and closed $225 million in long-term care mortgage financings. Earlier in his career, he was with the accounting firms of Price Waterhouse and Bennett/Thrasher.
Contact Information for Jim Piecyznski:
Jim Pieczynski, Co-President
Health and Specialty Finance Business
30699 Russell Ranch Road
Westlake Village, CA 91362
Contact Information for Steve Gilleland:
Steve Gilleland, Director of Healthcare Real Estate
Healthcare and Specialty Finance Business
Five Concourse Parkway, Suit 2950
Atlanta, GA 30328
Read the interview transcript:
SeniorCare Investor Editor Steve Monroe interviews Jim Pieczynski, Co-President of Healthcare and Specialty Finance Business, and Steve Gilleland, Director of Healthcare Real Estate, for CapitalSource Inc.
We are here today with Jim Pieczynski, who is the co-president of healthcare and specialty finance business at CapitalSource, and Steve Gilleland, who is a director of the same group.
Guys, we’ve had a great run for the last three to four years in the seniors housing industry, but the market has softened. When do you think we’ll see a turnaround?
I think it’s going to take a while and I think a while is kind of in the next six to nine months. The reason I think that is with the tightening of the credit markets I think it’s ultimately going to have an impact … it’ll ultimately be translating into a reduction in asset values over time. And what’s happened now is I think sellers have particularly gotten enamored with the prices that properties were going for and there’s going to be a slow realization that their expectations are going to have to be lowered.
Given that, I think what we’re going to see is that we’re going to be in kind of a lull for a while until people that sit there and go, okay, this isn’t going to change and I’m going to have to lower my price to get to something a little more realistic. And I think that’s probably going to take six to nine months for people to see that happen.
Is there any sector that you guys are favoring right now in terms of lending to? Skilled nursing, assisted living, CCRCs?
I would say skilled nursing is the main area that we’re focusing on right now. Quite honestly, with the AL and the IL and the CCRC models, you’re seeing cap rates that are in the 6% and the 7% range. And at that range, it’s very difficult to provide financing that actually makes sense. Whereas on the skilled nursing facility level, you’re seeing the cap rates have dropped, but they’ve dropped from 13% and 14% where it was a few years ago to the 10% and 11% and 12% zone right now, which still puts us in a position to be able to competitively finance those properties.
In addition to that, I believe that where we’re going to start to see the next spate of construction going on is going to be in the skilled nursing area. I think as the demographics change, there’s going to be more and more demand for higher private pay and Medicare residents. And I think those residents are going to start to demand more and better services. And I think, as a result, you’re going to start to see an increase in the supply of new skilled nursing facilities being built. And, quite frankly, that’s an area that we really want to focus on, getting into doing the construction lending for skilled nursing facilities along with, ultimately, the permanent financing associated with it.
Have you seen borrowing requests slow since the summer credit market meltdown, Steve?
We have seen the volume of deals coming in slow down. I think that the large deals are going to go by the wayside now, but we will still see the mom-and-pop, the regional operators, they’re going to still be in the acquisition mode, because there’ll still be deals out there to be done. It’s just, as Jim had mentioned, they’re going to be getting done at a little bit higher cap rate than they were in the past.
Do you have any idea in terms of the dollar volume so far this year, the split in your financings between acquisition financing and refinancing the properties?
I would say the lion’s share of ours, probably 90% of it, has been on the acquisition side. Very little has been done on the refinancing side, and I think that has a lot to do with the model that we’re in. I think when people come to us to do acquisition financing, we generally can get the deal because they know we’re going to be there and they know we’re going to be able to close on the deal in the time that’s needed. And I think people are willing to pay a little bit more for that.
As opposed to a refinancing, somebody typically has a year or so to refinance the deal and they kind of shop it all over and they go to every bank and every lender that’s out there. And it becomes more of a commodity pricing. So that, quite frankly, is a market when it’s commodity pricing that we don’t really compete very well in and so, I think just by definition, our model has been to really focus more on the acquisitions as opposed to the refinancings.
