EXPERT OPINION: A Conversation with Bill Kauffman
March 31, 2014
In this "Expert Opinion" interview, Bill Kauffman, Managing Director, Oak Grove Capital, discusses HUD, skilled nursing, LIBOR, the senior population, the future, and more.......
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Bill Kauffman is the Managing Director of Oak Grove Capital’s Seniors Housing debt platform. Bill has originated more than $2 billion of seniors housing financing throughout the nation. He has more than 30 years experience in the commercial real estate finance industry.
Bill has structured acquisition, refinance, bridge, and construction financing solutions to senior housing and nursing home borrowers through Fannie Mae, Freddie Mac, FHA, direct lending, and alternative sources.
Prior to joining Oak Grove Capital, Bill managed the Seniors Housing and Healthcare Group at Berkadia Commercial Mortgage subsequent to originating seniors housing loans for Capmark Finance Inc. and GMAC Commercial Mortgage. Bill also managed the Fannie Mae DUS program at Republic Realty Mortgage Corporation.
Bill received his Master of Business Administration from University of Southern California and a Bachelor of Arts degree from Bucknell University.
Managing Director- Seniors Housing
Oak Grove Capital, Inc.
Watch the video of the interview:
Some people think the lending markets are transitioning, they’re growing, certainly have rebounded from the Great Recession. I’m here with Bill Kauffman. He’s Managing Director of Oak Grove Capital. So, Bill, how did 2013 end up for you guys? I know you did a few very large senior housing transactions. Is there anything that kind of stood out?
Well, the thing that stood out really, Steve, for us I think at the end of the year we ended up with a great pipeline. We’ve already closed a couple of loans in January, got a running start for the year. On volume basis last year we were just shy of $400 million. It could have been a bigger number. A few deals fell out of all cash buyers. That was disappointing, but that’s the nature of the beast.
Is there anything that you and your team at Oak Grove are focusing on now in terms of type of property, type of borrower?
Well, first of all, today, unlike in the past where you found the owner/operator, you grew with them from small to bigger, you’ve got to find out who actually is making the financing decisions with these financial partners. That’s a bit of a challenge.
We’re working with big borrowers, we’re working with small borrowers, really trying to find the up and coming borrower we can grow with over time.
I just read about there’s new guys coming in, there’s small guys who are developing nice pipelines of either acquisitions or developments so I would think that there are quite a few of those smaller guys you can grow with.
There are. Most of them are veterans from bigger companies. There’s a lot of equity out there that find those equity sponsors, in some cases we recommend equity sponsors for them. But, yes, they’re out there.
And you’ve done a lot of HUD in your career as well as Fannie Mae. Today, what are borrowers coming into your office for? Is it more of the Fannie/Freddie? Is it the HUD?
What are they coming to our office for? I wish it was that easy. Yeah, I know I’ve been in the business for a while.
They just come and see you.
Yeah, I wish that it was that easy. Someone joked recently to me and said, Bill, there’s just too many of you, as in Fannie and Freddie HUD shops, and not enough product. You know, it’s funny; I wish it was that easy.
And you really have a bifurcated business. If you’re in the HUD business, you’re doing LEAN. That’s primarily skilled nursing. We’ve actually brought out a dedicated LEAN originator who is based in Columbus, Ohio. He knows the product really well. He has three deals signed up early. And that’s a business we’re going after in a bigger way. It’s something we should do more of, since we do it well.
We’re not going to be the medium and large portfolio type player in that space. The borrowers on the senior side, we are, again, looking for those smaller up-and-coming operators. Properties have changed hands, it’s a game of musical chairs of one private equity group to another private equity group. We just need to be sure we’re involved in all those contact points with advisors, the different private equity sources and staying in touch with all of that.
Those borrowers on the Fannie/Freddie front, it depends on their time horizon. They’re looking for fixed and variable.
Twice you’ve brought up the private equity partners and that has to be a little bit different in terms of who is the decision-maker, the borrower, the operator or is it the equity source? And the equity source is going to probably have a different rationale for borrowing a certain product.
