EXPERT OPINION: A Conversation with Alex Chavez

December 7, 2011

In this “Expert Opinion” interview, Alex Chavez, Managing Director of Healthcare Real Estate at CapitalSource, discusses lending in the current economic situation, rates, operating as a bank, and more.

Alex Chavez, CapitalSourceWatch the video      Read the transcript

Mr. Chavez joined CapitalSource (NYSE:CSE) in January of 2006 as Director in the Healthcare Real Estate Group and became the group’s managing director in 2010.  While at CapitalSource, Mr. Chavez has closed over $1.5BB in transactions, including financing for the acquisitions Tandem Healthcare and Genesis Healthcare.  Prior to joining CapitalSource, Alex was the Senior Vice President and Treasurer, at LTC Properties, Inc. (NYSE:LTC).  While at LTC, Mr. Chavez was involved in originating, servicing and financing nearly $1 billion of long-term care assets, in the public debt and equity markets.  Prior to joining LTC, Mr. Chavez was employed by Ernst & Young, LLP, from 1990 to 1996, where he specialized in the healthcare and real estate sectors and served in various audit capacities, including Audit Manager.  Mr. Chavez holds a Bachelor’s of Science degree in Accounting from the University of Southern California.
 

Contact Information:
Alex J. Chavez
Managing Director, Healthcare Real Estate
CapitalSource
30699 Russell Ranch Road, Suite 200
Westlake Village, CA 91362
Office: 818-540-2105
Cell: 805-444-2207
Email: AChavez@capitalsource.com

 

Watch the video of the interview: 

 

Read the interview transcript:

Steve Monroe:
We’re here today with Alex Chavez. He’s the managing director of healthcare real estate at CapitalSource, a company that’s been around a while, and very important in the senior care market. CapitalSource, a few years ago, effectively changed from a finance company to a commercial bank. So you legally are operating as a bank. How has that impacted your lending business?

Alex Chavez:
I think it’s largely been positive, for two main reasons. I think one is, it’s providing a very, very stable pot of proceeds and capital for us to lend. We’ve got a great balance sheet at the bank. Probably right now we’ve got at least $2.5 billion of capital we could put to work today, to lend. So, the years past of being a commercial finance company and having to worry about streams of capital coming in to finance growth, I think are way past us. We’ve got a great platform to build upon that.

And then, I think secondly, the platform of the bank I think gives us more flexibility actually than what we experienced in the finance company, in terms of being able to have higher LTVs and do some things that we probably would have been less likely to do within the old Cap Source, if you will. So, then, flexibility, great source of capital. And I think the other large factor to consider is pricing. We’ve been able to lower our pricing pretty substantially over the past 18 months, and I think—we’re much more bank-like in our pricing these days, and I think people were used to seeing us even two years ago. And we can certainly compete on pricing with almost any transaction.

Steve Monroe:
And you guys do both fixed rate and variable rate. Is there one you prefer over the other?

Alex Chavez:
It’s really tailored to our clients’ needs. So, for our variable-rate product, we’re typically doing three- to five-year deals; it’s priced off of 30-day LIBOR typically, with spreads of anywhere from 450 to 600, depending on the transaction. We’ll typically have some sort of floor in there. But for a well-sponsored deal that’s got reasonable leverage, we can certainly do deals in the mid 5’s, which I don’t think you would have seen CapSource do three or four years ago.

Steve Monroe:
Never, and I’ve noticed and seen, because I see what your loans and—on various deals, and the pricing has gotten, I think especially on the fixed-rate side, has gotten more aggressive. How are you getting that—because I think a lot of people do want that low fixed rate? How are you getting that out to your borrowers, let them know that you are offering that?

Alex Chavez:
Yes. So, in a fixed-rate product, typically what we’re doing—most of our customers are asking for a five-year deal, although we can go out to seven years on fixed very easily. So in that regard, we can be, on term, pretty competitive with some of the—not the HUD agencies, but on the assisted living side, maybe Fannie or Freddie, and still provide some flexibility that maybe you don’t have with the agencies, but still give some of the term.

