EXPERT OPINION: A Conversation with Brian Reynolds

November 16, 2011

In this “Expert Opinion” interview, Brian Reynolds, Managing Director of Capital Funding Group, discusses the seniors housing and care industry from the viewpoint of one of the largest HUD lenders in the market. Topics include finding business, HUD, skilled nursing, and more.

Brian Reynolds, Capital Funding GroupWatch the video      Read the transcript

Mr. Reynolds joined Capital Funding Group in June 2001, where he is responsible for the structuring and financing of healthcare transactions.  Mr. Reynolds oversees long term care business development for Capital Funding, LLC as well as the skilled nursing equity investments through Capital Senior Care Ventures.  Prior to working with CFG, he was employed for several years at Mercantile Bankshares Corporation where he worked as an affiliate loan review analyst.  While there, Mr. Reynolds audited the commercial loan portfolios of the affiliated community banks and also completed due diligence on the commercial loan portfolios of prospective acquisitions.  Mr. Reynolds is experienced in merger and acquisition structures and financings for healthcare transactions.  Mr. Reynolds received his BA in Economics from the University of Maryland Baltimore County and completed graduate studies at Johns Hopkins University.  
 

Contact Information:
Brian K. Reynolds
Managing Director - Long Term Care
Capital Funding, LLCA
Subsidiary of CFG Community Bank
Office 410-513-8738
Cell 443-799-1055
breynolds@capfundinc.com

 

Watch the video of the interview: 
 

 
 

Read the interview transcript:

Steve Monroe:
I’m here with Brian Reynolds. He’s the Managing Director at Capital Funding Group. You guys are one of the largest HUD lenders in the senior care market. Where do you find your business, and how many mortgage originators do you have who are bringing all this business in?

Brian Reynolds:
We consider ourselves relationship lenders. We have a lot of long term clients. We get a lot of referral business and repeat business from those clients. We have about eight folks on the team that service the entire country. We have a little bit of a different philosophy. [Actually, we only] do health care, and we like to sell from a position of knowledge. So rather than have 25 or 30 associates out pitching a number of products, we have six or eight folks that are out specifically pitching FHA and those ancillary products, Bridge to HUD loans, working capital, those kinds of things.

Steve Monroe:
And it looks like you’re going to have a record year this year on the HUD side specifically. What do you attribute that to?

Brian Reynolds:
We probably did $600 or $700 million in HUD’s fiscal year this year. We’ve already done a half a million [in our] year, to date. I think there’s macro issues still with banks not being terribly active and a lot of folks still aren’t back into the space, and interest rates are very low. But I think that the success of the Lean program, even though the queue is long, it’s transparent now, so you can know where you are in that queue, and you can see progress being made. So I think the success of that program has been very helpful.

Steve Monroe:
So the borrower can go on vacation for a few months knowing when it’s going to come up again.

Brian Reynolds:
Yes, I’ll give you the good e-mail, telling them where they moved.

Steve Monroe:
I know that HUD has been the lender of choice, and sometimes the only lender for skilled nursing facilities in the past. Do you find that’s going to be changing any time in the intermediate future?

Brian Reynolds:
I don’t. Obviously, as more capital comes into the market, you’re going to find that there are three and five year deals to be had, but there’s not really 10 year money out there. Maybe the best borrowers can find that. You’re not going to find 30 year fixed rate, of course.

Steve Monroe:
At 4.9% non-recourse.

Brian Reynolds:
Close, you’re in the low fours today, actually. So yes, I just don’t see that. I’ve always said that once you start to see the 10 year deals come out, that’s when a blow up occurs. So we’ll see a lot of three to five year stuff coming, but the long term fixed rates stuff is going to be—

Steve Monroe:
And are you guys looking more at the one-off property  and small portfolios, or are you really going after the big stuff?  I know you’ve been looking at some of the big stuff that’s kind of clogged the system for awhile, but what are you really pursuing?