And how much money do you think you’ll end up putting out in total for 2007 and what’s your target for 2008?
Well, I think our goal this year and next year was to be in the billion dollar zone. I think we may be a little under a billion dollars this year, just because of the slowdown that happened over the last couple of months. If you had asked me this before that, I’d say we’d definitely be at the billion dollar level. I think next year, our target again is to be at a billion. I think we’ll get there, but I think most of our activity will be coming on the sale-leaseback side. I think there are going to be some opportunities in that space. I think you can get better margins and there’s probably a little less competition in that arena than there are just for straight loans. So I would see that happening.
That’s a nice segue into my next question, which is, as a real estate investment trust, you’re in a position to buy as well as lend. Are you seeing values? Are they getting attractive enough for you as a buyer as a result of the credit market problems?
I would say that, yes, we are seeing that, particularly on the skilled nursing side. I think the properties that we’ve been able to acquire, we’re getting at reasonable multiples of EBITDAR, we’re kind of in the 8.5 multiple of EBITDAR. They maybe have stretched to a 9 multiple of EBITDAR. But deals can be done at that zone. And that, again, is on skilled nursing.
On assisted living, we’re finding it’s a lot more difficult, because we’re seeing people are paying 14 and 15 times EBITDAR and we’re just thinking that, at that price, that’s not really an attractive opportunity for us. But we are definitely seeing it on the skilled nursing side.
Has CapitalSource revised its underwriting criteria in any way since the summer meltdown in the credit markets?
I would say we have not revised our underwriting criteria at all. I think the values at which we lent at before are the values which we would be lending on today. I don’t think it’s changed because, even though the market really started to accelerate, we really didn’t change our underwriting, say, a year ago. I think, if anything, the only change today versus three months ago is probably we’re looking for increased spreads than we would have, and that’s just because of the credit markets.
To add on to what Jim’s saying, it’s just because our cost of funds went up slightly, so we’re going to try to get a little bit better yield than we did three months ago.
Everyone’s cost of funds went up and, with the cost of debt going up and the amount of equity required, it looks like in more deals, especially the highly leveraged ones, more equity will be required, getting back to traditional levels of equity. Do you think the big private equity firms are going to be out of the seniors housing market?
The jury’s still out on that one. I’m not certain. My guess is that that a lot of the big deals that were going to happen have happened. And relative to the private equity firms, do I think they’re going to start to acquire, increase their appetite more than it has been in the past? My guess is, if I had to pick one way or the other, I would say that I probably expect them to be a little more on the sidelines for a while right now and just kind of see what shakes out. There have been, obviously, the things in the news of late, people are looking at the private equity firms, they’re now asking for a congressional investigation into the private equity firms and what happens after they acquire properties.
So my guess is, they’re probably going to pause a little bit. But I don’t see them exiting the business.
What’s going to bring them back?
I think what will bring them back is when, I’ll say for lack of a better term, the heat is taken off. I think right now people are kind of wondering, all right, are there going to be any changes in reimbursement? Are there going to be any crackdowns at the state regulatory level? And I think what will bring them back is, when we get through this period and, everybody’s like, okay, the industry’s still there, it’s still a safe industry, it’s still a solid industry. And this is just one of the hiccups in the road.
So I think once they get convinced that the world is back to being right, that they’ll jump back into the space.
And last question, with the increased scrutiny on private equity, especially in skilled nursing facilities, anything you guys have heard in terms of the Manor Care-Carlyle deal? Still on track?
I’ve heard that it’s still on track. I haven’t heard there have been any changes. They’ve gotten the antitrust approval that they need. And every indication that I’m seeing out there is that that deal is on track.
Yes, I would concur. I’ve heard the same stuff.
All right, thank you for your time and we will talk again soon.
Recorded October 3, 2007