EXPERT OPINION: A Conversation with Kevin McMeen

December 16, 2009

In this “Expert Opinion” interview, Kevin McMeen talks about the lending environment for MidCap Financial, how it has been to start up a new lending platform and what types of loans they are interested in funding.

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Kevin McMeen is a co-founder of MidCap Financial and President of Real Estate Lending. Prior to joining MidCap, Mr. McMeen created and ran the real estate lending practice for Merrill Lynch Capital Healthcare Finance. Prior to joining Merrill Lynch Capital, Mr. McMeen led the healthcare real estate segment of GE Healthcare Commercial Finance and its predecessor, Heller Healthcare Finance.
Mr. McMeen serves as the Vice Chair on the board of the National Investment Centers for the Seniors Housing and Care Industries, he served on the advisory board of the Erickson Executive Education program at University of Maryland Baltimore County, and is an active member of the American Seniors Housing Association.
Mr. McMeen holds a M.S. in Urban and Regional Planning from Georgia Tech and a B.S. in Economics from the University of Wisconsin.

Contact Information: 
Kevin McMeen, President, Real Estate Lending
MidCap Financial
Chicago Office
190 South LaSalle Street, Suite 1220
Chicago, IL 60603
Phone: 312-234-0296

Watch the video:

Read the interview transcript:

Steve Monroe:
I’m here at the NIC conference in Chicago with Kevin McMeen. He’s the President of Real Estate at MidCap Financial. Kevin, you and your partners started MidCap at a time when lending sources were pretty much drying up for anything real estate-oriented and seniors housing-oriented. As a debt provider, it could be said it was the perfect timing for someone to enter this market. Do you agree with that?

Kevin McMeen:
You know, I’ve got two ways that I would answer that. I would say that it was early in the sense that the debt opportunities have not been as strong as we’ve anticipated. And I think that they’re starting to look better as we hit the fourth quarter of this year and I think in the next year, it’ll be a more robust market for debt.

But from a standpoint of the timing of raising the capital to do it, I think that we hit it just right, in the sense that, if we had been a little bit later, it would have been the fourth quarter of 2008 and nothing was getting done. And there were some other people from Merrill Lynch Capital that were out raising money to do a finance company for not just real estate, but other things. And they had investors pull back because of concerns about the market, everyone at that point in time was concerned that we were going to go into a major economic meltdown.

So, from a timing perspective of raising the capital, I think it was right. But the timing of actually deploying that capital is a little early, so all said and done, I think it was good timing.

Steve Monroe:
What’s been the most difficult part for you in starting a new lending platform in this economic environment.

Kevin McMeen:
It’s been difficult in the sense that our expectations were much higher for getting capital deployed than we—than the market has allowed. It’s just been very little transaction volume and it’s been a situation where there’s a big gap between market and then what people are modifying and doing with their existing lenders. So that’s been a challenge and it’s been frustrating. But aside from that, there’s all the things that I have a greater appreciation for that our customers go through in terms of starting a business and dealing with the phones and dealing with IT and all those kinds of things that I never had an appreciation for and that’s been challenging and interesting, but honestly, could do without it at times.

Steve Monroe:
I know that MidCap does lending outside of seniors housing, but within our sector, what are the property types that you guys are most interested in?

Kevin McMeen:
I would say that what’s most appealing for us right now is probably skilled nursing. And the reason is that we get the most coverage on our loans when we do skilled nursing, just because the valuation multiples or cap rates are so much more conservative than they are for the other asset types.

So that’s good. Our interest rates are in the 8%, 9% range, so you need to have a little bit of extra cushion there. It’s a little bit more challenging on AL and much more so on IL. I would say—and right now IL is still I think challenged in a lot of different markets. But from my perspective, if I actually had a good, solid foundation of senior debt deals, I’d be very interested in putting more risk capital to work in IL/AL because I think that over the course of the next 12 to 30 months, you’re going to see a turn in that and I think there’s opportunities for value creation from the point we’re at right now.

Steve Monroe:
Interesting. Now, when your borrowers are coming to you, are any borrowers a little hesitant to deal with you because your company is new, they don’t really have experience with it? They have experience with you as a person, but not the company.

Kevin McMeen:
Yeah, I think, after this past whatever, 18, 24 months it’s been that had all these financial services companies implode, every borrower that I think is prudent is asking questions about how do you guys fund yourselves? Are you going to be around? Get me comfortable that you’re going to be there and I’m not going to step into a situation where you’re either going to fade away before my deal gets done or in the middle of it and it’s going to cause me all kinds of problems. So that we got to walk people through and get them comfortable with how we’re set up and how we’re funded and what our balance sheet looks like.