Brian Reynolds:
I think that’s kind of a misconception about our company. We do a lot of portfolios, but about half of our portfolio is mom and pops. That’s probably not the right word- independent owners that have less than 10 buildings, and most of those have less than five. So we don’t have a large portfolio, we really built our portfolio on that. We did do the first large portfolio with Mr. Preston [Life Care Centers of America] and we continue to do portfolios, but we have a large clientele of small to mid-sized operators as well.

Steve Monroe:
That’s your bread and butter, the mid-size, and even the really small guys?

Brian Reynolds:
Absolutely. Remember, if you’re doing 20 loans or you’re doing one loan, you’re still doing 20 loans with a risk. There are some economies, of course, but you’re still doing 20 loans.

Steve Monroe:
And almost all the loans, it seems, that have come across my desk that you guys do, it’s all the skilled nursing side. Do you do anything in assisted living?

Brian Reynolds:
We do. About 10% of our portfolio is assisted. We did, it may have been HUD’s largest portfolio, I don’t know for sure. It was about $90 million or so with one borrower in 2009. Obviously there’s competition there, Fannie, Freddie.

Steve Monroe:
But they can’t do 35 years.

Brian Reynolds:
They can’t do 35 years, but they do some 10 year stuff that’s attractive for a lot of assisted living folks. So it’s more difficult to get that business.

Steve Monroe:
But do you see yourself pursuing that more?

Brian Reynolds:
Oh, absolutely. Yes, we continue to pursue that, along with the skilled side, but we’d like to do a lot more assisted living business. We do a fair amount of assisted living construction. Fannie and Freddie don’t really do that, so we’ve been able to do that. We actually have a couple of projects going right now on the construction side with HUD.

Steve Monroe:
And in your dealings with HUD, how are they viewing the 11.1%—everyone calls it that, it’s an average—but the 11.1% Medicare cut. How are they looking at it when they see the financial statements, current financial statements?  Are they restating it?  Are they looking to you for advice?  I mean, are they getting a little nervous about this?

Brian Reynolds:
They are, and thus far they haven’t published anything, but what we’ve been doing is we’ve gone back and looked at the billings we had in the queue, and are actually cutting revenue by the current run rates. It could be 11%, actually that’s the average. We took into account a 7% to 8% cut anyhow, with everything we’ve submitted, kind of as a precautionary measure. I think a lot of folks did that, at least I hope they did. So we have a little bit to make up. I mean, there have been additional revenue cuts obviously, and lots of Medicaid cuts in some places as well. HUD really requires you to use published rates, so we will be using published rates to underwrite revenue. But we also will give credit to expense cuts. So if you had expense cuts that make sense, we certainly will include those in the underwriting.

Steve Monroe:
Okay, and I know you’re having a great year this year, a record year. How is your 2012 pipeline looking?  Is it going to be just as busy?

Brian Reynolds:
I hope so, obviously. But if a few things hit, we could do the same. Obviously it depends on HUD’s queue and timing, but we have a very robust pipeline. We were anticipating that as we saw the success of the LEAN program, so we’ve staffed up, beefed up our staffing, specifically on the processing side and underwriting side. So we’re definitely prepared to have another big year, and I think we will. So hopefully we’ll eclipse it.

Steve Monroe:
And if you had to sum it up in something, what would you say Capital Funding’s differential advantage is?  I mean, why are you getting so much business?

Brian Reynolds:
A couple of things. I think the first reason we get so much business is that this is really our business, this is what we do. We don’t do long term care finance. The biggest part of what we do is FHA. We have the Bridge to HUD programs, we have what we like to call a one-stop-shop for long term care. So working capital needs, the HUD, the Bridge to HUD, all those things, we have all those products to sell. And we focus specifically on this sector, which I think gives us an advantage in knowledge over some of our competitors.

Steve Monroe:
And I think a lot of people think of you as a HUD house, and forget that if someone needs to close a deal or something very quickly, you do that bridge loan that’s going to be taken out by HUD, and I think people forget about that, that you can do that short term loan, which is very beneficial, especially in the acquisition market.

Brian Reynolds:
Sure.

Steve Monroe:
Well good luck next year. I hope you have another record year.

Brian Reynolds:
Great, thank you very much. I appreciate it.
 

 

 

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