And in terms of our fixed-rate pricing, we can be sub-6 for the right deal on a fixed basis. So, I think weighing flexibility versus being tied into an agency that might be attractive for some of those customers. I will say, on the fixed side, we’re going to have the loan locked out substantially through the term. But that’s not a lot different than a lot of other fixed-rate lenders. But I think we are competitive on that product.

Steve Monroe:
Yes. When you get down sub-6, you definitely are, and especially with the execution, the competition is HUD for skilled nursing, but your execution is much faster than that.

Alex Chavez:
Absolutely.

Steve Monroe:
If someone needs the money now, then they’re not going to go the HUD route, bridge to HUD.

Alex Chavez:
Absolutely. Yes. And our typical time to close, whether it’s a fixed or variable deal, is probably right around 60 days, depending on transaction size, complexity, and the borrower. That’s certainly very doable for us. We can react pretty quickly.

Steve Monroe:
A lot of borrowers during this bad economy and credit tightness complain about loan to values. It dropped from 80% to 75 to 70, and some banks are 60, 65%. And that, for a skilled nursing acquisition, that can be tough. But you guys did a deal this summer, and it’s public out there, but Platinum Healthcare bought a skilled nursing facility, and on the acquisition, you financed 100% of the purchase price.

Alex Chavez:
That’s right.

Steve Monroe:
Not many people are doing that. So there must have been something in there that you liked.

Alex Chavez:
Sure. Yes, a couple things. One, I think, again going back to the kind of “banky” platform, our kind of—I’ll say, regulatory lending limit, is 85% of appraised value. Now, I think, Steve, as you know, knowing us for as long as you have, we typically underwrite with a lot of different criteria, and so from our perspective, looking at that deal, we had a couple of things that were really favorable. One was, we have a lot of proprietary information and databases of a lot of operational information on skilled nursing facilities. So, when we kind of were approached by Platinum to look at this deal, there were a couple of things that stood out to us from a positive standpoint.

One was the property was currently being operated by a nonprofit for basically a religious organization whose mission was to serve the poor in the market. So we said, okay, their mandate is to basically spend every dollar that they make. And so we kind of said, okay, what would this facility look like if it was being run as a for-profit in this market. We had a lot of market data from the region that we were looking at, and were able to pretty quickly say, this is what we think this thing should be running like if somebody was running it for profit.

We took that information and then kind of overlaid it with what Platinum was projecting, and the numbers actually lined up pretty closely. And so in doing that, we got pretty comfortable that Platinum’s plan for ramping this up to a for-profit model made a lot of sense. And so when you look through the EBITDA that we said this facility could produce, it’s like, okay, this is kind of like a 75% LTV purchase price. And so we felt very comfortable providing the kind of 100% purchase price proceeds. And Platinum did put some money in for some other things. But that was kind of a deal that I think is indicative of, one, the expertise that we have in the industry, being able to understand asset-specific stories; but then having the kind of bank platform that actually created some flexibility for us, to be able to go and lever it up, with really having some cushion there behind it.

Steve Monroe:
I’d even say it’s probably—the loan was 100% of the cost, but 50% of the value a year from now.

Alex Chavez:
Exactly.

Steve Monroe:
Because I think they obviously do a great job. Can you, when you’re doing a loan that you know is going to be taken out by HUD or the agencies two or three years from now, can you get more aggressive on that?  Or is that going to be—

Alex Chavez:
Yes, that’s a great question, because it wasn’t too long ago that we were approached by a customer that we know very, very well, who had a portfolio that they wanted to take to agency. And they were running a process, and we were very aggressive in our pricing in that transaction. We were actually sub-5 on that, and actually ended up not winning the deal. We were full proceeds, but—but I think what I can say about that is, again, for the right sponsor and the right transaction, we can be extremely competitive on pricing. And if that opportunity came again, same kind of set of metrics, I know we’d be kind of right back there. So again, we can certainly do that.

Steve Monroe:
And how do you tie in with the client’s refinancing or acquisition financing with working capital lines, revolvers, whatever you want to call it?  Is that something that you really try to pursue with that borrower, to get both sides of the business?  Or even if they don’t ask for it, you offer the line of credit?