But it’s been very rewarding for me and the other people on our team, we get a lot of people who will come and say, “Look, if you guys think you can get it done, then I know you’ll get it done.” And that’s been built on a reputation of doing a lot of business over the past 10 years.

So it’s a mix. People definitely come to you with the expectation that, hey, you’ve got a reputation of doing things and getting things done, but they still want to know that, at the end of the day, the business is solid, it’s going to be there.

Steve Monroe:
Good. And you’ve been in business a long time, you know a lot of people. Is there still a significant unmet need for debt right now? And can you fill it?

Kevin McMeen:
I would say there’s—it doesn’t strike me that there’s a significant unmet need and the reason I say that is that there’s not a lot of transactional activity going on. And the little bit that we’ve seen, there are regional and local banks that are filling that need.

Then, when you get to the refinancing market, we’re finding that there’s a lot of lenders that will, as I think some people said in your audio conference last week, they’re just kicking the can down the road, it’s the extend and pretend kind of thing, whatever you want to call it. But there’s maturities, there’s default issues, whatever, and people are working through it and they’re extending the loans maybe another year, something like that.

So there’s not a void. I think that as the real estate market, general commercial real estate market continues to deteriorate over the course of the next 12 to 24 months, senior housing lending operations within commercial real estate lending platforms at banks are going to have a harder time doing that and then you will see a greater need for capital and I think that there could be a void in capital and we’ll do our best to fill it, but we don’t have an unlimited balance sheet kind of like what we had at Merrill Lynch Capital or GE, in the past.

Steve Monroe:
Right. Now, is MidCap gearing up for 2010, 2011 when a lot of the, let’s say five-year loans from the 2006 period are maturing? Are you gearing up to try to deal with that and to try to help refinance some of that?

Kevin McMeen:
Well, I wouldn’t say “gearing up.” From a strategic planning perspective—and our strategic planning goes out about 30 to 60 days—but so we’re focused on getting deals done now. From a standpoint of our infrastructure and our team, I think that we have a team in place to be able to handle more volume and we’re certainly excited about the prospect of there being more business opportunities for us in 2011 and in that timeframe.

So we’re geared up for it in that sense, but we’ll have to hire people if our volume goes up significantly, but we’re focused more on the rest of 2009 and into 2010.

Steve Monroe:
In the last 12 months, how has the type and quality of borrowers changed, if at all?

Kevin McMeen:
You know, I think for us we’re still focused on doing business with high quality operators. The difference is now, our deal size is $5-to-$20 million at the most. And, in the past, at Merrill Lynch Capital, for example, we were looking to do larger transactions. And when we’re trying to $1 billion of business a year, doing a $5-to-$10 million deal doesn’t move the needle. For us, now, it does, so the profile of operators is probably smaller—five to 20 properties, maybe. So a local, maybe a regional type of operator. And with that, they might be a little bit less well-capitalized.

So it’s a little bit different profile, but at the end of the day, we’re still focused on people who understand the business and deliver quality care and you can do that with a small platform as well if not better sometimes than the larger platforms.

Steve Monroe:
And, finally, do you feel any new buzz in the market? Do you think things are a bit on the uptick now or will you be kind of slow and steady for several quarters?

Kevin McMeen:
You know, my sense is it’s probably going to be slow and steady. I think that, from my perspective, there seems to be some hope in the sense that the housing market seems to have stabilized somewhat. And the stock market rally certainly helps people with investment portfolios and that sort of thing. So the wealth, in fact, isn’t necessarily growing, but at least is stabilized, it seems. So I think that helps people in terms of making some decisions to move and to try and—if they try to sell their house, their house actually gets sold, maybe.

The unemployment thing is still kind of an unknown and how much support do the children or adult children, whatever you want to call them, provide to the seniors that move into the facilities. So that’s I think still a little bit of an unknown how that will continue to affect the performance of the underlying property markets.

But it strikes me that, in talking to different operators, that lease-up has been relatively good the last couple of months, it’s been a decent summer. So that’s certainly positive. And if we can continue that momentum, I think things could be—maybe we’re at the bottom and starting to move upward a little bit, which would be great.

Steve Monroe:
Well, I think we all hope so.

Kevin McMeen:
Yeah, absolutely.

Steve Monroe:
Well, good luck next year and thank you for joining us today.

Kevin McMeen:
Great, thanks, Steve.



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