Yes, and the operator/private equity relationship is different in each structure. The decision-makers are different, the interest levels are different. There are some operating partners who actually sign on documents as opposed to the equity side, others that don’t. It’s an interesting mix. It’s almost as if you needed a scorecard to keep track of all the different arrangements, which makes it a lot more difficult than it was, say, 15 years ago to focus on our operators.
I know, absolutely. For several years all we heard about and we talked about, interest rates are going to go up, interest rates are going to go up. And finally, last May with the Fed announcement, they bumped up 100 basis points. Subsequent to that, what happened with your clients? Did people start thinking, geez, I’d better lock in rates now or did people say, you know what, the floating rates are still at historic lows, let me still go floating?
Again, if you look at the two sides of the business, HUD was definitely impacted. There were a lot of deals that fell out because of the refi side of things. It made a huge different on the HUD side, deals in pencil as well. On the agency side of the business it really depends on the borrower’s time horizon and their tolerance for risk.
There are borrowers who are very comfortable taking variable rate deals and they’ve figured out that if I can save money, I can save, say, 200 basis points over a two-year horizon, I’m better off in the long run by going with variable rate.
There are other borrowers who go variable rate because they plan to add to properties and want the flexible pay off to get a construction loan or they don’t want to get themselves locked and deal with maintenance for 10 years and they think they might want to sell in five. The variable rate pricing gets very tricky.
And, for that matter, LIBOR, however, has gotten lower through time. You know, sub 20 basis points and another feature; if you go back historically, there are a number of agency loans maturing today from a time period when you did a 10 plus 1 or a 7 plus 1. Those were fixed rate loans where you’ve the low one-year tagged on to variable rate. At that time LIBOR was 4 and the spread was, say, 2.50 over LIBOR. Well, to borrowers that’s a 6.5 rate. I’m never going to use that.
Lo and behold, now they’re looking sub 3, I think I might take that here. So, that’s where we get a lot of the difference.
Talking about history, you’ve been through a lot of cycles in this industry. Is there anything out there that makes you nervous in this current environment?
I would say anytime there are a lot of names I don’t recognize in terms of corporations, whether they are operators or equity partners, and you do a little digging and the resumes are thin, they don’t have the scars, they don’t have the same, especially the equity guys who are gung ho to get in this space, that troubles me.
There’s a lot of building going on. First of all, I think that’s healthy. Secondly, I don’t think it’s an over-supply at this point, in general. And third, it’s going to create some opportunities down the road because some of these will be failures at some level, either the wrong site; there will be opportunities for someone else, oftentimes the second, third owner coming in does well.
But I do get a little worried. I don’t think that the great wave of the 80+ population is going to be coming for another five years or so. But, so far to date there are quite a few names that I don’t recognize yet, but I’ll get to know them.
I hope so. You work with some of the largest companies and you work with small providers. What’s the difference when you take them to the market?
It’s interesting, in many ways, it’s the same. Our whole proposition with the borrowers, we explain how to get you through an agency or a HUD deal. And as sophisticated as big borrowers are and they’ve done it before there are still nuances. They don’t want to have to do this full-time. They want a knowledgeable mortgage banker to walk them through the process.
With a new borrower, the first time transaction, the smaller borrower, it’s incredibly gratifying to get their first agency or deal done. With the big borrowers because of the number of properties, they’ve got more bells and whistles, we do a lot of credit facilities; we’ve done several in the last three years, looking at both Fannie Mae and Freddie Mac to sell those today, both great products. We can offer those to bigger borrowers, but we wouldn’t do that to small borrowers. That’s one major difference.
Right. So, tell me, why should borrowers come knocking on your door? Even though you’re knocking on their door, why should they come to you for money?
I had to make a conscious decision three years ago when I had a chance to change companies and I liked the fact that Oak Grove is privately owned. It’s not private capital lender, private equity; it’s not owned by a bank, very focused on the customer. We give terrific service. We hire knowledgeable people. It’s all about getting the deal done as painlessly as possible and have a few laughs along the way. Don’t make this overly complicated. And being able to be flexible and nimble enough so that if we work on 20 property transactions we pull a team together and get it done and it gets done well.
Okay, very good. Well, good luck in 2014 and I’m just going to make the assumption you’re going to keep on growing.
I think that’s a safe assumption. Thank you.