Alex Chavez:
On the skilled side, I think most of our clients know, and we certainly talk to everybody that we enter into dialog with, that we can provide both the ABL financing and the term-debt financing on the real estate. I think, as you know, Steve—we kind of cut our roots on the ABL side, and so it’s something that we’re very, very comfortable with. We never require a term loan real estate borrower to take out a revolver with us, but it’s an option for them; if they want to do it, that’s great.

And then I think a lot of them that come to us, especially on—maybe larger, mid-sized operators that have ABL capacity, we can let them use a portion of an ABL (asset-based lending) for acquisitions. Where they’ve got to execute on something quickly, we can allow them to use a certain piece of that revolver to the extent they have availability, to effectuate an acquisition, and let us come on the back side and then term it out. So I think having that kind of dual-product offering gives our customers a lot of flexibility on how they can run and manage their business.

Steve Monroe:
Recently you guys did quite a large refinancing, ten-year loan, for a CCRC—don’t see you in the CCRC space much—and it was at a very attractive rate. Is that something you think you’re going to do more of—and it was entrance-fee CCRC?

Alex Chavez:
Yes. I guess before I address the specific transaction, I think one comment I’d like to make is, I think for a period of time, people have viewed Capital Source as pretty much a long-term-care finance organization that really focuses on the long-term-care aspect of the business. We like senior housing. We always have, I mean, going back to my days and Jim Pieczynski’s days at LTC Properties when we were financing Steven Vick and Karen Brown Wilson on the first assisted living projects that were kind of coming online, we know the asset classes on senior housing very well.

It just seemed that over time, the valuations got farther and farther away from what we thought real true valuations were or should be on these assets. And so for that reason more than anything else, we never were active in financing that space, because we could never get some proceeds that a lot of other lenders were willing to lend on those assets. I think given what’s happened over the past few years, that’s come back now to a level where we think it makes sense and is comfortable. So, when we were approached on this particular transaction that you talked about, and looked at the property, which was an absolutely fantastic, beautiful property, it had all the attributes that you would ideally want. It was a great physical plant; it was incredibly well maintained, great occupancy. The market that it was in had superior demographics in terms of affluence, but even more importantly, barriers to entry. No one was going to be able to build a competing facility in any meaningful distance from this property anytime soon.

And then, you kind of couple that with, in my opinion, the top-notch operators of that asset class, LCS (Life Care Services). They do a fantastic job. And then an equity sponsor that CapSource has done a lot of business with and has an incredibly honorable relationship with. It was kind of the perfect confluence of attributes you’d want in providing financing.

Steve Monroe:
So you’ll be doing more in the IL/AL space?

Alex Chavez:
Yes, absolutely. We’re looking at several transactions in that space now, and again, it’s—we see the values very, very attractive right now, and so we’re happy to provide capital at those valuations.

Steve Monroe:
And lastly, you’re a bit unusual, now that you are a bank, and you’ve been a bank for a few years. Most of the banks in the senior housing space don’t really work on a national basis. They’re regional, they’re super-regional. You work on a national basis. Has that helped you competitively, or—do people know that?  That you will basically lend almost anywhere?

Alex Chavez:
I certainly think the larger operators and owners in the space know that, and certainly come across us on a national platform. I think one of our tasks is to continue to do a better job of educating and getting in front of the smaller regionals and the local operators, to let them know that this bank that’s located in Chevy Chase, Maryland and Los Angeles can and will go to a mid-sized town in Iowa or Michigan or Washington State and provide financing that can really help their business. So we’re working on that, but I think generally we have a good reputation in the larger market, and we’ll continue to hopefully grow and expand upon that.

Steve Monroe:
All right, very good. Good luck, and I hope to be seeing a lot more loans coming out of you guys.

Alex Chavez:
We’re doing our best, we’ve got lots of money to put to work, so we’re trying to do it smartly.

Steve Monroe:
All right, hope so. Thanks.
 

 
 

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