In this “Expert Opinion” interview, John Cobb analyzes the senior housing market in the months following the credit market crisis, and discusses what forces would help jump-start the industry again.
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John Cobb is Managing Director of Long-Term Care for GE Healthcare Financial Services, a unit of GE Commercial Finance. In this role, he is responsible for all real estate related healthcare lending for the long-term care sector. Prior to this role, Mr. Cobb was Senior Vice President of Skilled Nursing and one of GE’s top originators in managing skilled nursing and senior housing transactions across the U.S. He has spent most of his career in the financial services industry, having worked as a senior underwriter and risk analyst with Heller Financial, Ocwen Financial Corporation and Fidelity Mutual Life Insurance Company. Mr. Cobb graduated from Lehigh University with a bachelor’s degree in Finance.
Contact Information:
John Cobb, Managing Director, Long-Term Care
GE Healthcare Financial Services
500 W. Monroe
Chicago, IL 60601
(312) 441-7421
john.d.cobb@ge.com
Read the interview transcript:
SeniorCare Investor Editor Steve Monroe interviews John Cobb, Managing Director of Long-Term Care for GE Healthcare Financial Services.
Steve Monroe:
Okay, we’re sitting here at the 17th NIC Conference in Washington, D.C. I’m here with John Cobb, managing director of Long-Term Care at GE Healthcare Financial Services.
John, how does the atmosphere seem to you? Is it a little different from last year?
John Cobb:
I think it’s a little bit different. I think people are very energized, [there are] a lot of smiles on their faces. People are trying to search through the clouds. Everyone knows about the credit market or the credit crunch, as people are calling it, and they’re trying to see what’s going to happen. And I think people think that probably cap rates have risen. I think they’re trying to figure out, (a) from what they’ve risen from and (b) how much is that? Is that 50 basis points, is it 100 basis points? I think that’s what people are kind of searching for. So it’s interesting that they’re all searching for something.
Steve Monroe:
All searching. Well, how has GE Healthcare responded to the summer’s credit crisis?
John Cobb:
I think, unfortunately, we’ve probably paused a little bit. I think we’re trying to figure out where the market has come to. You know, the first two quarters of the year, we had not done a lot of seniors housing volume. We did a lot more skilled nursing volume, mainly because that’s where some of the yield was. But right now, we’re definitely pausing. I mean, our cost of funds has gone up. We assume, well, everybody else’s cost of funds has come up, and we’re trying to figure that out.
Steve Monroe:
How has volume of loan, deal requests — because I know you lend, you also acquire — how has that changed? Has that dropped significantly in the last six weeks? Have people contacted you?
John Cobb:
I think, from two parts, from the acquisition side, that’s definitely dropped off. I think there’s definitely less acquisitions out there today than there were probably three months ago. Mainly because the sellers, the smart sellers, are trying to say, well, I’m going to wait until things settle down and go from there. And when the market comes back or settles or—because you don’t really know what is the right price today.
On the debt side, the funded volume is probably remaining flat for us, because we didn’t do a lot in the first two quarters. But we still see a lot of requests. A lot of it is the deals that did not get done in August and September. So we’ve seen a lot of inflows just in the last three weeks of deals that weren’t able to get done and they come back to us and say “What can you do?” And we are quoting a lot of those right now.
Steve Monroe:
For your LIBOR-based loans, how much has that spread increased since the summer bottom?
John Cobb:
It’s at least 50 basis points and it’s probably more like 75 basis points, it’s increased.
Steve Monroe:
How about for fixed rate loans? Spread over 10-year Treasuries?
John Cobb:
I think it’s over the swap right now, in swap rates, so it’s probably at least 100 basis points.
Steve Monroe:
Higher than before?
John Cobb:
At least 75 basis points. The swap curve has widened about 25 basis points since early June. The swap curve’s widened, too, and then that’s kind of what’s hurting the fixed rate loan market.
Steve Monroe:
Any idea when you think some kind of normalcy is going to return to the capital markets?
John Cobb:
I think that kind of depends on how Wall Street handles the amount of leveraged loan volume they have out there. And I think that’s what’s fundamentally holding back a lot of new production, is a lot of that money has to flow through the system. And when that happens, and hopefully it’s sooner than later, hopefully it’s by year-end, you’d like to see a robust first quarter. But it could go past that. I would not be surprised if we’re in second quarter and we still haven’t had [that]. But I don’t think it’ll get back to the robustness that you saw back in June.
Steve Monroe:
Right. And GE, in my mind, has been known to favor large transactions, you have a large balance sheet. Has the change in the market meant that smaller deals will be looked at more favorably by you guys?
John Cobb:
I always find that — we get that reputation a lot. I can tell you in 2006 we did 54 transactions ranging from $1.4 billion to $3 or $4 million. So we do a lot of smaller loans, a lot more than people think about. It’s just people don’t report on them, because they’re not as flashy.
But I think it’s easier to get a smaller deal done than a larger deal because of the capital market situation. We’re looking at both sides of this. And I think everybody has a different definition of “smaller.”
Steve Monroe:
You let me know about your small deals and I guarantee you I’ll write about them. Is that a deal?
John Cobb:
We can do that.
Steve Monroe:
The seniors housing industry, you know and I know is fundamentally, still, in very good shape.
John Cobb:
Yes.
Steve Monroe:
Why does it always seem to get penalized in the market?
John Cobb:
I’m not sure it’s getting overly penalized yet. I mean, all asset classes, all leveraged loans from the corporate finance side and realty side are being penalized. But what happens is, which is why you have the NIC which is to spur capital, you have a core group of banks or financial institutions that invest in the space. And then there’s other people that come in to make it much more efficient, other banks that have not historically been here. The reason they come and do that is because they can get a little bit more yield and to diversify.
And so kind of like what Alan Greenspan said during lunch is, when there’s smoke, people just kind of leave. And people like GE and other financial institutions that have been here for a long time, we’re not going to leave. We’re just going to kind of figure it out, where a lot of people will just leave. And so that’s the penalizing that you’ll probably see as a longer-term effect in the space.
Steve Monroe:
Good. And has GE’s underwriting criteria, because of the credit problems this summer, has the underwriting criteria changed in the past two months and, if so, how?
John Cobb:
It hasn’t changed, because it didn’t change earlier in the year. I think you’re able to do a little bit less leverage, but our core underwriting has never really changed. But I think today’s market, instead of getting 80-to-85% leverage, I think the market’s more like 75% leverage.
Steve Monroe:
Well, that’s a significant change.
John Cobb:
Yeah. I think it’s about 5%.
Steve Monroe:
Okay. And is there one thing that you can think of that would jump-start the market again? Any kind of positive thing, whether real estate, seniors housing or just credit markets?
John Cobb:
I think that what would help in this market is to get a lot of financial institutions to start doing syndicated deals. And I think we’ve been working very vigorously on it, a couple of our competitors have been working very vigorously on syndicating and getting other people in that way and taking small bites instead of taking large bites. And I think that would help.
Steve Monroe:
Okay. Well, all right, John, thank you very much for your time.
Recorded October 5, 2007
